The financial plight of the Pennsylvania Academy of Music impacts a variety of stake holders. Along with creditors, the group includes the students, faculty, donors who contributed over $5 million, the County taxpayers who donated a million dollars, and the state which provided a $5 million grant. Further at stake is the potential for an international music school in downtown Lancaster.
When all other efforts fail to protect stake holders through negotiations among creditors, then a fiduciary responsibility of the trustees is to seriously consider the provision of the Bankruptcy Act which often structures a multi-year plan that enables an entity to continue in operation while fairly treating all creditors. In short, making the most of a bad situation.
Often, the threat that an entity will file for Chapter 11 reorganization results in negotiated arrangements among the parties that are similar to what would emerge from Chapter 11 without the parties having to undergo the costs and delays of litigation.
The following is reproduced from Wikipedia:
“Features of Chapter 11 bankruptcy Chapter 11 bankruptcy retains many of the features present in all, or most bankruptcy proceedings in the United States. It also provides additional tools for debtors as well. Most importantly, 11 U.S.C. § 1108 empowers the trustee to operate the debtor’s business. In Chapter 11, unless appointed for cause, the debtor acts as trustee of the business.
Bankruptcy affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business’ earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
If the business’s debts exceed its assets, the bankruptcy restructuring results in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganized company.
All creditors are entitled to be heard by the court. The court is ultimately responsible for determining whether the proposed plan of reorganization complies with the bankruptcy law.
The chapter 11 plan
Chapter 11 is reorganization, as opposed to liquidation. Debtors may “emerge” from a Chapter 11 bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. With some exceptions, the plan may be proposed by any party in interest. Interested creditors then vote for a plan. Upon its confirmation, the plan becomes binding and identifies the treatment of debts and operations of the business for the duration of the plan.
Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time (in most cases 120 days). After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be “confirmed” by the bankruptcy court. Among other things, creditors must vote to approve the plan of reorganization. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.
Automatic stay
As with other forms of bankruptcy, petitions filed under Chapter 11 invoke the automatic stay of § 362. The automatic stay requires all creditors to cease collection attempts, and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask the court to convert the case to a liquidation under Chapter 7, or to appoint a trustee to manage the debtor’s business. The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter 11, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management and is relatively rare.”
