The utilization of out-of-court remedies has been particularly popular in the automotive industry. Given the complexity of the decision to file chapter 11, it is important for manufacturers, suppliers and lenders to understand the associated benefits, risks and available alternatives to filing for bankruptcy.

Filing for Bankruptcy: Pros and Cons
Chapter 11 undoubtedly offers significant benefits to organizations in distress and their creditors, but sometimes the expense, obligations and oversight that accompanies a bankruptcy filing outweigh the relief afforded by the Bankruptcy Code. When a company files for chapter 11 relief to effectuate a § 363 sale, liquidation or a restructuring, the company must consider significant professional and filing fees, which can make bankruptcy too expensive for some companies (and reduce funds available for distribution to creditors).

Congress attempted to streamline the chapter 11 process to make it a more viable option for smaller businesses with the passage the Small Business Reorganization Act of 2019, which created subchapter V of chapter 11. Under subchapter V, businesses with less than $7.5 million in debt are able to bypass some of the more onerous aspects of chapter 11, including, among other things, elimination of the obligation to submit a disclosure statement and elimination of the absolute priority rule.

The § 1111(b) Election
The § 1111(b) election allows a partially secured/undersecured creditor to waive its unsecured deficiency claim and elect to treat its entire claims as secured. The election can protect a creditor against the undervaluation of the collateral in a market that may be temporarily depressed, and a subsequent sale of that collateral when values rebound, resulting in a financial benefit to the debtor. The election allows the secured creditor to retain a lien on the collateral equal to the full amount of the claim. While the secured creditor that elects § 1111(b) will not participate as an unsecured creditor in the plan process, it retains the benefit of any post confirmation appreciation.

Bankruptcy Proceedings
In July 2016, ESML Holdings Inc. and Essar Steel Minnesota LLC (together, the debtors) filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware. During the chapter 11 Cases, Chippewa Capital Partners, LLC sought to acquire the debtors. Chippewa’s affiliate, ERP Iron Ore, retained B. Riley & Co., LLC (k/n/a B. Riley FBR, Inc. and referred to herein as “B. Riley”) as financial advisor to assist ERP and its affiliates (including Chippewa) with the acquisition.

The parties’ engagement agreement provided, among other things, that B. Riley would receive a success fee upon the consummation of certain financing transactions. Chippewa and the debtors implemented the acquisition through a chapter 11 plan whereby Chippewa served as plan sponsor and funded the debtors’ exit from chapter 11. The bankruptcy court entered an order confirming the plan. The plan and confirmation order implemented (1) a discharge of all claims against the debtors arising before the effective date of the plan, and (2) an injunction precluding the holders of such claims from bringing causes of action against the debtors and Chippewa.