More than 200 changes have been recommended to reform Chapter 11 of the U.S. Bankruptcy Code in the recently released American Bankruptcy Institute (ABI) Chapter 11 Commission Report. Of the several recommendations affecting secured creditors’ rights, most will have the effect of weakening these rights.
One recommended change that is beneficial to secured creditors is a proposed 60-day moratorium on 363 sales unless a party can show that a debtor’s asset values would be adversely impacted by the delay. In addition, the bankruptcy court must determine if the 363 sale satisfies at least some of the requirements of the Chapter 11 reorganization plan and that it would be in the best interest of the estate to proceed with a 363 sale.
Bankruptcy courts in Chapter 11 reorganization cases have traditionally used a number of different business valuations to determine the worth of collateral for purposes of providing creditors with adequate protection, including retail value, liquidation value, wholesale value, replacement value and an average of liquidation and fair market value. The ABI Commission has recommended that adequate protection values in Chapter 11 cases should now be based on foreclosure value, which can potentially reduce a secured creditor’s adequate protection payments significantly.
Section 1129(a)(10) of the Bankruptcy Code requires that at least one class of creditors must approve a Chapter 11 reorganization plan. The ABI Commission has recommended the elimination of this section, which means that a Chapter 11 reorganization plan could move forward without the approval of any secured creditors.
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