Prepackaged Bankruptcy Offers Investors a Quick Return to Liquidity Chapter 11 bankruptcy cases are typically lengthy and expensive, potentially lasting years and costing millions of dollars in fees and expenses. One valuable technique to minimize a debtor’s time in Chapter 11, reduce cost and disruption, and still secure the benefits of a Chapter 11 plan is a prepackaged bankruptcy (also called a “prepack”). In a prepack, a debtor negotiates the terms of a chapter 11 plan and solicits votes prior to the bankruptcy filing.
As you know, the last two years have seen a somewhat improved, but by no means robust, business climate. At the same time, structural shifts in the law firm business model have been both highly publicized and memorably demonstrated.
Last month, District Court Judge Shira A. Scheindlin of the Southern District of New York affirmed a bankruptcy court ruling which held that the environmental cleanup obligations of debtor Mark IV Industries, Inc. were not discharged in bankruptcy.2 Given the current legal landscape, Mark IV may make the likelihood of discharging environmental claims even more difficult, potentially undermining chapter 11 as an optimal alternative for companies saddled with environmental liabilities.
When a company saddled with potential environmental liabilities seeks bankruptcy protection, the goals of Chapter 11—giving the reorganized debtor a “fresh start” and fairly treating similarly situated creditors—can conflict with the goals of environmental laws, such as ensuring that the “polluter pays.” Courts have long struggled to reconcile this tension.