The word bankruptcy is derived from Italian banca rotta, meaning “broken bench,” and may derive from the early modern Florentine custom of breaking a moneychanger’s bench to signify his insolvency and cease his operations. Yet, as we explained earlier this year, a chapter 11 debtor need not be broke. We summarized the law as follows: “In short: insolvency is not required to file a chapter 11 petition, but a valid reorganization purpose with respect to the property of the debtor appears to be. And a valid reorganizational purpose implies reasonably imminent serious financial difficulties for the debtor as a whole that can be addressed in a chapter 11 case.”
Last week our sister site Commercial Bankruptcy Investor provided a good example of a non-broke debtor in describing the chapter 11 filing of Aereo, Inc., a television broadcasting disruptor or a start-up (please look to linked article for further factual background). Aereo asserted that it has assets of approximately $20.5 million and undisputed liabilities (primarily trade debt) of approximately $4.2 million. Though Aereo is solvent, it is unquestionably experiencing financial distress and things look to get worse.
What has made Aereo so pessimistic? An unfavorable United States Supreme Court ruling and unclear prospects of getting timely legal and regulatory relief form the effects of that ruling. Ramon A. Rivera, Aereo’s Secretary, Treasurer, and Chief Financial Officer explained in a declaration he filed in support of the debtors first-day pleadings: “The Debtor based its business plan on three fundamental legal principles: a) that consumers have the right to watch local, over-the-air broadcast television via an individual antenna; b) that consumers have the right to record these broadcasts for later viewing for personal use; and c) that consumers have the right to use remote technology to record and watch individual copies of broadcast programming.” Eschewing Aereo’s view of consumer rights, ABC, CBS, NBC and other broadcasters sued to enjoin Aereo from violating their rights under the Copyright Act.
Ultimately the United States Supreme Court held that Aereo was essentially performing as a traditional cable system under the Copyright Act, and remanded the case to the District Court, which entered a preliminary injunction on October 23, 2014 preventing the use of Aereo’s system for playback while the underlying program was still airing. Aereo complied, and is suffering.
OK, so what are the solvent Debtor’s valid reorganizational goals in chapter 11? Rivera explained that it requires breathing space to effect a sale or “to achieve a recapitalization or similar restructuring transaction” as it continues to try to shift the legal and regulatory framework to its favor. The debtor has sought approval from the court for its retention of highly qualified professionals – including a CRO — to accomplish these objectives.
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