Debtor In Possession
While individuals are not precluded from using chapter 11, it is more typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separately and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation does not put the personal assets of the stockholders at risk, although they may lose the value of their investment in the company’s stock. A sole proprietorship, on the other hand, does not have an identity separate and distinct from its owner(s); accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal estates of the owners-debtors. Like a corporation, a partnership exists separately and apart from its partners; however the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case; or the partners may, be forced to file for bankruptcy protection.

Section 1107 of the Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a chapter 11 trustee, and requires the performance of all but the investigative functions and duties of a trustee. Such powers and duties include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the United States trustee, such as monthly operating reports. The debtor in possession also has many of the other powers and duties of a trustee including the right, with the court’s approval, to employ attorney’s, accountants, appraisers, auctioneers, or other professional persons. Other responsibilities include filing tax returns and filing such reports as are necessary or as the court orders after confirmation such as a final accounting. The United States trustee is responsible for monitoring the debtor in possession’s compliance with the reporting requirements.

The debtor in possession also has many of the other powers and duties of a trustee including the right, with the court’s approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons. As soon as is practicable, the debtor in possession must either file a plan or a report explaining why a plan will not be filed, or recommend that the case be converted to another chapter or dismissed.

Small Business Debtor
Certain types of debtors are defined in the Bankruptcy Code and have special provisions that apply only to them. One such debtor is a “small business,” defined as a person engaged in commercial or business activities (not including a person who primarily owns or operates real property) who has aggregate non-contingent liquidated secured and unsecured debts that do not exceed $2,000,000.00. If a debtor qualifies and elects to be considered a small business, the case is put on a “fast track” and treated differently than a regular chapter 11 case under the Code. For example, the appointment of a creditor’s committee and a separate hearing to approve the disclosure statement are not mandatory. On request of a party in interest and for cause, the court may order that a creditor’s committee not be appointed. The court may conditionally approve a disclosure statement, subject to final approval after notice and a hearing. Solicitation of votes for acceptance or rejection of the plan may proceed based on the conditional approval of the disclosure statement. Thereafter, the disclosure statement hearing may be combined with the confirmation hearing. In addition, the debtor has a shortened period of time within which only the debtor may file a plan. After that period expires, any party in interest may file a plan; however, all plans must be filed within 160 days from the date of the order for relief.

Single Asset Real Estate Debtor
Another type of debtor that has special provisions under the Bankruptcy Code is a single asset real estate debtor. The term “single asset real estate” is defined as “a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debtor” other than operating the real property and which has aggregate non-contingent liquidated secured debts of no more than $4,000.000.00. The Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay. For example, on request of a creditor with a claim secured by the real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor, within 90 days from the date of the order for relief, unless the debtor files a feasible plan of reorganization or begins making payments to the creditor. The payments must be equal to the current fair market interest rate on the value of the creditor’s interest in the real estate.

The Automatic Stay
The automatic stay provides for a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed. The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. §362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation.

Under certain circumstances, such as when the debtor has no equity in the particular property and that property is not necessary for an effective reorganization, the secured creditor can obtain an order from the court granting relief from the automatic stay to foreclose on the property, sell it, and apply the proceeds to the debt. A secured creditor is one which has a lien against or interest in certain property of the debtor to secure payment of a debt or performance of an obligation.

Creditor’s Committees
Creditors’ committees can play a major role in chapter 11 cases. The United States trustee, a federal employee to be distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of the persons willing to serve on the committee who hold the seven largest unsecured claims against the debtor. Unsecured claims are those for which the extension of credit was based upon an evaluation by the creditor of the debtor’s ability to pay, as opposed to retain a lien against the property of the debtor to secure payment. In addition, other types of unsecured claims may arise from patent infringement, personal injury or other damage claims. The committee may consult with the debtor in possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan. A creditors’ committee can be an important safeguard to the management of the business by the debtor in possession.

The United States State Trustee
In addition to the private case trustee or examiner and the creditors’ committee, the United States trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The United States trustee is responsible for monitoring the debtor in possession’s operation of the business, the submission of operating reports and fees, applications for compensation and reimbursement, plans, and disclosure statements, and creditors’ committees. The United States trustee conducts a meeting of the creditors, often referred to as the “341(a) meeting,” in a chapter 11 case. The United States trustee and creditors may question the debtor under oath at the 341(a) meeting concerning the debtor’s acts, conduct, property, and the administration of the case.

The United States trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, the establishment of new bank accounts, and the payment of current employee withholding and other taxes. By law, the debtor in possession must pay a quarterly fee to the United States trustee for each quarter of a year until a plan is confirmed or the case is converted or dismissed. The amount of the fee depends upon the amount of disbursements during each quarter. Should a debtor in possession fail to comply with the reporting requirements of the United States trustee, or order of the bankruptcy court, or fail to take the appropriate steps to bring the case to confirmation, the United States trustee may file a motion with the court to have the debtor’s chapter 11 case converted to a case under another chapter of the Code or file a motion to have the case dismissed.

The Disclosure Statement
The filing of a written disclosure statement is preliminary to the voting on a plan of reorganization, and the disclosure statement must provide “adequate information” concerning the affairs of the debtor, to enable the holder of a claim or interest to make an informed judgment about the plan. After the disclosure statement is filed, the court must hold a hearing to determine whether the disclosure statement should be approved. Acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement. After the disclosure statement has been approved, the debtor or proponent of a plan can begin to solicit acceptances of the plan, and creditors may also solicit rejections of the plan.

Acceptance of the Plan
During the first 120 day period after the filing of the voluntary bankruptcy petition, which filing also acts as the order of relief that begins the automatic stay, only the debtor in possession may file a plan of reorganization. The debtor in possession has 180 days after the filing of the voluntary petition (or in a case commenced by an involuntary petition after the order for relief) to obtain acceptances of the plan. For cause, the court may extend or reduce this exclusive period. The exclusive right of the debtor in possession to file a plan is lost, and any party in interest, including the debtor, may file a plan if an only if: (1) a trustee has been appointed in the case; (2) the debtor has not filed a plan within the 120-day exclusive period or any extension granted by the court; or (3) the debtor has not filed a plan which has been accepted by each class of claims or interests that is impaired under the plan within the 180 day period or any extensions granted by the court.

If the exclusive period expires before the debtor has filed and obtained acceptance of a plan, other parties in interest in a case, such as the creditors’ committee or a creditor, may file a plan. Such a plan may compete with a plan filed by another party in interest or by the debtor. If a trustee is appointed, the trustee is responsible for filing a plan, a report of why the trustee will not file a plan, or a recommendation for the conversion or dismissal of the case. A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and solicitation.

It should be noted that in a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a chapter 7 liquidation. It also permits the creditors’ committee to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case.

Section 1123(a) of the Bankruptcy Code lists the mandatory provisions in a plan, and section 1123(b) lists the discretionary provisions. Section 1123(a)(1) provides that a chapter 11 plan shall designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.

Under section 1126(c) of the Code, an entire class of claims has accepted a plan if the plan has been accepted by the creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of the class held by the creditors that have accepted or rejected the plan, i.e., creditors who have not voted on the plan. Under section 1129(a)(10), if there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered). Moreover, under 1126(f), holders of unimpaired claims are deemed to have accepted the plan.

Under section 1127(a) of the Bankruptcy Code, the proponent may modify the plan at any time before the confirmation, and the modified plan will become the plan; but the plan as modified must meet all the requirements of chapter 11. Bankruptcy Rule 3019 provides that when there is a proposed modification after balloting has been conducted, and if the court finds after a hearing that the proposed modification does not adversely affect the treatment of any creditor who has not accepted the modification in writing, the modification shall be deemed to have been accepted by all creditors who previously accepted the plan. If it is determined that the proposed modification does have an adverse effect on the claims of non-consenting creditors, then another balloting must take place.

Because more than one plan may be submitted to the creditors for approval, Bankruptcy Rule 3016(b) requires that every proposed plan and modification be dated and identified with the name of the entity or entities submitting such plan or modification. When competing plans are presented and meet the requirements for confirmation, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm.

Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on the confirmation of a plan. If no objection to confirmation has been timely filed, the Code allows the court to determine that the plan has been proposed in good faith and according to law. Before confirmation can be granted, the court must be satisfied that there has been compliance with all the other requirements of confirmation set forth in section 1129 of the Code, even in the absence of any objection. In order to confirm the plan, the court must find that: (1) the plan is feasible, (2) it is proposed in good faith, and (3) the plan and the proponent of the plan are in compliance with the Code. In addition, the court must find that confirmation of the plan is not likely to be followed by liquidation or the need for further financial reorganization.

Chapter 11 Discharge
While some courts have a practice of issuing a discharge order in a case involving an individual, a separate order of discharge is usually not entered in a chapter 11 case, because the discharge given to the debtor is one of the effects of confirmation as set forth at 11 U.S.C. §1141(d). Section 1141(d)(1) specifies that the confirmation of a plan discharges the debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan or discharge creates new contractual rights, replacing or superseding pre-bankruptcy contracts.

There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization will discharge any type of debtor – corporation, partnership, or individual – from most types of pre-petition debts. It does not, however, discharge an individual debtor from any debt made non-dischargeable by section 523 of the Bankruptcy Code. Confirmation does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, and the debtor is not an individual. When the debtor is an individual, confirmation of a liquidation plan will effect a discharge unless grounds would exist for denying the debtor a discharge if the case were proceeding under chapter 7 instead of chapter 11.