The fundamentals of business bankruptcy (reorganization and liquidation). (Selected Topic).

I. INTRODUCTION

Contracts govern countless commercial transactions entered each day by businesses throughout the United States. In connection with the need to promote and regulate commerce, Congress has exercised its power to establish uniform laws on the subject of bankruptcies by enacting the Bankruptcy Code (the "Code"). The Code embodies the power to alter contractual rights and is an implicit part of every contract.

In general, once a bankruptcy case has been commenced by a party to a contract, state law (and/or applicable nonbankruptcy federal law) continues to define a party's rights under the contract and federal bankruptcy law determines how those rights are enforced in a bankruptcy case. For example, damages may be calculated under state law, but they are paid out according to bankruptcy priorities and principles. Additionally, the Code contains provisions designed to promote the equal treatment of creditors with claims of the same priority.

The Code has provisions providing for reorganization and liquidation of eligible entities and is divided into different Chapters. Cases are commenced under the Code by filing a bankruptcy petition with the bankruptcy court under one of five operative Chapters: 7 (liquidation); 9 (municipal debt adjustment); 11 (reorganization); 12 (adjustment of debts of a family farmer with a regular annual income); or 13 (adjustment of debts of individuals with regular income). As far as business entities are concerned, the operative Chapters discussed in this article are Chapters 11 and 7. Chapter 11 of the Code governs reorganization cases (although Chapter 11 can be used for liquidation). Chapter 7 solely applies to liquidation cases.

The provisions in Chapters 1, 3 and 5 of the Code apply to both Chapter 11 (reorganization) and Chapter 7 (liquidation) cases. In some instances, it is feasible for entities to reorganize (e.g., through an out-of-court debt restructuring or workout) or liquidate (e.g., through an assignment for the benefit of creditors) without resorting to the jurisdiction of the bankruptcy court.

II. REORGANIZATION VERSUS LIQUIDATION

A. Chapter 11