Essay Sample on Bankruptcy: A Legal Process of Debt Relief

Introduction

Bankruptcy is a legal process that people resort to when they cannot repay certain debts to creditors; (Altman and Hotchkiss (2006) describes it as a sobering economic reality that brings out the unique nature of the American way of corporate "death." Federal Law governs the rules and procedure for filing bankruptcy. It allows individuals and business entities that are unable to live up to their financial obligations to be excused from repaying some or all of their debt; the process, therefore, acts as a form of relief to debtors.

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Types of Bankruptcies

The following are types of bankruptcies:

Chapter 7 bankruptcies- they are liquidation bankruptcies whereby the debtors must make a turn -over of all non-exempt property to a supervising officer (bankruptcy trustee). The trustee will then take charge of the debtors' property and sell it, the money that will be realized from the sale shall be used to pay off the debtors' creditors.

Chapter 13 bankruptcies- This is a reorganization bankruptcy in which debtors are allowed to keep their property and instead come to an agreement of providing monthly payments towards their debt for a period of three or five years.

Chapter 11 bankruptcies- This type is available to business entities that have become insolvent but may still wish to remain in business. It allows a company to obtain protection from their creditors while they come up with a repayment plan. Liabilities can also be reduced and restructured to accord the business another chance to make profits.

JM's Pre-emptive Bankruptcy Declaration

John-Manville after several considerations in the trend of the lawsuits that were being filed against it for liabilities that were as a result of asbestos decided to file for protection under Chapter 11 of the Title 11 of the United States Code (The Bankruptcy Code.) This move was met by opposition by several co-defendants in the case; the grounds of opposition include, among others, the lack of good faith on the part of John-Manville, a position which the court thought was raised late by one of the co-defendants in the case.

Another ground of opposition that was raised with regards to JM's declaration was that it had committed a fraud on the court and creditors by exaggerating the extent of its economic distress so that it can be able to obtain reorganization. The court was however fast to note that, if the claims of future claimants are represented correctly, then the means of an emergence of a proper plan which fairly provides for the survival and just treatment of their interests will be assured.

It is against this background that the court denied the motion to dismiss JM's declaration by the co-defendants stating that there is no question that JM is eligible to be a debtor under the Code's statutory requirements as provided by Section 109 of the Bankruptcy Code. JM was found to have met the requirements therein as it was domiciled and had a place of business in the United States. It also passed the "personality test" as a person is described under the Code as a partnership and a Corporation.

The court also addressed itself on the question of insolvency and stated that it was no longer necessary for a petitioner for reorganization to allege insolvency or demonstrate its inability to pay debts as they mature. The court, therefore, upheld John Manville's petition for a Bankruptcy declaration.

The court in dismissing the motions filed by co-defendants on speculations as to whether JM will be able to discharge the future claims held that Manville had demonstrated a sufficient cause as to the dischargeability of future claims. It also dismissed the bad faith motion by Asbestos Committee (co-defendant) and held that it did not support its motion with concrete facts and thus did not rebut the essential fact that JM was a real company with a substantial amount of real debt and real creditors threating to realize the payment of such debts.

As such JM pre-emptive bankruptcy declaration that sought to bring about a settlement through a repayment plan to the future claims of claimants and interested parties; was allowed due to the reasons as mentioned earlier.

Fundamental Purpose of Chapter 11 as opposed to Chapter 7 Bankruptcy Filings

In filing for protection under Chapter 11, a party can create an estate for the benefit of all the creditors, and equity holders of the debtor where all the parties involved may voice their interests and bargain for their best possible treatment. In reaffirming its fundamental purpose, the court addressed itself on the efficiency of the Chapter 11 noting that reorganization is more efficient than liquidation(which is provided under Chapter 7) because "assets that are used for production in the industry for which they were designed are more valuable than those same assets sold for scrap". It also added that reorganization propels the goals of preservation of jobs in the threatened entity.

Chapter 7 (liquidation) will be wasteful and inefficient in this instance because it will destroy the utility of assets of high value that belongs to the Manville and also negatively affect the notion of jobs preservation. This kind of bankruptcy may run the risk of precluding the catering of compensation for some of the victims that have been presently affected by the asbestos and all future asbestos victims. It is these realities that made the court to strictly adhere to the requirement of basic potential liquidation avoidance (the purpose of Chapter 11.)

Good Faith Argument

The court at the onset stated that the concept of good faith is an elastic one and should be read into the statute on a limited basis. It also stated that this concept is only demonstrated where there are reasons to believe that the jurisdiction of the court has been abused. The court recognized the good faith argument presented by Manville; it acknowledged the fact that Manville was a real business with real creditors in dire need of economic reorganization.

This is supported by real and massive debts which include estimated 6,000 new asbestos health claims which have arisen in the first 16 months since the filing date; prior to the filing date, several schools also initiated suits seeking compensatory and punitive damages from Manville for unknowing use of asbestos that was in ceilings, walls, and piping. There has also been several post-petition school property damage suits filed by individual school districts and schools in various states.

It is clear from the ongoing facts that Manville's liability for compensatory action is a real and massive debt which ranges from $500 million to $ 1.4 billion as the projected amount of Manville debt to school creditors. In addition to this, the Corporation also owes a liquidated commercial debt of $425 that had been filed in the proceeding, a move that triggered the acceleration of more than $275 million in unsecured public and institutional debt which was not due prior to the filing.

Johns-Manville's present possession of cash and liquid assets would not be sufficient to pay off these financial obligations, and this is made worse by the unwillingness of its insurance carriers to make contributions to facilitate the payment of the debts. In light of the foregoing, John- Manville has demonstrated to the court its distressing financial position, and as such, it passes the eligibility test, and the court upheld the candid nature of reorganization.

Reference

Altman, Edward, I., Hotchkiss, Edith. (2006). Corporate Financial Distress and Bankruptcy. New Jersey: John Wiley & Sons, Inc. Retrieved from b-ok.org/book/735206/7995bf