American Bankruptcy Institute Publishes Final Report Regarding Chapter 11 Reform

The American Bankruptcy Institute published its blue-ribbon commission report titled "2012-2014 Final Report and Recommendations of the Commission to Study the Reform of Chapter 11." According to the American Bankruptcy Institute, efforts to review and assess U.S. business reorganization laws are undertaken approximately every 40 years.

The report provides a series of recommendations to revise Chapter 11 of the Bankruptcy Code to offer tools to "resolve a debtor's financial distress in a cost-effective and efficient manner." The report provided, among other things, recommendations regarding amendments to Chapter 11, including the following:

• reduce barriers to entry by providing debtors with more flexibility in arranging debtor-in-possession financing, clarifying lenders' rights in the Chapter 11 case, disclosing additional information about the debtor to stakeholders, and providing a true breathing spell at the beginning of the case during which the debtor and its stakeholders can assess the situation and the restructuring alternatives;
• facilitate more timely and efficient diligence, investigation, and resolution of disputed matters through an estate neutral – i.e., an individual that may be appointed depending on the particular needs of the debtor or its stakeholders to assist with certain aspects of the Chapter 11 case, as specified in the appointment order;
• enhance the debtor's restructuring options by eliminating the need for an accepting impaired class of claims to cram down a Chapter 11 plan and by formalizing a process to permit the sale of all or substantially all of the debtor's assets outside the plan process, while strengthening the protection of creditors' rights in such situations;
• incorporate checks and balances on the rights and remedies of the debtor and of creditors, including through valuation concepts that potentially enhance a debtor's liquidity during the case, permit secured creditors to realize the reorganization value of their collateral at the end of the case, and provide value allocation to junior creditors when supported by the reorganization value; and
• create an alternative restructuring scheme for small and medium-sized enterprises that would enable such enterprises to utilize Chapter 11 and would enable the court to oversee the enterprise more efficiently through a bankruptcy process that incentivizes all parties, including enterprise founders and other equity security holders, to work collectively toward a successful restructuring.

Of particular interest is the report's recommendation to narrow certain of the safe harbors for financial market contracts. The entire report and the relevant section are linked below.

See: Complete Report; Section Focusing on Safe Harbors.