CHAPTER 11
DISCLAIMER: What follows is a layperson’s attempt to explain Chapter 11 and what Midsouth’s application for Chapter 11 bankruptcy protection means for Fairfield Harbour. The material is a compendium of information gleaned from various legal sources such as nolo.com, about.com, and investopedia.com and provided for your convenience.
A company files for bankruptcy when its present revenues are inadequate to meet its debts, but its anticipated revenues exceed the liquidation value of its assets. In other words, Midsouth is in trouble now, but sees a more profitable future. Structured bankruptcy provides a bit of breathing space, and gives Midsouth time to restructure its debts and stay in business.
Several options are available for debtors: Chapter 7 (liquidation), Chapter 11 (restructuring and the only option for a partnership), Chapter 12 (for farmers, only), and Chapter 13 (has debt limits), corresponding to their chapters in the US Bankruptcy Code.
A company that files for Chapter 11 must disclose all of its assets and list each of its debts. Safeguard: If this isn’t done honestly, the court can appoint a trustee to run the company and make the payments.
Chapter 11 allows Midsouth to become a debtor in possession, and, as such, to continue its business and maintain ownership of all of its assets while it devises a plan to satisfy its creditors. As debtor in possession, Midsouth can act as trustee. It can file lawsuits to avoid transfers of monies to creditors, obtain loans for the debtor, and accept or reject contracts, with court approval. Safeguard: Any creditor, or the court, may seek appointment of a bankruptcy trustee if mismanagement is suspected.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 gives Midsouth 120 days to submit its plan for debt restructuring to the bankruptcy court and to its creditors for approval. Safeguard: If Midsouth fails to meet this deadline, the creditors can devise the plan.
Once the plan is approved by the court and each of the creditors, the Chapter 11 bankruptcy is certified and confirmed. Midsouth must then begin to make payments on its debt. Safeguard: If it doesn’t, a trustee may be appointed to insure compliance.
If Midsouth can not make its payments, the Chapter 11 converts to a Chapter 7 bankruptcy and the assets are liquidated to satisfy first, the secured debts, and then, if monies remain, the unsecured debts. (See below)
Under Chapter 11, Midsouth can make only its usual sales and purchases. It can sell some, or all of its assets so that it can downsize and pay its debts. Safeguard: Since the value of its assets are of particular interest to its creditors, any major purchase, or any sale of a major piece of equipment or property must have the court’s approval.
Classes of debts:
Simply, debt is divided into two types: secured, and unsecured When a debt is secured, the creditor has a lien on real property, such as a home, land, or a car. If the debtor doesn’t pay what is owed, the creditor forecloses on, or repossesses the real property.
When Midsouth bought the Fairfield Harbour amenities, it did so using loans from banks.
If Midsouth doesn’t repay, or can’t repay those loans, the banks can foreclose and take possession of those amenities.
The second type of debt is unsecured debt, not backed by real property. The money awarded to Fairfield Harbour in its successful suit against Midsouth for its failure to maintain the amenities is unsecured debt. If Midsouth doesn’t, or can’t satisfy this debt, the POA cannot repossess anything. If Midsouth’s Chapter 11 restructuring is unsuccessful, and its assets are liquidated, the holders of secured debt get paid first.
Is MidSouth’s bankruptcy bad for Fairfield Harbour?
Under Chapter 11, the court and its creditors can insist that Midsouth maintain its assets and, thus, their value to its creditors, should liquidation become necessary. Since the maintenance of the amenities has been a major source of contention between the POA and Midsouth, it seems to me the POA has gained some powerful allies.
Your FACTS Reporter