The Examiners: Companies Need Time to Reorganize

If you could make one change to the bankruptcy code, what would it be?

In 2005, after eight years of drafting and a fair amount of political wrangling, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Widely supported by lenders and other institutions, BAPCPA was largely intended make it more difficult for some consumers to file for bankruptcy under Chapter 7. The qualitative data remains far from clear as to whether BAPCPA has achieved its desired aims in the consumer realm. Two other so-called reforms, however, significantly changed the landscape of Chapter 11. I believe both deserve scrutiny and serious consideration of future modification.

Prior to BAPCPA, a Chapter 11 debtor could seek generally unlimited extensions of the exclusive period to file and solicit a plan of reorganization. BAPCPA placed a limit of 18 months to file and 20 months to solicit a plan of reorganization. Secondly, prior to BAPCPA, while the bankruptcy code deemed a real property lease rejected if not assumed within a 60-day period, bankruptcy courts had authority to extend the assumption/rejection decision up to the date of plan. BAPCPA provides for a hard 210-day limit to make this critical decision.

Supporters of these two provisions (and several others) contended that Chapter 11 debtors had been able collectively to use the bankruptcy code to stonewall progress in Chapter 11 cases to the detriment of creditors while clogging the bankruptcy courts with Chapter 11 cases that had no end. Of course, these views simply ignored the reality that in order to obtain extensions of these deadlines and further the Chapter 11 process, debtors had to demonstrate cause to the bankruptcy court and generally had to have some level of creditor support, especially as the cases progressed. Nonetheless, these two changes made their way into BAPCPA and have fundamentally changed Chapter 11.

How? By creating largely artificial timing constraints, the BAPCPA changes have provided lenders and certain creditors with undue influence over the progress of Chapter 11 cases. This influence too often is used to focus on short-term returns versus longer-term business viability. One effect of this is that lenders are often unwilling to provide true debtor-in-possession financing to bridge to a going-concern reorganization. All of this seems to run counter to the well-established precept that a Chapter 11 debtor should be afforded with the “breathing room” necessary to restructure its affairs.

Thus, with limited liquidity and time, BAPCPA has constrained the alternatives available to Chapter 11 debtors, largely relegating them to selling their assets in whole or in part under section 363 of the bankruptcy code or, worse, liquidating. The list of Chapter 11 debtors that have been forced down this path is numerous, while the list of those who have been able to successfully reorganize their operations—thereby protecting not only jobs, but also creditor relationships—is much smaller.

With the likelihood that more companies will be forced to rely upon Chapter 11 to solve their liquidity and operating challenges in the next several years, serious consideration should be given to affording these debtors the ability to actually use Chapter 11 in the manner it was created and not with the restrictions imposed by BAPCPA.

Richard A. Chesley is the co-chair of DLA Piper’s restructuring practice, focusing on bankruptcy transactions both in the United States and internationally. He is based in Chicago.