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Liquidating rather than reorganizing Chapter 11 cases have become the norm. There are two primary fact patterns. In most instances the case is filed for the purpose of completing a sale of the entire ongoing business of the debtor pursuant to Chapter 363, or in rare cases pursuant to the terms of a confirmed chapter 11 Liquidating Plan. In other cases the assets are liquidated within the Chapter case through a series of going out of business sales.
The drafters of the Bankruptcy Code legitimized the concept of a liquidating Plan in section 1141(a)(3)(A) and provided a basic bare bones framework although they did not realize what a great percentage of all chapter 11 cases would take this route and they did not seem to anticipate the use that has been made of Section 363. As Chapter 363 cases have moved from the Pariah stage to the norm bankruptcy judges have added onto that bare bones framework so that parties would know what is expected of them.
Thus, once a plan is confirmed, many plans of liquidation place all remaining assets, including causes of action, in a liquidating trust for the benefit of unsecured creditors. The goal of the elected liquidating trustee is to liquidate these remaining assets for maximum value and thereafter make distributions, net of the trust's administrative costs, to the unsecured creditors. If structured properly, liquidating trusts can be extremely flexible and cost-effective tools tailored to put money in the hands of creditors quickly and efficiently.
Some parties may think that conversion to a case under chapter 7, appointment of a chapter 11 Trustee or dismissal of the Case is a better alternative.
