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Dealing with Corporate Distress 01: Hello Darkness, Our Dear Friend

A Series on the ABCs of ABCs, Business Bankruptcy & Corporate Restructuring/Insolvency

Greetings, dear reader:

It seems you’re interested in learning how to deal with corporate distress, and we’re glad you’re here. But let’s first make sure you got on the right plane.

Maybe you . . .

  • Are a C-suite executive of a business that’s considering buying a failing competitor on the cheap
  • Manage a private equity or hedge fund
  • Are a junior associate in the restructuring or special situations group of a law, investment banking, or accounting firm
  • Are a credit manager
  • Own a company being sued for having received a preference from a bankrupt company
  • Own or manage a company that does business with a company that is in financial distress
  • Worst of all, own, manage, or sit on the board of a company which is, itself, in financial distress (if so, we’re sorry)

Or, maybe you just don’t get out much and have no interesting hobbies.

If any of the above describes you, you’ve come to the right place. In this series, we’ll walk you through how to navigate corporate distress, including the basics of business bankruptcy, corporate restructuring, and insolvency. If you don’t count yourself in one of the above groups, then you probably have better things to do. May we suggest Netflix?

Bankruptcy is an Overused Word – When Corporate Distress Does Not Lead to Bankruptcy

First, let’s disabuse you of some popular misconceptions by telling you the truth about corporate distress:

  • A company can go out of business without filing bankruptcy.
  • A company can sell all its assets without filing bankruptcy.
  • A company can restructure its debts without filing bankruptcy.
  • A company can be taken over and run by an independent fiduciary without filing bankruptcy.
  • Creditors can force a company to pay its debts to them without filing an involuntary bankruptcy.
  • A company need not be insolvent to file bankruptcy.
  • Even though chapter 11 is titled “Reorganization,” plenty of companies file chapter 11 for the purpose of liquidating.

Bankruptcy (and chapter 11 in particular) is one tool—but only one tool—in the proverbial tool belt that can be used by debtors and their creditors to address financial distress. We’ll cover all of them in this series.

Chapter 11 is, however, the best known and most widely used of these tools. And when professionals like us help a client decide which tool is best suited to their needs, given their particular circumstances, we have to consider the likely risks and rewards of each tool relative to the others. The one tool that is almost always at the top of every client’s mind is bankruptcy. For these reasons, this series discusses chapter 11 bankruptcy more than any of the other tools, drawing frequent comparisons to the others. And for this reason, we start by providing you with a basic framework for understanding chapter 11.

Consumer vs. Business Bankruptcy

Just as you wouldn’t go to the best cardiologist in the world to help you with a sore throat, you shouldn’t go to a corporate restructuring professional (a subset of whom are bankruptcy attorneys) to help you with consumer debt relief. Just as all doctors go to medical school, all attorneys go to law school; and just as most doctors these days specialize in a particular field of medicine, most attorneys specialize in a particular field of law.

Yes, there is only one Bankruptcy Code in the United States, and it applies to both consumer and business bankruptcy. But the Bankruptcy Code is big, and entire sections of it do not come into play in a business bankruptcy. And on top of this, the Bankruptcy Code is only one piece of the overall puzzle that comprises what a corporate restructuring professional needs to know to do her job well. So don’t look to us to try to teach you anything about consumer bankruptcy. That’s a different plane.

The Foundational Law of Bankruptcy

Bankruptcy is old. The word was coined in England, in the 1500s, and derived from the Italian words “banca” and “rotta,” meaning “broken bench.” That phrase, in turn, originated long before, in the area that is now Italy, and stemmed from the concept of breaking a moneychanger’s bench to indicate his insolvency to the world (whether the concept took actual physical form or was just a metaphor is disputed). But that’s all ancient history (See what we did there?).

Bankruptcy is important1—enough so that the concept made its way into the U.S. Constitution when it was enacted, giving Congress the right to enact uniform bankruptcy laws for the United States. Thus, bankruptcy (but not all its alternatives) is and can only be a creature of federal law; not state law (though for reasons we will explain, state law does factor into bankruptcy cases). This federal power preempts state insolvency laws when there is an inconsistency between them and the federal law.

Fast forwarding, we bring you to 1978: the year “Grease,” and “Animal House,” premiered, the year the cellular phone was introduced, and the year aerosol sprays were first banned by any country (thank you, Sweden). It was also in 1978 that Title 11 of the United States Code, commonly referred to as the Bankruptcy Code, was enacted into law.

The Bankruptcy Code is the foundation of bankruptcy law in the United States. But that’s not to say it’s the only thing that counts. Quite to the contrary, case law interpreting the Bankruptcy Code, other titles of the United States Code2, and various state law statutes and case law all come into play, to create what is commonly thought of as “bankruptcy law.”3

Short Outline of the Bankruptcy Code & Related Laws & Rules

The Bankruptcy Code is organized into different “chapters.”

Chapters 1, 3 and 5

Chapters 1, 3, and 5 of the Bankruptcy Code are generally applicable to all bankruptcy cases:

Chapter 1 includes definitions, rules about who can be a debtor in a bankruptcy, and generally describes the powers of the bankruptcy courts, among other general rules.

Chapter 3 governs bankruptcy “case administration,” and includes rules that govern key aspects of all cases, including: rules for filing cases; employing various professionals; establishing the “automatic stay”; selling, using, or leasing bankruptcy estate assets; obtaining financing after a case is filed; executory contracts and unexpired leases; and dismissing or closing cases.

Chapter 5 covers matters related to the rights of debtors and creditors, including claims and their priorities, exemptions, what constitutes “property of the estate,” and “avoidance” powers.

Chapters 7, 9, 11, 12, 13 and 15

Chapters 7, 9, 11, 12, 13, and 15 each contain provisions that only apply in a bankruptcy case filed under that specific chapter:

Chapter 7 is titled “Liquidation.” It provides specific rules under which the debtor’s assets are liquidated (i.e. reduced to cash). People (who qualify) and most businesses can file chapter 7. The gist of chapter 7 is that all of a debtor’s property (if a natural person, only her non-exempt property) is surrendered to a chapter 7 trustee, who then sells the property and distributes the proceeds to creditors.

In the case of a debtor who is a natural person, at the conclusion of the chapter 7 case, the debtor is “discharged” from most of her debts, enabling the debtor to have a “fresh start.” This is not the case for business debtors, though that’s an academic point, since a liquidated company is usually not an attractive collection target for creditors. Some people may not file chapter 7 because of the application of the Bankruptcy Code’s “means test,” and, instead, may file chapter 13.

Chapter 9 provides rules for the reorganization of municipalities (i.e. cities, counties, and water or sewer districts).

Chapter 11, titled “reorganization,” can be filed by natural persons but is primarily used by businesses. Chapter 11, in stark contrast to chapter 7, allows a business to continue operating as a going concern. Despite its title, however, and as we note above, businesses often end up liquidating in chapter 11 after operating. Since we’re going to spend so much of this series diving into the specifics of chapter 11, we’re not going to say anything more about it here.

Chapter 12 covers the “adjustment of debts of a family farmer or fisherman with regular annual income.” Chapter 12 essentially provides a chapter 13-style reorganization for people in these two professions who do not qualify for chapter 13 relief, because of the debt limits of chapter 13.

Chapter 13 is a specialized chapter available only to natural persons who have regular income. In chapter 13, the debtor commits a portion of her postpetition personal earnings to pay down prepetition debts. In exchange, a chapter 13 debtor can discharge more debt than a chapter 7 debtor. In chapter 13, the debtor makes payments under a plan, which is managed by a chapter 13 trustee. There are limits to the amount of debt someone can have and still file chapter 13. If a debtor’s debts exceed these limits, then the debtor may instead file chapter 11, or chapter 12, if eligible.

Chapter 15 governs “cross-border” insolvencies, where a debtor has bankruptcy or insolvency proceedings pending in multiple countries. Chapter 15 isn’t a “prime time” bankruptcy device like the other chapters. It can instead be thought of most broadly as a process designed for domestic and foreign bankruptcy tribunals to cooperate and avoid conflicts with one another.

Beyond the Bankruptcy Code itself, there are procedural rules that govern important ministerial issues, like who to serve with different types of documents, how long a party has to wait before it can ask a bankruptcy judge for specific relief, and so on. These rules are contained in the Federal Rules of Bankruptcy Procedure—a cousin to the Federal Rules of Civil Procedure and the Federal Rules of Evidence.

Finally, bankruptcy courts within a specific federal district (or division of a district) may have their own local rules. And beyond that, individual judges may have their own “local, local rules,” (sometimes referred to as “standing orders,” or “courtroom procedures”).

Things to Come

We’ve designed this series on corporate distress so that you can read any installment in any order. The order in which the installments appear, however, is quite deliberate. Just as we learn addition before learning multiplication, some concepts we will cover in this series serve as the building blocks for learning about other concepts of corporate distress.

Here is a list of the installments in this series, including those we intend to write (we may change our mind on some, but if we do, we’ll just make edits below and no one will likely notice because, well, the Internet. . . .):

  1. Hello Darkness, Our Dear Friend
  2. These Are the People in Our Neighborhood: An Overview of Parties in Chapter 11
  3. Welcome to the Jungle: The Animals of the Restructuring Industry
  4. Chapter 11–If You’ve Seen One, You’ve Seen Them All
  5. Lifecycle of a Chapter 11 Case
  6. Some Basic Chapter 11 Concepts to Know Before We Go any Further
  7. What to Do when Chapter 11 is not the Answer: Strategic Alternatives For & Against Distressed Businesses
  8. Preventing Forest Fires with First Day Motions in Chapter 11
  9. All About “Claims” in Bankruptcy
  10. How to Protect Your Claim: In & Out of Bankruptcy
  11. Meet Our Little Friend, The UCC
  12. The Unsecured Creditor’s Perspective About Their Debtors
  13. The Secured Creditor’s Perspective About Their Debtors
  14. Digging into DIP Financing & Cash Collateral Motions in Bankruptcy
  15. Overview of Bankruptcy Code § 365
  16. Focus on Assuming & Rejecting Executory Contracts & Unexpired Leases in Bankruptcy
  17. Buying & Selling Distressed Businesses
  18. Buying & Selling Distressed Businesses in Bankruptcy: An Overview of Bankruptcy Code § 363
  19. Small Business Debtors
  20. Practical Considerations for Operating in Chapter 11
  21. More About Bankruptcy Alternatives (a/k/a Chapter 11 Sucks)
  22. ABCs
  23. State Court Receiverships
  24. Federal Equity Receiverships
  25. Article 9 Sales
  26. Workouts & Composition Agreements
  27. Back to Chapter 11: What is the Goal Again?
  28. A Plain English Guide to Bankruptcy Code § 1129 (and its Associated Sections)
  29. Getting an Impaired Class to Accept a Chapter 11 Plan
  30. Prepacks & Prearranged Chapter 11s
  31. Restructuring Support Agreements & Plan Support Agreements
  32. Reorg Plans vs. Liquidating Plans vs. Structured Dismissals
  33. Where Are we in the Forest, Again?
  34. From Credit Manager, to Creditor, to Committee Member
  35. Post-Confirmation Estates & Liquidating Trusts
  36. Overview of Chapter 5 of the Bankruptcy Code
  37. Bankruptcy Preference Litigation (Bankruptcy Code § 547)
  38. Bankruptcy Fraudulent Transfer Litigation (Bankruptcy Code §§ 548 § 544)
  39. Some Advanced Chapter 11 Topics (An Overview)
  40. Claims Trading in Bankruptcy Cases
  41. Essential Reading for Lessees & Licensees whose Lessor/Licensor is in Bankruptcy
  42. Cross Border Cases
  43. Bad Words (Chapter 11 Trustees, Examiners, Conversion, & Dismissal)
  44. Professional Retention & Compensation in Bankruptcy
  45. Involuntary Bankruptcy Filings
  46. Chapter 12: Specialized Concepts for Family Farmers & Fishermen Under the Bankruptcy Code

Check back often to see when more links have been added to the list above as we work our way through this series.

Hello Darkness, Our Dear Friend

Bankruptcy and other restructuring professionals typically work with clients who have seen better days. The same way people dread the idea of visiting a surgeon or an undertaker, a business doesn’t look forward to working with restructuring professionals. The reality, however, is that the issues that caused a company to seek out a restructuring professional happened in the past. Like a patient in need of a doctor, the earlier a company (or one of its creditors) in need of restructuring or winddown services addresses its issues, the more likely it will be that an acceptable—or even excellent—outcome can be achieved.

As the expression goes, it’s always darkest before the dawn. Or if you prefer another cliché, when life gives you lemons, make lemonade. More to the point, bankruptcy can be both a shield and a sword, when wielded by an expert swordsman.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Help, My Business is in Trouble! and Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit.]

A Nod to Our Provenance

A tip of our hats is owed and given to the precursors to this column. More than a decade ago Jonathan Friedland persuaded Professor John D. Ayer and Michael Bernstein to co-author with him a series of articles for the American Bankruptcy Institute Journal entitled “Chapter 11 – ‘101,’” which ran for about two years. The column was later updated and supplemented by the three of them, joined by Professor George Kuney, and was published and sold by the ABI as a CD (when CDs were a thing). Most recently, Professor Kuney and Jonathan Friedland co-authored and led a series inspired by their earlier work entitled “Dealing with Distress for Fun & Profit,” published by DailyDAC. This series, “Dealing with Corporate Distress – The ABCs of ABCs, Business Bankruptcy, & Corporate Restructuring/Insolvency,”  could not exist but for the groundwork laid by those earlier series.

About Us: An Extended Look at Our Background in “Corporate Distress”

Because your co-authors are quite modest (if we do say so ourselves), we’ll only present you an extended “about us,” note in this first installment.

Jonathan Friedland is a senior partner with Sugar Felsenthal Grais & Helsinger. He is also the founder and publisher of DailyDAC and is principal author and managing editor of Commercial Bankruptcy Litigation and Strategic Alternatives for and against Distressed Businesses, each published yearly by West Publishing Company, and each weighing in at about 2,000 pages. He has advised and represented hundreds of distressed businesses and their constituents for more than two decades. Read a more robust biography of Jonathan’s work and credentials.

Jack O’Connor is widely recognized for his excellent work as a restructuring attorney and partner at Sugar Felsenthal Grais & Helsinger. Jack has been recognized by various organizations for his strategic thinking and tactical expertise, including Super Lawyers Magazine, Leading Lawyers Magazine, and the Turnaround Management Association. Read a more robust statement of Jack’s background and credentials.

Hajar Jouglaf is an associate at Sugar Felsenthal Grais & Helsinger who collaborates with clients to identify and resolve critical issues when dealing with distressed situations. Hajar also sits on the board of the Chicago Network of the International Women’s Insolvency & Restructuring Confederation. Read a more robust biography of Hajar’s background and credentials.

Sugar Felsenthal Grais & Helsinger LLP is a boutique business law firm that represents high net worth individuals and families, family offices, private equity funds, and other privately-owned businesses.  Sugar Felsenthal Grais & Helsinger’s Restructuring, Insolvency, Special Situations, and Corporate Turnaround Group represents companies facing existential threats, and their various stakeholders. Learn more about SFGH and its legal practice.

[Editor’s Note: Questions? Call SFGH at 312.704.9400, or email them at [email protected]]


1 To understand the importance of chapter 11 in the broader context of the U.S. economy, see Chapter 11: Not Perfect, But Better than the Alternatives James H.M. Sprayregen, P.C., Jonathan Friedland et al., 14 Journal of Bankruptcy Law and Practice 6 Art. 1 (December 2005).

To understand the importance of chapter 11 in the broader context of the U.S. economy, see Chapter 11: Not Perfect, But Better than the Alternatives James H.M. Sprayregen, P.C., Jonathan Friedland et al., 14 Journal of Bankruptcy Law and Practice 6 Art. 1 (December 2005).

3 For example, Title 28 of the U.S. Code contains bankruptcy jurisdiction provisions. Bankruptcy crimes can be found in Title 18—the Federal Criminal Code. There are also some bankruptcy tax laws contained in Title 26 of the U.S. Code, better known as the Internal Revenue Code.


About Jonathan Friedland

Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…

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Jonathan Friedland

About Jack O'Connor

Jack is a corporate and restructuring partner in the Chicago office of Sugar Felsenthal Grais & Helsinger LLP. Jack’s practice covers a range of healthy and distressed business engagements. He is widely recognized for his excellent work as a restructuring attorney including recognition by various organizations for his strategic thinking and tactical expertise, including SuperLawyers…

Read Full Bio »   •   View all articles by Jack »

Jack O'Connor

About Hajar Jouglaf

Hajar is an associate with Sugar Felsenthal Grais & Helsinger LLP in both its Business Transactions Group and its Restructuring & Insolvency Group.

View all articles by Hajar »

Hajar Jouglaf