AN EMBARRASSMENT OF CHAPTER 11 PLANS FOR ONE COMPANY'S CREDITORS

By Gilman & Edwards
24.10.13
12:20 AM
<< Blog

When AMR Inc. learned of the federal government’s opposition to the American Airlines and US Airways merger, the company asked the bankruptcy court to address the issue as quickly as possible. Any further delay, the holding company said, would hurt its chances of successfully exiting Chapter 11 bankruptcy. The court agreed.

That kind of speed has been notably absent in the Chapter 11 bankruptcy of wireless network company LightSquared. The company filed for bankruptcy protection in May 2012. The federal government had just told LightSquared that its network could interfere with global-positioning systems, prompting the Federal Communications Commission to revoke the company’s license to use the wireless spectrum.

Eighteen months later, losses and reorganization plans have piled up. The bankruptcy court recently granted the company permission to auction its assets and to deliver the four — yes, four — reorganization plans to creditors. The company’s hedgefund shareholder has a plan; its banks have a plan; the owner of much of LightSquared’s debt has a plan; and, of course, LightSquared has a plan.

AMR’s single plan is actually a little “old school” when it comes to business bankruptcies. The law change in 2005 limited the exclusivity that corporate debtors had enjoyed up until then. Speak to a College Park Maryland Chapter 11 Lawyer to determine if a Chapter 11 bankruptcy filing is the right move for your company.

Before 2005, corporate debtors in Chapter 11 bankruptcies had the exclusive right to file a reorganization plan early in the bankruptcy. If the debtors wanted an extension, they needed to show “cause” to the court. It was the norm for Chapter 11 bankruptcies to proceed from filing to exit with just one reorganization plan.

Cases like LightSquared’s cause business analysts to wonder if more is necessarily better. Weighing the pros and cons of each plan may be beyond the skills of some creditors; some may simply not have the time to put into it. For example, how would average bondholders have sorted through multiple plans, each with a unique perspective on the value of the debtor and different ideas of how best to revive that value, for a company like General Motors?

The danger in such cases is that those bondholders will simply give up, minimizing their own recovery and leaving the field open for distressed debt buyers. Sometimes less is really more.

Sources:

The New York Times, “Are Competing Bankruptcy Plans a Good Thing?” Stephen J. Lubben, Oct. 11, 2013

Dow Jones Daily Bankruptcy Review, “LightSquared Losses Approach $1 Billion During Bankruptcy,” Joseph Checkler, Oct. 17, 2013

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