Michael Riela: Hello. My name is Michael Riela. I'm a partner at the Law Firm of Tannenbaum Helpern Syracuse and Hirschtritt in New York City. I chair it's bankruptcy department and I've practiced business bankruptcy for about 20 years. Today I'd like to provide an overview of business bankruptcy which should be useful to any lawyer or professional whose clients may encounter financial distress, as well as those whose clients may deal with distressed companies as either creditors or contract counter parties or in some other fashion.

   First I'm going to talk about the differences between the various Chapters of the Bankruptcy Code, and there are several. Just simply mentioning that there's a bankruptcy case doesn't really tell you the entire story. So first I'll talk about Chapter 7, which is the liquidation statute within the Bankruptcy Code. And as I just mentioned it deals with the liquidation of debtor's assets, whether that be a company, a corporation and LLC, or an individual's assets. Both individuals and businesses can file Chapter 7 for liquidation.

   In every Chapter 7 case, whether it's a business or an individual case, there's a Chapter 7 trustee who gets appointed whose job it is to marshal the assets together, at least the non-exempt assets, sell them or otherwise administer those assets, and then pay off the creditors to the extent there is money to do so in accordance with priorities in the Bankruptcy Code. The Chapter 7 trustee is an independent individual who is appointed from a panel of potential Chapter 7 trustees that's maintained in the district where the bankruptcy case is filed. The Chapter 7 trustee's job is basically to shut down and liquidate any business. The management of the company no longer is going to operate the company once a Chapter 7 is filed. In some rare circumstances, a Chapter 7 trustee can ask the bankruptcy court for authorization to continue operating the company for some short period of time. But again, that's pretty rare. Usually when companies file Chapter 7, that marks the end of their business operations.

   Now Chapter 7 cases can be commenced in one of two ways. One is it could be filed at the outset. So say a company decides as its initial bankruptcy move to liquidate, that's one way that a Chapter 7 case can begin. Another way that a Chapter 7 case can begin is it could have first started as a Chapter 11 reorganization case, which I'll get to next, and the case may be converted to a Chapter 7 if either all the assets are sold at the company or if the company runs out money or the Chapter 11 case otherwise fails. So there are basically two ways to get into a Chapter 7, either at the outset or as the result of a failed or converted Chapter 11 case. So that's Chapter seven.

   Chapter 11 is the Chapter of the Bankruptcy Code that is mostly associated with business bankruptcies and restructuring efforts. Chapter 11 is the restructuring aspect of the Bankruptcy Code, and there are a number of things that a company can accomplish in Chapter 11. First is a reorganization of its assets, its business, and its financial affairs under what's called a Chapter 11 plan of reorganization. And we'll talk a lot about Chapter 11 plans during this next hour. Another thing that a company can do in a Chapter 11 case is it could sell some or all of its assets, and they can do so either through a Chapter 11 plan or can do so under what's called a Section 363 sale. Section 363 gets that name because that's the provision of the Bankruptcy Code, 11 USC 363, that authorizes these types of sales. Another thing that a company could do in Chapter 11 is effectuate an orderly wind down or liquidation of the assets under the control of the company's management.

   So in Chapter 11, unlike a Chapter 7, the default rule is that management of the company will remain in control of the company. The directors and officers will continue to operate the business, albeit under the watchful eye of the bankruptcy court and other parties. Unlike Chapter 7, there is no automatic appointment of a trustee to liquidate assets. Now in some Chapter 11 cases, there may be a Chapter 11 trustee who gets appointed to either operate the company's businesses or to liquidate the assets. But Chapter 11 trustees are generally rare and courts generally will allow management at least a first opportunity to try to reorganize, sell, or orderly liquidate their businesses before doing anything else. So those are the two main Chapters of the bankruptcy case and the two only ones that deal with business reorganizations.

   There is one Chapter, Chapter 15, which I won't get into in any detail. But Chapter 15 proceedings are those in which US bankruptcy courts will recognize and allow companies in foreign insolvency proceedings to marshal assets in the United States. So you may have a company that is based outside of the United States that starts an insolvency proceeding in another country. The representative in control of that company will then come into the US Bankruptcy Court under Chapter 15, asking for the US Bankruptcy Court to recognize that non-US insolvency proceeding and allow that representative to take various actions within the United States, either to gather assets within the United States or to deal with parties in the US. I will not be talking more about Chapter 15, but that is something that is available also to businesses. But again, those will only relate to non-US businesses that have already begun some sort of insolvency proceeding outside of the United States.

   Now there are two different ways for bankruptcy petitions to be filed generally. One is voluntarily. The company self understands, agrees, and decides that it needs to seek bankruptcy protection. So it will do so by filing its own Chapter 11 or Chapter 7 petition. Another way that a bankruptcy case can be started is through an involuntary bankruptcy petition, and that's a situation where a bankruptcy petition is filed by creditors against the company. So the company does not want to be in bankruptcy, or least has not decided to file for bankruptcy, but the creditors decide that they want to file an involuntary petition to put that business in bankruptcy.

   Now the rule generally is that three or more creditors that hold non-contingent, undisputed, and unsecured claims totaling over a threshold, and it's nearly $20,000 now, must join together to file the involuntary petition. So you need to get three creditors, all of whom would agree to sign the involuntary petition. However if the debtor has fewer than 12 unsecured creditors, then you only need to have one creditor that qualifies who can then sign that petition.

   Now involuntary bankruptcy petitions can be risky for creditors, which is why they're not used all that often. Because if the business or the debtor decides to challenge the involuntary bankruptcy petition, the bankruptcy court would order the debtor into bankruptcy only if the debtor is generally not paying its debts as they become due, at least not their undisputed debts as they come due, or if the debtor had a custodian or a receiver appointed within the last four months. So if creditors decide to file an involuntary bankruptcy petition, then the court decides not to grant the relief requested in the petition because the debtor is challenging it, and if the court finds that the debtor is in fact paying its undisputed debt as they come due generally, the involuntary petition would be dismissed.

   And the Bankruptcy Code, Section 303, provides that if the involuntary petition is dismissed, the creditors that filed the bankruptcy petition could be liable for costs and the attorney's fees of the debtor. In addition if the bankruptcy court determines that the involuntary petition was filed in bad faith, the petitioning creditors could also be additionally liable for damages caused by the involuntary filing as well as punitive damages. So there are a fair number of risks that are involved for creditors in deciding to file an involuntary petition, and usually courts will not allow an involuntary petition to go forward if the sole reason for the filing of that petition was because the creditor wanted to gain some sort of advantage in a two-party litigation.

   Bankruptcy is not some sort of sword that you can use to wield against an opponent to try to get an advantage in litigation generally. Bankruptcy is seen much more as a collective remedy to benefit creditors generally. So you really need to have a good reason to file an involuntary bankruptcy petition typically, and such good reasons may be the company may be moving assets away from itself to try to defraud or hinder their creditors. There may be a bunch of different creditors out there who are trying to collect from the debtor because it is not paying their bills. And so some creditors may say, "Look. I don't want some creditors to have an unfair advantage in trying to collect their debts where I'm not getting that advantage. Let's all go to bankruptcy courts so that all the creditors can be treated fairly." Those would be generally good reasons to file involuntary petitions.

   So now I'll turn to what happens once the company is in bankruptcy, again, either voluntarily or involuntarily, whether it's Chapter 7 or Chapter 11. Now there are a number of different reasons why a company may voluntarily decide to file bankruptcy. Some of the obvious ones are the company has too much debt or doesn't have enough cash or liquid assets to pay their creditors as the debts become due. The company or its industry could be suffering a decline that relates simply to the company or to the industry. You'll see those every so often, recently it was oil and gas cases and retail companies that have been suffering quite a bit. So a lot of large and midsize companies, and small companies, had been filing bankruptcy because their industry were in decline.

   Obvious to these days, in COVID-19 world, there may be a catastrophic event or a pandemic that affects the business. In a COVID-19 situation, if a business relies heavily on foot traffic and in person meetings with their customers, they very well may be in a difficult position now. A company may file bankruptcy because there is mismanagement or even fraud by management, and in those types of cases typically you'd have new management or at least a new restructuring officer get appointed to try to mitigate the damages that were caused by prior management's mismanagement or fraud. Otherwise companies may file bankruptcy for more prosaic purposes, such as to try to reject burdensome contracts or leases. The big reason why big retailers have filed bankruptcy was because they're trying to get out of their lease hold obligations with their landlords. Bankruptcy also allows you to deal with pension and labor obligations.

   Companies may also want to file bankruptcy to effectuate a sale to a third party free and clear of liens and other interests. And indeed, there's a cottage industry with respect to filing of bankruptcy cases to effectuate a relatively quick sale of the assets. And because the Bankruptcy Code allows you to sell the assets free and clear of liens and interest in certain situations, the debtor may end up getting a higher purchase price from the buyer because the buyer knows it's getting a bankruptcy court order that is granting them those assets free and clear of any potential claims or successor liability types of claims. Now in a bankruptcy case generally ... so those are the reasons why a company may wish to voluntarily file bankruptcy, the business justification for it.

   Now within bankruptcy, we know once the case is filed, the primary or main purposes of the bankruptcy case are to maximize the value of the assets that the debtor has and to maximize distributions to creditors. Bankruptcy also seeks to ensure a fair distribution of assets among creditors in accordance with those creditors relative priority rights under the Bankruptcy Code, and I'll talk a little bit more about what the priority of rights are. In Chapter 11, the goal is to give the debtor enough time to prepare a new business plan and to file a Chapter 11 plan, whether it be a Chapter 11 plan of reorganization or orderly liquidation.

   And there's also the purpose of trying to rehabilitate financially viable businesses that just happened to be coming in on rough times. If a business is able to clean up its balance sheet and to earn some contracts and leases and other things, that company may continue to prosper or may begin to prosper again, saving jobs and all the things that we wanted to accomplish in a bankruptcy. So that's why we have the reorganization statute in particular. We want to see, to the extent that we possibly can, if we can save businesses that can be saved. Because, again, that would save jobs and you have more productive businesses and more productive society. That's kind of your societal goals for a Chapter 11 reorganization process.

   Next I'll talk about who the primary in a bankruptcy case are. Who are the people that get involved in these types of cases? So first you'll have the bankruptcy judge. And the judge in a bankruptcy case, their general roles are to adjudicate any disputes that may arise in a bankruptcy case, rule on any requests by debtors or creditors for any specific relief that they may seek under the Bankruptcy Code, and otherwise basically to oversee the case and make sure that it reaches some sort of conclusion. The bankruptcy judge does not operate the business, they're not involved in overseeing the day to day operations. And indeed there's a provision of the Bankruptcy Code that allows debtors or bankruptcy trustees, if there is a trustee, to operate a business in the ordinary course of business without having to seek specific approval from the bankruptcy judge. So the bankruptcy judge is a vital part of the bankruptcy process, but again, their job is generally to rule on disputes and rule on requests for any relief that any party may seek.

   Another primary participant is the debtor of the business itself. Again, as I mentioned before, in most Chapter 11 cases the board of directors and the officers will continue to remain in charge of the company. They are running the business. If there is a bankruptcy trustee, Chapter 7 trustee or Chapter 11 trustee, if one is appointed, that person is going to be in charge of maintaining the debtors assets and their business.

   And then we also have the various creditors and equity holders that have rights against the company. So you'll have secured creditors, and those are creditors that have some sort of security interest, a lien, mortgage, in some or all of the debtor's property, either because they made a loan to the company before it filed bankruptcy, maybe got a judgment against the company. So the secured creditors are the ones that have the most rights against the creditor because they have an interest in specific assets as collateral. So they are treated better under the Bankruptcy Code than unsecured creditors, these are folks who the debtor owes money to, but those creditors do not have a security interest or lien or mortgage on any property. And there tends to be in large cases hundreds, if not thousands, of unsecured creditors, and they could be owed very little and some of them may be owed quite a bit.

   There's a specific entity or group that gets appointed, at least in the large Chapter 11 cases, but they could also be appointed in midsize and smaller Chapter 11 cases as well, called an unsecured committee of unsecured creditors or I call them creditors committees. These are committees consisting of an odd number of unsecured creditor representatives, whether it be 3, 5, 7, or 9 large unsecured creditors who are appointed by the Office of the United States Trustee, which is a Department of Justice arm. And the committee's job is to act as a fiduciary for all unsecured creditors of the company. So the idea is you have a representative group of some of the largest unsecured creditors who are going to hire their own lawyers, their own professionals, and they're going to take a key role in the bankruptcy case to monitor what the debtor is doing, seek any relief or file any objections with the bankruptcy court. And their job is to look out for the rights of unsecured creditors generally. Again, this group is a fiduciary. They need to act in the best interests of the creditors as a whole, and not simply for their own personal pecuniary interests, at least while they're sitting as a committee.

   You'll also have equity holders involved in a bankruptcy case. Now equity holders generally get the worst treatment in a bankruptcy case. Just like under state law, corporate law, equity holders get whatever's left of the assets of a business after all the other creditors have been paid off. And under many, if not most, Chapter 11 plans, equity holders end up getting nothing on account of their existing equity interests. But there are some cases where there's enough value, enough assets of the company whereby existing equity holders may actually receive something. But again, that's relatively rare.

   Another party who gets involved in bankruptcy cases, I alluded to them when I was talking about creditors committees, is the Office of the United States Trustee. Now the US Trustee is different from Chapter 7 or Chapter 11 trustees who are in charge of liquidating or operating a business. The United States Trustee is a government employee. There will be a trial attorney or more than one trial attorney who gets assigned to a particular bankruptcy case. And the US Trustee's job is to make sure that the case is run in compliance with the US Bankruptcy Code, as well as making sure that the debtor and the creditors committees and the others are following the rules that are either in the Bankruptcy Code, the bankruptcy rules, or general standard good bankruptcy practice. So the US Trustee does not have a pecuniary or financial interest in any particular case, but they are taking the watch dog role to make sure that the rules are being followed.

   Next I'll talk about what the relative priorities of claims and equity interests are in a bankruptcy case. I alluded to this a little bit before, but there actually is a list of creditors and what their rights are relative to each other. So at the top of the list are lenders who loan money to a debtor on a secured basis after that company filed bankruptcy, they're called Debtor in Possession or, D-I-P, DIP lenders. These are institutions or even people who actually decide to lend money to a company that has filed bankruptcy.

   And you may wonder why in the world would anybody want to do that, lend money to a debtor, and the reason is that the lender is going to get a court order from the bankruptcy court that will basically allow them to be paid first as a general matter. There are exceptions and all of that, but as a general rule, a lender may say, "Look. I will lend X amount of money to a debtor so that the debtor can have some money to try to reorganize its business. But in exchange for that, I get to be at the top of that priority waterfall. I get paid before anybody else." And there's a bunch of other protections that these, D-I-P, DIP lenders receive. So they are at the very top of the priority waterfall.

   Next up, second position are the Holders of Pre-Petition, pre-bankruptcy, Secured Claims. And so these are the secured creditors I talked about before who have some sort of security interest in a business' assets before the bankruptcy was filed. Next up in the third position are Holders of, so-called, Administrative Expense Claims, and these are folks who provide goods or services to a company while it's in bankruptcy. The reason why folks who provide goods or services during the bankruptcy get a better position is because the Bankruptcy Code wants to encourage parties to continue doing business with a company after it files bankruptcy to see if the business can reorganize or come to some sort of case resolution that's different than a fire sale liquidation. So to incentivize parties to do business with a bankrupt debtor, those parties will get what's called administrative expense claims.

   In fourth position are the Holders of Priority Unsecured Claims. Now these are unsecured claims that the Bankruptcy Code gives some sort of priority to. In general those are going to be wage claims, salary compensation claims of employees for work done before the bankruptcy, tax claims, certain types of tax claims, employee benefit plan related claims. These are pre-bankruptcy unsecured claims that the Bankruptcy Code determined should have some sort of priority over general unsecured claims. And those general unsecured claims are the next wrong day down in the ladder, and that generally tends to be where you have the most affected entities or parties. They would be non-priority general unsecured creditors providing some sort of goods or services to a company, made a loan to the company, but didn't get paid for it before the bankruptcy filing. Those would be general unsecured claims.

   You also have Holders of Subordinated Claims. Just like the Bankruptcy Code provides that some sorts of claims should have priority, there are others that the Bankruptcy Code is determined that they should be treated worse than other unsecured creditors. And those generally tend to be claimants who have agreed to have subordinated claims. There are situations where a creditor would say, "Okay. I'll agree that I'll get paid after all the other general unsecured claims." There are also creditors who may have acted inappropriately in some fashion, so their claims should be what's called equitably subordinated. And there may be also stockholders who may assert some sort of securities fraud claim, and the Bankruptcy Code is determined that securities fraud claims relating to bonds or equity, et cetera, should be given subordinated treatment. And finally, as I mentioned before, the very last rung of the priority ladder are the equity holders, the holders of stock or LLC membership interests. They'll just get whatever is left, if anything, from the company after everybody else is paid. So those are the general players in the bankruptcy case, the folks who would be involved.

   Now let's talk a little bit about some of the things that happen in a bankruptcy case, and the first thing I'll touch upon is the automatic stay. The automatic stay is a provision that is set forth in section 362 of the Bankruptcy Code. It applies and it takes effect immediately upon any bankruptcy filing, whether it be voluntary or involuntary. And basically what the automatic stay provides in Section 362 is that once a bankruptcy case is commenced, nearly all creditor rights to initiate or continue the enforcement or collection actions relating to pre-bankruptcy debts would come to an immediate halt. So the term is automatic stay because it automatically happens, there doesn't need to be any further request to the bankruptcy court for it to come into effect. And it's a stay of any types of collections or continuation of enforcement actions with respect to the debts.

   So what does the automatic stay cover? Well, it would deal with efforts to collect or recover on pre-bankruptcy claims. So if there's any litigation outstanding against a debtor to collect on a debt that arose before the bankruptcy, those are stayed. That litigation can no longer go forward. Any type of controlling of property of the bankruptcy estate, if a creditor is holding property of the bankruptcy estate because of a pre-bankruptcy claim, it can no longer control that property. Creation, perfection, or enforcement of liens or foreclosure actions, if there's a pending foreclosure action against some property of the business, that foreclosure action would be stayed. The automatic stay applies in all bankruptcy cases, whether voluntary, involuntary, Chapter 11, Chapter 7. It applies to all of those.

   Now the automatic stay is not all encompassing. There are certain specific types of actions that the automatic stay does not cover. For example, the automatic stay does not apply to criminal proceedings or proceedings by governmental units to enforce their police or regulatory powers. So if a business is the subject of some sort of enforcement action for environmental cleanup or securities fraud or things like that, those police regulatory powers, those types of actions, are not going to be stayed by a bankruptcy. It also does not apply to certain acts to perfect, maintain, or continue the perfection of security interests in property if they were already perfected, or if the Bankruptcy Code provides for some period of time for the company ... I'm sorry, for the creditors to perfect those liens. There's also a specific carve out from the automatic stay for certain types of contractual rights under certain financial agreements and instruments such as repurchase agreements, swap agreements, commodity contracts, forward contracts, and other types of financial contracts. And that is a specific provision of the Bankruptcy Code.

   Now even if the automatic stay applies in a case, the affected creditor may ask the bankruptcy court to modify or lift the automatic stay, and the court can do so if it determines that cause exists to do so. So typically if the creditor has a secured claim in some property and the property is not necessary for the business' reorganization, or if the creditor is owed more than what the value of the collateral is worth, those are the types of situations where a court may find that cause exists to lift the automatic stay. Also in connection with certain types of some litigation, perhaps between a third party and a debtor where the litigation has really kind of proceeded and is nearing the end and all that needs to be determined is potential liability or things like that, a bankruptcy court may determine to allow other litigation to go forward at least to determine whether or not a debtor is liable with respect to the underlying litigation.

   There are special rules for lifting the automatic stay in single asset real estate cases. I won't go into that in any detail here, but many cases involve an LLC typically or even a corporation, where it's only asset or only material asset is a piece of real property. And there are special rules to govern those cases, because typically those cases are filed by the entity that owns the real estate on the eve of some sort of foreclosure action or default being called by the mortgagee.

   Next I'll talk about the treatment of contracts and leases that a company has in bankruptcy. Now many contracts provide that the contract would terminate or gets modified in some way if one of the parties to that contract files for bankruptcy, we call those ipso facto clauses. Because there's a bankruptcy or because there's some sort of financial deterioration of some sort, one party has the power to terminate or modify the contract. And the thing you need to know in bankruptcy is that those types of ipso facto clauses are unenforceable generally in bankruptcy. The Bankruptcy Code provides that an executory contract or an unexpired lease may not be terminated or modified solely because of a provision in that contract that is conditioned on the insolvency or financial condition of the debtor, the commencement of the bankruptcy case, or the appointment or taking possession by a bankruptcy trustee or a custodian before the commencement of a case.

   So there will be a lot of contracts you'll see that will say, "Party one gets to terminate the contract if party two files bankruptcy." And what you need to know is in an most circumstances, that is going to be unenforceable if party two actually does file bankruptcy. So what does that mean? That that means that the contract is still going to be in effect, and the contract or lease is still enforceable by the debtor against the counterparty, but the counterparty doesn't necessarily have the ability to enforce the contract against the debtor. So it's a weird situation where the bankruptcy case gives the debtors at least some rights with respect to the contract that the counterparty does not have.

   Now there are a couple things that the debtor can do with that contract. The idea of that, by the way, is to allow the debtor to have some time to decide whether it's particular contracts or leases are beneficial to them or whether they're burdensome. And if a contract or a lease is beneficial, the debtor can decide to assume the contract, it's called assumption. And what a debtor would do to assume a contract is it would ask the bankruptcy court to approve the assumption of the contract. And in order to assume a contract, the debtor must do a couple of things. One, it must cure all existing defaults under the contract. So including payment defaults and other defaults under the contract, basically the debtor needs to make the counterparty whole and make up for any default if it wants to assume the contract. It also must provide adequate assurance to the creditor that it can continue to perform its obligations under the contract after it is assumed.

   Another thing that a debtor can do is assume and then assign the contract to a third party, and a debtor will typically do so in connection with a sale of its assets. And to assume and assign a contract, the debtor must also ask the court to approve it. And there the obligation of the debtor or the third party is to cure the defaults under the contract, just like assumption. The counterparty needs to be made whole. And then the assignee, the third party that's getting the contract, would have to provide adequate assurance to the counterparty that it can start and later perform the terms of the contract after it receives assignment of that contract. So those are two things that a debtor can do if it decides that a contract or lease is beneficial.

   What a debtor can do if it decides that a contract is not helpful, if it's burdensome, is it can reject the contract. And in order to reject the contract, the debtor must file a motion to reject the contract with the bankruptcy court. And once the contract is rejected, once the judge approves the rejection, the counterparty would not be entitled to any cure. All they would have is a general unsecured claim for anything that was owed before bankruptcy as well as a general unsecured claim for any damages arising out of the rejection. So in a rejection situation, the creditor is treated worse than it would be if the contract were assumed. Now even in a rejection scenario, the counterparty would be entitled to an administrative expense full payment for any goods or services or any value provided to the debtor under the contract during the bankruptcy. But any pre-bankruptcy defaults and any damages relating to the rejection would be treated as general unsecured creditors.

   So in a lot of situations what a debtor will do with its counterparties is once it files bankruptcy, or maybe even before it files bankruptcy, it'll go out to their contract and lease counterparties and say, "Look. The current terms of these agreements don't work for me, the debtor. I'm going to go and reject those contracts and leases in bankruptcy unless you agree to some sort of modification. If we agree to a modification, then I, the debtor, will ask the court to assume the contract as modified." So modification is something that a debtor can do consensually with the counterparties' approval. A debtor cannot unilaterally modify a contract without the counterparty's approval so all a debtor can do without getting the counterparties' approval, all they need is the bankruptcy court's approval is they can assume, assume and assign, or reject. But there is a potential for modification that can be done with the counterparties' consent.

   There are certain types of situations where a debtor cannot assume or assign a contract, and these will be situations like personal services contracts or certain types of intellectual property agreements, where applicable law excuses the counterparty from performing to a third party. So basically what the court would look at is non-bankruptcy states or federal law that would excuse a counterparty from accepting performance by somebody else. And your typical situation would be a personal services contract, for instance. If I find Picasso here and I'm a fantastic artist and I agree to you to paint a portrait for $50,000 because I'm that good, I as a painter decide to file bankruptcy, I can't assign the contract to my next door neighbor who can barely draw within the lines or color within the lines. Because you, as a counterparty, would have contracted with me, the fantastic artist, to do that work.

   I'm going to now talk a little bit about what Chapter 11 plans and disclosure statements look like. These are generally your ultimate intended end games in a Chapter 11 reorganization process. So if a company has decided that it has come up with a business plan and a plan for paying, or at least making distributions, to their creditors and exit from bankruptcy, they do so under a Chapter 11 reorganization plan. In addition to a Chapter 11 plan, which is part of the plan process, the company must also file a written disclosure statement that would contain information concerning the assets, liabilities, and business affairs of the debtor in such detail that would be sufficient to enable the creditor to make an informed judgment about how it would want to vote on a debtor's plan of reorganization.

   These tend to be very lengthy documents, disclosure statements look almost like Form S-1s in Security filings because it provides a lot of detail about the business and what the Chapter 11 plan would look like, what the risk factors are, what the alternatives are if the Chapter 11 plan is not approved, and so forth. In certain types of small business cases, there is no need for a disclosure statement because generally in smaller cases, the code is basically determined that a plan itself is sufficient. There should not be a need for a separate disclosure statement because there's already adequate information out there. But in midsize and large Chapter 11 cases, you would need a written disclosure statement that would accompany a plan. Now what would happen is that the disclosure statement would be approved by the bankruptcy courts and then that court approved disclosure statement and the plan would then be sent to creditors who would be entitled to vote as to whether they wish to accept or reject the plan.

   Now voting is done on a class basis in Chapter 11. Basically what would happen is that various types of groups of holders, unsecured creditors, priority creditors, subordinated creditors, equity holders would be grouped together and would vote to accept or reject the plan as a class. And some plans would also provide that different types of creditors against different types of entities would also be grouped separately because some entities within the debtor organization may hold different amounts or types of assets, so those creditors may be treated somewhat differently than creditors of other entities within the enterprise.

   So voting is done by creditors whose rights are impaired under the plan, and a claim is considered impaired under the plan unless the plan leaves the legal, equitable, and contractual rights of the creditors unaltered, or if the plan cures non-bankruptcy defaults and provides for compensation of damages. If either of those two situations apply, the plan leaves all rights unaltered or if the defaults are completely cured, they would be considered unimpaired and would not vote on the plan and they would be deemed to accept the plan. Anybody else who is impaired, but receives something under the plan, will get to vote whether or not to approve or reject the plan. And again, as I mentioned before, voting is done on a class basis. So a class would be deemed to approve a plan if it's accepted by the holders of at least two-thirds in amount and more than one half in number of the claims in the class that actually vote.

   So here you have a situation where you do not need unanimity among creditors or members of a class of creditors to approve or accept a Chapter 11 plan. That's part of the magic of Chapter 11, is that unlike an out of court restructuring where you generally need to get everybody's consent to a particular restructuring outcome, in Chapter 11 you can impose a plan on creditors who do not vote to accept the plan. As long as the class itself approves the plan, those dissenting individual creditors would be deemed to consent to the plan. Unimpaired classes, again those who are being left alone in bankruptcy, they're going to be deemed to accept the plan. They do not get to vote. And an impaired class that get nothing under the plan, they also don't vote, but they would be deemed to reject the plan. So in a lot of Chapter 11 cases, you'll have equity holders who get nothing under the plan. They're impaired because a plan takes away their rights as stockholders or membership holders, but they're getting nothing under the plan because there's not enough left for them. Those equity holders would be deemed to reject the plan.

   So once the voting is done, the tabulation is in, the court would then decide whether or not to confirm the Chapter 11 plan. Now plan confirmation is ... that's a topic that would take hours to cover every nook and cranny of plan confirmation requirements. Suffice to say, Section 1129A of the Bankruptcy Code lists the requirements that a Chapter 11 plan must meet to be confirmed. There are a number of requirements, many requirements. But a few of them are that the proponent of the plan must comply with the provisions of the Bankruptcy Code, the plan must be proposed in good faith and not by any means forbidden by law, confirmation cannot be likely to be followed by the liquidation or the need for further reorganization later. In other words, the plan has to be feasible.

   In most cases, the plan has to be accepted by at least one class of non-insiders that hold impaired claims. In other words, at least one voting class has to have voted to approve the plan. The plan must provide that post-bankruptcy administrative expense claims get paid in full and in cash on the effective date of the plan, unless the holders of those claims agree otherwise. So basically the plan must provide for the payment of all debts that were incurred during the bankruptcy, unless the holders of those claims agree otherwise. And then another requirement of plan confirmation, at least consensual plan confirmation, is that every class of claims and interests must have accepted the plan. So therefore plans where any class has voted to reject the plan or any class where there's going to be an impaired class that get nothing, they would have to go through a separate procedure in order to have the plan confirmed because you would not have full consent.

   So you have plan confirmation under section 1129A with the consent, or at least the approval, of all impaired classes. I would consider that the consensual manner. The other way is to have a plan confirmed via cramdown, which is a situation in which a plan can be confirmed over the rejection or the deemed rejection of one or more classes of creditors and equity interests, as long as the plan does not discriminate unfairly against the rejecting class and that the plan is fair and equitable with respect to the class. So we have, for cramdown, non-consensual confirmation of plans. The plan cannot discriminate unfairly against the dissenting classes, and the plan must be fair and equitable to those classes. And there's a lot of case law about what unfair discrimination may be. Not all discrimination is unfair. Equal classes can, in fact, be given different kinds of consideration under a plan as long as they receive rough equivalence to each other.

   The fair and equitable test, the Bankruptcy Code provides what secured creditors must receive in order for the plan to be fair and equitable with respect to their secured claims. To be fair and equitable to a class of unsecured claims, the so-called absolute priority rule applies. Which means that in order for a plan to be fair and equitable for a class of unsecured claims, the plan must provide that those class of unsecured claims receive basically a payment in full or that lower priority creditors, junior creditors, cannot receive anything. So either unsecured creditors, the class must be paid in full, or if they're not paid in full, nobody below them can receive anything on account of their junior claims. Now it's not as simple as it sounds from just scratching the surface here, because there's a fair amount of case law on issues where a debtor tries to get around the absolute priority rule. And in some circumstances, the debtor is able to do so.

   Last I'll talk a little bit about preferences, because a number of creditors will end up potentially being sued by a bankruptcy trustee, debtor possession, or some sort of post-Chapter 11 trust to seek to clawback certain transfers that the debtor made to the creditor within 90 days before the bankruptcy filing. Now there's a situation where a debtor pays its debts to third parties, even undisputed debts, within the 90 days before it files bankruptcy. Later on, up to two years later, the representative of the debtor may go back to the creditor and say, "Look. I want the money back that the debtor paid you, even though the debt was undisputed and you provided the goods and services and you were entitled to the money."

   The idea behind this 90-day clawback statute, this preference statute, is to try to foster equality of distributions to creditors. The idea is some creditors would've gotten paid during the 90 days before bankruptcy and others may not have, and those creditors that did get paid should really give back some of the money that it got paid so that those that did not get paid could get some sort of distribution. The preference statute is also there to prevent aggressive collection activities by certain creditors. So if a creditor makes a lot of noise and really tries to collect against the debtor and gets paid during the 90 days, that creditor is more likely going have to give back some or all of that payment for the benefit of the other creditors who were not as aggressive.

   Now the elements of a preference action are set forth in Section 547 of the Bankruptcy Code. Transfer can be clawed back as a preference if it was made to or for the benefit of a creditor, made for on account of an existing debt, made on or within 90 days before the bankruptcy filing, or within one year if the transfer was into an insider of the company, and if it was made while the debtor was insolvent, and it enabled the creditor to received more than it would have received in a Chapter 7 liquidation. Now I counsel a lot of companies that receive demand notices and adversary proceeding complaints with respect to preferences. Just because you get a letter or receive a complaint does not mean you have to pay back the entire thing.

   There are defenses to preference actions, which usually would be asserted by defendants, and the ultimate outcome tends to be some sort of settlement whereby the defendant, the creditor, pays back something less than what they receive. Because of these potential defenses there's an ordinary course of business defense, there's a subsequent new value defense. Ordinary course of business defense basically is that the payments were made roughly in accordance with the ordinary course of business between the parties or within industry standard in effect before the 90 days. And so this was the payment would basically be a continuation of an ordinary course transaction. Or a creditor may reduce the amount, but it would have to give back on a preference if it provided new value to the creditor subsequent to that transfer. So the preference statute is something that creditors should certainly look at when they're doing business with a potential debt, but does not necessarily mean that if a creditor receives that notice that they would actually have to give back the full amount.

   So that is a general overview of Chapter 7 and Chapter 11. There would be a lot more to discuss. I barely scratched the surface in this hour, but hopefully this was a helpful overview of what a business bankruptcy tends to look like. Thank you very much for your time.