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1 SUMMARY OF CHAPTER 11 PROCEDURES AND PROCESS Presented to The Virginia Bar Association 11th Annual Corporate Counsel Fall Forum By David K. Spiro, Esquire Robert S. Westermann, Esquire Sheila deLa Cruz, Esquire HIRSCHLER FLEISCHER SUMMARY OF CHAPTER 11 PROCEDURES AND PROCESS This Executive Summary discusses the significant procedural requirements in a case under Chapter 11 of the United States Bankruptcy Code and the Chapter 11 process. It is intended to provide a review of general legal principles and business practices as a basis for further discussion and inquiry. TABLE OF CONTENTS I. OVERVIEW II. COMMENCEMENT OF THE CASE III. EFFECT ON OPERATIONS AND FINANCES A. Preservation of the Status Quo B. Continuation of Business in the Ordinary Course C. Adverse Consequences of the Commencement of a Chapter 11 Case IV.

2 THE DEBTOR IN POSSESSION V. OTHER MAJOR PARTICIPANTS IN THE CASE A. Secured Creditors B. Lessors and Parties to Executory Contracts C. The United States Trustee D. The Creditors Committee E. Other Committees F. The Chapter 11 Trustee and Examiner G. Governmental Entities VI. SPECIAL SITUATIONS AND CONSIDERATIONS A. Employee Relations B. Relief From Stay C. Financing Post-Petition Operations D. Key Vendors E. Executory Contracts and Leases F. Commercial Real Property and Equipment Leases G. Preferences and Fraudulent Transfers H. Pending Litigation I. Taxes HIRSCHLER FLEISCHER VII. PLAN OF REORGANIZATION AND CONFIRMATION A.

3 Confirmation of a Plan B. Plan Components C. Plan Distribution Schemes D. Plan Funding E. Confirmation Standards F. Confirmation Without Acceptance by an Impaired Class ( Cramdown Plan) G. Issuance of Securities H. Effect of Confirmation I. Modification of a Plan J. Post Confirmation Events VIII. CHAPTER 11 CASE CHRONOLOGY IX. SUMMARY HIRSCHLER FLEISCHER I. OVERVIEW A Chapter 11 case is governed by the United States Bankruptcy Code, a federal statute, and is heard in the United States Bankruptcy Court which is a federal court. The objective of most Chapter 11 cases is to realize the maximum economic value of a business enterprise, usually by the restructure of its debt and business operations, and to distribute that value to holders of claims and interests.

4 Some of the most successful Chapter 11 cases are those commenced for the purpose of implementing a restructuring that has been agreed to by the major parties in interest prior to the commencement of the case. However, many Chapter 11 cases are commenced by businesses faced with situations that threaten the survival of the enterprise and for which there is no immediate, agreed-upon solution. A Chapter 11 case can provide management with the opportunity to maintain business operations under the legal protections and restriction of Chapter 11 while working solutions to the problems that caused the filing. The goal of most Chapter 11 cases is confirmation by the Bankruptcy Court of a plan of reorganization that incorporates a feasible business plan and implements a new capital structure by the distribution of cash, notes, or stock on account of prior creditor claims and shareholder interests.

5 A Chapter 11 plan may provide for the continued operation of the business enterprise or the liquidation of the assets and operations of the debtor and a distribution of the proceeds. If the plan is accepted by the requisite classes of creditors and shareholders and is confirmed by the court, it is binding on all creditors and shareholders whether or not they have accepted the plan of reorganization. II. COMMENCEMENT OF THE CASE A voluntary Chapter 11 case is commenced by the filing of a Chapter 11 petition with the United States Bankruptcy Court which is an adjunct of the United States District Court. All Chapter 11 cases are automatically referred by the District Court to the Bankruptcy Court under a local rule or general order. Within certain time limits, a party in interest, including the debtor, may seek a withdrawal of the reference and a return or the entire case, or of a specific proceeding or matter in the case, to the District Court.

6 Such requests are rarely granted. As a general matter, corporations, partnerships and individuals which have a domicile, place of business, or property in the United States are eligible for Chapter 11 relief. The Chapter 11 case may be commenced in the district where the debtor has its domicile, residence, principal place of business, principal place of assets or where an affiliates case is pending. Certain enterprises are not eligible for Chapter 11 relief, including insurance and banking institutions, stock brokers, and commodity brokers. A judicial determination of eligibility for Chapter 11 relief is not required for the commencement of a voluntary Chapter 11 case; only a board resolution is required. A business does not need to be insolvent to file a voluntary Chapter 11 petition but, typically, the enterprise is experiencing or anticipates difficulty in satisfying its obligations as they come due.

7 HIRSCHLER FLEISCHER An involuntary Chapter 11 case may be commenced against a business entity not engaged in farming by the filing of an involuntary petition by three or more creditors. An involuntary petition may be contested by the debtor but the fact of the filing materially restricts its ability to conduct business. If a Chapter 11 case is inevitable, there are advantages to commencing the case by voluntary petition rather than waiting for the filing of an involuntary petition by creditors. A Chapter 11 petition filed by or on behalf of a partnership without the consent of all general partners is treated as an involuntary petition. III. EFFECT ON OPERATIONS AND FINANCES Upon the filing of a voluntary Chapter 11 petition, the operations, assets, and liabilities of the debtor entity are subject to the control of the Bankruptcy Court, consistent with the provisions of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.

8 These provisions are intended to preserve the status quo, to permit the continued operation of the business in the ordinary course, to protect the interests of creditors, and, where feasible, promote a rehabilitation of the debtor. A. Preservation of the Status Quo There are four major parts of the Bankruptcy Code which contribute to the preservation of the status quo: the automatic stay, the prohibition of payment of pre-petition debt, the preservation of certain legal rights and causes of action, and the ability to avoid certain pre-petition transfers. 1. The filing of the Chapter 11 petition operates as an automatic stay of almost all actions against the debtor and its property, including lawsuits, lien enforcement by secured creditors and repossession by lessors, and other creditor action, whether or not such actions would have been taken in a court proceeding or out of court.

9 The automatic stay is intended to protect the debtor and its property from all collection efforts, creditor harassment, foreclosure actions, and seizures of property and to preserve the status quo pending formulation and confirmation of the plan of reorganization. The automatic stay remains in effect for the duration of the reorganization process unless modified or terminated by order of the Bankruptcy Court aver notice and a hearing. A secured creditor may request the Court to require adequate protection which may include cash payments, the giving of substitute collateral or other actions by the debtor as a condition to maintaining the automatic stay. The automatic stay of pending litigation can significantly reduce the burden on management during the reorganization process and make possible the more efficient resolution of litigation and claims.

10 In most cases litigation will be resolved in the Bankruptcy Court as part of the claim allowance process. Only the debtor is protected by the automatic stay; affiliates, guarantors, officers, directors and shareholders are not protected, although in rare cases such persons or entities may be protected temporarily by a retraining order. The automatic stay does not apply to a criminal action against the debtor or to certain other actions, including governmental, police or regulatory actions. 2. The second part of the Bankruptcy Code which contributes to the preservation of the status quo is the prohibition of payment of obligations and debts incurred for goods received HIRSCHLER FLEISCHER or services rendered before the Chapter 11 petition. Such obligations are payable only in accordance with the terms of a confirmed plan of reorganization.