HOW CAN THIS BE!(more companies filing a second Chapter 11)

Dealing With a Major Customer's Second Chapter 11 Filing

After much negotiation, you finally have an allowed administrative claim for your reclamation claim, as your major customer's Chapter 11 plan of reorganization is finally confirmed. The plan of reorganization helps the customer to continue to operate, albeit with significantly less debt. Your administrative claim comes at a price, as you agree to ship on credit to the "reorganized" debtor post-confirmation. Your company anticipates resuming significant sales to the reorganized debtor and supports resumption of credit terms. The payment on your reclamation claim is over time--based on the reorganized debtor's cash flow. Payment on a percentage of your mid-six figure claim is also to be over time. Your company also receives stock in the reorganized debtor in exchange for its prepetition claim.

Notwithstanding all of the projections prepared by the debtor's accountants to confirm the plan of reorganization demonstrating the debtor would be profitable, it is not. Projections are missed, and the debtor fails to pay on your administrative claim. The debtor also fails to pay on your post-confirmation credit sales. The debtor is chased by creditors and files a second Chapter 11 bankruptcy. How can this be? May a company file a second Chapter 11, also referred to as a Chapter 22? Your major customer had spent two years in Chapter 11 and several million dollars on its attorneys, accountants and investment bankers to assist in paring down creditors' pre-bankruptcy debts, disposing of certain assets and repositioning itself in the marketplace.

Your customer had circulated a hundred-plus page disclosure statement and plan of reorganization to all of its creditors, supported by the creditors' committee and the bank group, coupled with pages of financial projections prepared by the debtor's Big 5 accountants detailing how the "new and improved" reorganized debtor would meet its trade obligations and return to profitability. The bankruptcy court found the plan of reorganization "feasible" and blessed the plan. You now realize that a confirmed Chapter 11 plan of reorganization, even supported with detailed projections showing your customer profitable, does not guarantee payment on your pre-Chapter 11 debts nor on your new shipments. What to do?

A number of companies have made headlines recently for their second Chapter 11 cases, such as Montgomery Wards, Bradlee's, Crown Books, Converse, Inc. and LTV Steel Corporation (which was a Chapter 11 debtor for seven years). Indeed, TWA Airlines and Grand Union Supermarkets have each filed three Chapter 11's, and a number of companies are rumored in the press to be considering similar action.

Many of these reorganized debtors are in industries with strong competition that could not meet their debt obligations and were forced again into Chapter 11 by their creditors. Notwithstanding years in Chapter 11, the extraordinary benefit of generally not paying pre-bankruptcy creditors, and a negotiated plan of reorganization that was supported by detailed projections of how the reorganized debtor would be profitable, such companies often failed to pare down their debt sufficiently in the first Chapter 11.

These companies defaulted on their confirmed plan of reorganization and post-confirmation debts, followed by the filing of a second bankruptcy petition to obtain the automatic stay (an injunction that arises automatically upon the filing of the petition that enjoins creditors from collecting on their pre-petition claims) and a second opportunity to pare down their debts, and a likely orderly liquidation of the debtor's assets.