Two major hurdles for companies seeking to restructure their financial and business affairs through a chapter 11 bankruptcy are that the process is too expensive and takes too long. The legal and other professional fees in the largest chapter 11 cases can run into the hundreds of millions of dollars and it can take a year or more to obtain bankruptcy court confirmation of a plan of reorganization. Fortunately, chapter 11 of the bankruptcy code includes a number of provisions that permit a company to obtain creditor approval for a plan or other critical elements of a bankruptcy reorganization before the case is actually filed with the bankruptcy court. Creditors who take advantage of these provisions are thus able to file what are commonly referred to as “pre-packaged” chapter 11 cases or “prepacks.” Prepacks are becoming increasingly popular as a means of keeping both professional fee expenses, and the time spent in bankruptcy, to a minimum.
For example, in May 2020, retailer J. Crew filed a chapter 11 petition with the Richmond Division of the U.S. Bankruptcy Court for the Eastern District of Virginia (“Richmond Bankruptcy Court”). Before it filed its bankruptcy case, J. Crew secured both “debtor in possession” and exit financing and the approval of a majority of its lenders to the terms of its proposed plan of reorganization. Because the key terms of its plan had been negotiated prior to commencement of its bankruptcy case, J. Crew was able to complete the chapter 11 restructuring process in just over four months. While key terms of its plan had been pre-negotiated, creditors in the case were still permitted to vote to accept or reject the plan and an official committee of unsecured creditors was formed – had the plan been more fully negotiated pre-bankruptcy, such voting and the organization of a committee might not have been required, further simplifying the chapter 11 process. Nonetheless, by having reached agreements with key parties in advance of the case, J. Crew was able to minimize the legal and other professional fees required to get the chapter 11 case done.
In November 2020, soon after J. Crew exited bankruptcy, Guitar Center filed a chapter 11 petition in the Richmond Bankruptcy Court. Prior to the filing, Guitar Center obtained the agreement of certain key creditors to their treatment under Guitar Center’s proposed plan, and solicited votes on the plan from creditors whose claims were “impaired” under the plan. These pre-bankruptcy efforts allowed the company to file its plan and begin the chapter 11 confirmation process on the first day of its bankruptcy case. In addition, the plan did not “impair” the claims of unsecured creditors, thus relieving the company from having to solicit votes on the plan from such creditors, speeding up the plan approval process. Having completed or at least begun most of the work needed for confirmation of its plan in advance of the actual bankruptcy filing, Guitar Center was able to obtain confirmation of its plan in under one month, allowing it to exit bankruptcy in December 2020.
More recently, in late January 2021, Alpha Media filed a chapter 11 petition in the Richmond Bankruptcy Court. Like Guitar Center, it filed its plan of reorganization within a day of filing its petition. The plan included a “restructuring support agreement” evidencing the agreement to the plan of all impaired parties entitled to vote on the plan. In this case, although unsecured creditors are projected to receive a 100% distribution (as in the Guitar Center case), an unsecured creditors committee was appointed. Nevertheless, if the case progresses as projected, the plan confirmation hearing will take place April 2021.
While not a local matter, it is noteworthy that Belk, Inc., a department store chain, recently announced its intention to file a prepack in a Texas bankruptcy court with the goal of completing its chapter 11 case in a single day!
The speed with which prepacks proceed requires judges who are familiar and comfortable with the prepack process and the due process and other issues that such high-speed cases generate. In that regard, the Richmond Bankruptcy Court has proven itself a standout. Our team at Hirschler is involved in the J. Crew, Guitar Center, and Alpha Media cases and would be happy to discuss your options as a potential chapter 11 debtor or to assist you in exercising and protecting your rights as a creditor or equity interest holder.
Kristen M. Chatterton