Document Type

Article

Publication Date

Spring 2013

Abstract

The premise of a chapter 11 bankruptcy is that the business’ going concern value exceeds its liquidation value. It provides the debtor with an opportunity to restructure their debt so that they can pay back their creditors and stay in business.

The debtor’s filing of the bankruptcy petition creates an “automatic stay.”[1] The automatic stay is an injunction that prevents creditors from pursuing legal actions against the debtor and its assets. The automatic stay, however, protects not only the debtor but the creditors as well. In the absence of the automatic stay, creditors would “race to the courthouse” to seek the judicial enforcement of claims they had against the debtor. The consequence of this would be a “first-come-first-serve” distribution of assets. In chapter 11, similarly situated creditors must be treated equally.[2]

A chapter 11 debtor will often continue to oversee and manage the operations of their business as a debtor-in-possession (“DIP”) and is given the authority to exercise powers similar to those of a bankruptcy trustee pursuant to §1107 of the bankruptcy code.[3] The DIP owes a fiduciary duty to the bankruptcy estate that is created upon the filing of the bankruptcy petition. [4]

The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case wherever located and by whomever held.[5] For example, the debtor’s ownership interests in cash, accounts receivables, real property, contracts, and leases all become property of the bankruptcy estate.[6] Because these property interests no longer belong to the debtor, the bankruptcy court must approve expenditures from estate resources. Only expenditures in the ordinary course of business are not subject to court approval.

On June 27, 2011, the Los Angeles Dodgers and its four of its affiliated entities filed for relief under chapter 11 of the Bankruptcy Code in U.S. Bankruptcy Court for District of Delaware. All five debtors were incorporated in Delaware.[7] The petition was filed for the petitioners by Robert Brady of Young Conaway Stargatt & Taylor, LLP, one of Delaware's largest firms.[8] Debtors were also counseled by the international firm Dewey & Leboeuf LLP.

With more than 1,300 attorneys in 12 countries, Dewey & Leboeuf (“Dewey”) was one of the largest firms in the United States.[9] In 2012 the Dewey filed its own petition for protection under chapter 11.[10] Since then the firm has pursued liquidation and winding down of operations.[11] At the time this case was filed, however, Dewey was still considered one of the premier firms in the world.

The Dodgers’ case was assigned to Judge Kevin Gross. Admitted to the Delaware bar in 1978, Judge Gross received his bachelor's degree from the University of Delaware before he attended the American University in Washington D.C. where he received his JD.[12]

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