Chapter 22 Bankruptcy Cases: Your Questions Answered

Contributed by: R. J. Shannon

What is a “Chapter 22” case?

“Chapter 22” refers to repeat chapter 11 filings. Although the term is used to mean any repeat chapter 11 filings by a debtor, it best describes situations when either the first chapter 11 case is still ongoing (e.g., a confirmed plan of reorganization is still being implemented) or the subsequent filing is substantially related to the same difficulties the debtor faced in the first chapter 11 case.

What is the prevalence of repeat filings?

From 1984-2013, approximately 15% of publicly traded companies that were acquired through or emerged from chapter 11 re-filed during that period. Looking only at companies that emerged as a continuing, independent entity, the recidivism rate was approximately 18%.

What does the Bankruptcy Code say about repeat chapter 11 filings?

The Bankruptcy Code does not prohibit repeat filings but a Chapter 22 can look like an end run around certain provisions of chapter 11. To wit, Bankruptcy Code § 1127 prohibits nonindividual debtors from modifying a confirmed plan of reorganization that has been substantially consummated. The only options once the plan has been consummated are conversion to chapter 7 or dismissal under Bankruptcy Code § 1112. Further, Bankruptcy Code § 1141(a) makes the terms of a confirmed plan otherwise binding on the debtor, creditors, and equity holders.

Contrary to these provisions, the practical effect of a Chapter 22 can be the amendment of the prior plan (prohibited by § 1127) and further modification of the rights between the debtor and its creditors (limiting the legal force of § 1141).

What have courts said about repeat chapter 11 filings?

Courts have generally analyzed repeat chapter 11 filings under a good-faith framework. While a Chapter 22 can permit a debtor to improperly bypass prohibitions contained in the Bankruptcy Code, the Fifth Circuit held in Elmwood Dev. Co. v. General Electric Pension Trust (In re Elmwood Dev. Co.) that successive bankruptcy filings may be in good faith where unanticipated changed circumstances arise.

In In re JCP Properties, the U.S. Bankruptcy Court for Southern District of Texas pointed out that the critical analysis conducted by the Fifth Circuit in Elmwood was “whether the filing of the subsequent case was so ‘related in time or substance’ so as to offend ‘traditional notions of res judicata’ and whether the debtor otherwise evidences good faith in the subsequent filing.” JCP Properties presented five factors to consider in this analysis:

(i) The length of time between the two cases;
(ii) The foreseeability and substantiality of events which ultimately caused the subsequent filing;
(iii) Whether the new plan contemplates liquidation or reorganization;
(iv) The degree to which creditors consent to the filing of the subsequent reorganization; and
(v) The extent to which an objecting creditor’s rights were modified in the initial reorganization and its treatment in the subsequent case.

How does feasibility play into this?

Bankruptcy Code § 1129(a)(11) conditions plan confirmation on a finding that “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan.” Courts have held that bankruptcy judges must make an independent finding of feasibility even in the absence of any objection to confirmation. The goal is to prevent the need for a debtor to re-file bankruptcy.

Some commentators have called for increased judicial scrutiny of feasibility to reduce the number of Chapter 22 filings. In support of this position, empirical analysis suggests that jurisdictions with laissez-faire reputations (deservingly or not) have higher rates of repeat filings than other jurisdictions.

What’s so bad about repeat filings, anyway?

Beyond the tensions described in Question 3 with provisions of the Bankruptcy Code, increase in the amount of professional fees in repeat filings is a common criticism of repeat filings. The argument is that the debtor’s estate pays twice to arrive at a viable going concern or liquidation. Other reviewers do not see repeat filings as a problem.

Parties lower in priority often come out better as the result of a Chapter 22. For example, in plans where general unsecured creditors receive a negotiated amount of cash and proceeds from causes of action on the plan’s effective date, they will tend to have a better outcome than higher priority claimants who are receiving a full payment over time.

Secured lenders who negotiated longer term amortization of their secured claims, bondholders who converted their debt into equity, and investors who injected new money for controlling equity in the debtor are the potential losers in a repeat filing. Unlike the unsecured creditors who were taken out on the “effective date” of the plan, these other parties must wait until the business has improved and the debt or equity in the reorganized debtor has actually come into the money to realize a recovery. The repeat filing usually means that these parties guessed wrong about the ability of the debtor to successfully reorganize under the terms of the prior plan.

I had an allowed claim in the first chapter 11 case. What happens to my claim in the second case? Do I need to file another proof of claim in the subsequent case?

The treatment of a claim depends on the previously confirmed plan of reorganization. If the plan provides that the reorganized debtor will make plan payments, the claim is against the debtor and a second proof of claim may be necessary. If the plan provided that the claim will be paid by a trustee, however, creditors’ claims against the trust will likely not be affected.

To the extent that a proof of claim is necessary, res judicata may apply with respect to the merits of the claim. The debtor may be prohibited from challenging the substance of the claim in the second case if the claim was allowed in the previous case.

Are payments made pursuant to a confirmed plan of reorganization subject to avoidance in a Chapter 22 case?

Plan payments may be challenged as preferences in a subsequent bankruptcy filing. Property of the bankruptcy estate vests with the debtor upon confirmation of a plan, unless the plan provides otherwise, according to Bankruptcy Code § 1141(b). Bankruptcy Code § 1141(a) and (d) provide that the confirmed plan creates new biding obligations between the debtor and its creditors. Payments according to the plan are therefore transfers of the debtor’s interest in property for the benefit of a creditor on account of an antecedent debt. Where the plan payment allows certain creditors to receive more than they would have in a chapter 7 and the debtor is insolvent, it would be an avoidable preference under Bankruptcy Code § 547 unless a defense applies.

An attempt to avoid a plan payment as a fraudulent transfer, however, would likely fail. Bankruptcy Code § 1129(a)(3) requires a finding that the plan was proposed in good faith for confirmation. This precludes a later contradictory finding that the obligation was incurred with the intent to hinder, delay, or defraud creditors as required for actual fraudulent transfer under Bankruptcy Code § 548(a)(1)(A) and strongly suggests that the payment of the obligation was also in good faith. Because plan payments are enforceable obligations against the debtor, the debtor received reasonably equivalent value for the plan payment for purposes of constructive fraudulent transfers under Bankruptcy Code § 548(a)(1)(B).

Where the plan provides for the continued existence of the bankruptcy estate or establishes a trust to administer claims, distributions to creditors should be safe from avoidance actions. Bankruptcy Code §§ 547 and 548 do not apply because the distributions are made by the trust or bankruptcy estate rather than the debtor.

Does the Small Business Reorganization Act of 2019 affect Chapter 22 filings of small business debtors?

The Small Business Reorganization Act of 2019 adds section 1193 to the Bankruptcy Code. Bankruptcy Code § 1193 provides a mechanism for the modification of a plan after substantial consummation. This amendment appears to largely eliminate the need for a repeat filing in small business cases.

Has the United States Trustee’s Office provided any guidance on repeat filings?

No. However, within Region 7 (Texas), the United States Trustee would likely look to the good faith analysis applied by the Fifth Circuit in In re Elmwood to determine whether the repeat filing is appropriate.

What are some recent Chapter 22 cases?

The following notable large Chapter 22 cases were filed in 2019:

Oil & Gas Industry:

  • Vanguard Natural Resources, Inc., S.D. Texas, Case No. 19-31786
  • Halcon Resources Corporation, S.D. Texas, Case No. 19-34446

Retail Industry:

  • Charming Charlie Holdings Inc., Delaware, Case No. 19-11534
  • Gymboree Group, Inc., E.D. Virginia, Case No. 19-30258
  • Payless Holdings LLC, E.D. Missouri, Case No. 19-40883

1 Comment

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