Real estate and other business bankruptcies are filed to preserve assets, distribute assets equitably, and/or facilitate orderly liquidation. When a business files for bankruptcy, it may choose to liquidate under chapter 7 or it may file for reorganization under chapter 11 of Title 11 of the United States Bankruptcy Code. If the entity wants to continue operations, generally it will file under chapter 11, but it always has the opportunity to “convert” to a chapter 7.

In a chapter 7 case, a trustee is appointed to account for the assets and liabilities of the business. The trustee may sell or auction the assets and pursue claims against third parties for the benefit of the creditors. The chapter 7 trustee administers the assets of the bankruptcy estate and may prosecute fraudulent conveyance and preference actions.

In a chapter 11 case, a trustee is typically not appointed. Absent a court order, the debtor, with its preexisting management, operates as a “debtor-in-possession” and assumes the role of the fiduciary to creditors. The debtor has all of the powers of a trustee to recover preferences, fraudulent conveyances, and other assets for the benefit of the creditors. The debtor also has an “exclusive period” to present a plan of reorganization to the court. The process requires court approval of a disclosure statement summarizing the plan and disclosing pertinent financial and operational information.

The use of the United States Bankruptcy Code should be considered by real estate professionals as part of a plan to survive the impact of COVID-19 on continued operations.

For more information on this subject, please contact Rob Gundlach at 215.918.3636 or rgundlach@foxrothschild.com. Attorney Gundlach can arrange a confidential conference with an appropriate bankruptcy attorney at Fox Rothschild on the subject.