The Pre-packaged Chapter 11 Bankruptcy
A regular Chapter 11 is initiated upon your lawyer’s filing of the bankruptcy petition. Then all creditors are immediately notified of the filing.
The most critical ingredient in a successful development of a Chapter 11 in the “pre-pak” format is having only a few major lenders with which to deal prior to actual filing the Chapter 11. First, the debtor must design the major Plan of Reorganization creditor payment terms, to which major secured and significant large unsecured creditors must agree and sign immediately before the bankruptcy filing. That condition is critical to the shortened duration. Typical terms might be extending the loan’s terms, or interest rate, or other conditions—or, sometimes, no conditions. This is designed to encourage these lenders to accept those pre-pak terms in place of a regular longer-term and considerably more expensive traditional Chapter 11. That way, there might be only one, two, or three new payment agreements to be completed prior to filing. Once the pre-pak is filed, most of the remaining unsecured creditors will probably agree to reasonable restructuring terms.
In dealing with the secured creditors up-front, it is important to be (and to have been) straightforward and open with them in your discussions about the company’s challenges and how this pre-pak would benefit them relative to their current situations.
Ability to cancel unprofitable leases, and other contracts
Fortunately, there are sometimes other valuable of the benefits Chapter 11, which offer the debtor even greater benefits—the rights to cancel executory contracts, which can be generally defined as leases, franchise agreements, installment credit loans, mortgages, consulting and service contracts, etc. These can generally be cancelled immediately at the debtor’s option. In some examples, such as long-term unprofitable real estate leases, there might be some formularized resulting costs, but usually well worth that cost. The debtor has these rights, whether it is the tenant or the landlord.
A simple example of an ideal situation for a pre-pak
A sporting goods company, ABC, has 100 stores across the U.S. on leased commercial property. New competitive stores have since entered the market, resulting in 30% of its locations becoming unprofitable. Closing those stores and canceling those long-term leases would immediately return ABC to substantial profitability.
The major secured creditors would have to agree pre-filing. The unsecured creditors would likely accept very reasonable, affordable, and longer terms after filing.
Those landlords, whose leases would be cancelled, would not have to be notified until post-filing of the bankruptcy.
See the Piccadilly Cafeteria case: “Piccadilly Spectacular Turnaround / Disaster”, at the Liuzza.net website. Liuzza Managemeent Consulting, LMC, created the basics of the pre-pak. LMC’s legal cost estimate, for including both pre and post filing cost estimate was $500,000. The company’s law firm, a principal of which was a former Chapter 11 bankruptcy judge, agreed to the fee. However, for some unstated reason, the debtor’s private equity owner chose to wait one year and then chose a larger local law firm, which filed a regular Chapter 11 which consumed over two years. But worse, the owner lost all its equity! The major unsecured creditor received the total ownership of the company in settlement of its loan.
