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The American reorganization process challenges and opportunities

Often times when a foreign company hears the word “bankruptcy,” a great fear overcomes them. The initial impulse is to ignore the bankruptcy and hope it will go away because of the challenges American bankruptcies can present. However, there are significant opportunities for foreign companies to participate in the chapter 11 reorganization processes in the United States if the company is a creditor, supplier or contract holder with the debtor. Further, even foreign companies that had no direct involvement with the U.S. company prior to the bankruptcy still have opportunities to participate in the reorganization.

Chapter 11 reorganizations were created in the United States by Congress as part of the Bankruptcy Code to help rehabilitate financially distressed United States businesses. Chapter 11 gives those businesses, now called debtors-in-possession or DIPs, significant rights that do not exist outside of a chapter 11 bankruptcy process. For instance, an immediate automatic stay is put in place preventing creditors, landlords, contract holders and others from repossessing property, terminating a contract or pursuing a lawsuit for collection until the automatic stay is terminated. In addition, a chapter 11 debtor has the extraordinary right to assume or reject particular executory contracts and certain leases. These include labor contracts, real property leases, employment contracts and any types of contracts that still have duties to be performed by both sides of the contract.

Creditors of chapter 11 debtors have certain rights that they should pursue aggressively and expeditiously. For instance, immediately upon the filing of a chapter 11, creditors can reclaim certain goods delivered or in the process of being delivered to a debtor. Occasionally, a creditor can be classified as a “critical vendor” and thus be paid for prepetition debts. Also, a significant creditor can become a member and participate in a creditors’ committee that may be formed in a chapter 11. While these and other rights exist, they are only valuable if exercised.

Monitoring the chapter 11 and becoming familiar with the intentions of the debtor is critical. For instance, creditors should determine as early as possible whether the debtor intends to rehabilitate its business with the existing equity structure, create a new equity structure for a surviving business, or sell part or all of its assets in a sale or pursuant to a plan of reorganization. The goal of chapter 11 reorganization is to have a confirmed plan approved by the bankruptcy court. Prior to confirmation, a disclosure statement is usually disseminated to the creditors, which contains information and gives the creditors the opportunity to make an informed decision whether to vote for or against the plan. It is beyond the scope of this short paper to discuss the intricacies of what goes into the actual confirmation process.

There are opportunities for foreign businesses to participate in the chapter 11 process even if they are not parties in interest in the chapter 11 such as creditors, contract holders or suppliers. For example, a foreign business may consider purchasing assets of the debtor-in-possession. Purchasing the debtor’s assets can be accomplished either through a “363 Sale,” or a plan of reorganization. A 363 Sale can occur quickly prior to the confirmation of a plan, while a sale pursuant to a plan cannot occur until after its confirmation. Both types of sales, however, require some form of bankruptcy court approval. A significant advantage of a bankruptcy sale is that the purchase of assets is done free and clear of any and all liens, thus perhaps the most efficient way to purchase assets from businesses that may be in distress.

Regardless of the type of relationship a foreign company maintains with a chapter 11 debtor, it is imperative for the foreign business to be aware of its rights, duties and obligations under the Bankruptcy Code. A keen awareness of United States bankruptcy law will allow a foreign company to successfully overcome challenges and pursue opportunities with chapter 11 debtors.

  • Senior Partner

    John is a member of the Tax and Finance Department. He works exclusively in the business reorganization process, both in Chapter 11's and state law workouts. He represents debtors, as well as creditors, both secured and unsecured. He ...



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