The expensive administrative burdens of cases under Chapter 11 of the U.S. Bankruptcy Code have created among creditors renewed interest in state insolvency laws as alternatives for distressed-asset sales. Under the right circumstances, creditors can achieve significant cost savings by availing themselves of state court alternatives.
Chapter 11 was conceived as a mechanism for debtors and creditors to restructure debt through plans of reorganization that would establish a new contractual deal between the debtor and creditor constituencies. Section 363 of the code authorized the sale of assets but typically was used to sell individual assets rather than the entire enterprise of the debtor. In fact, early cases under the code required the showing of an emergency to sell substantially all the assets of the debtor. See, e.g., In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983). However, this approach changed rapidly. In recent years, many bankruptcies were largely controlled by secured lenders that were unwilling to fund a Chapter 11 case through a plan. Instead, they sought to quickly sell the entire going-concern enterprise through § 363 of the code, and then convert the case to a Chapter 7 proceeding. Today, the number of bankruptcy sales far outnumbers the number of bankruptcy restructurings.
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