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THE RETURN OF CHAPTER 22 BANKRUPTCY
We have all heard of Chapter 7 and Chapter 11 bankruptcy. Chapter 7 is generally used when a company throws the keys on the table, liquidates its assets, and distributes proceeds to creditors in the order set out in the Bankruptcy Code. Chapter 11 is generally used when a company is trying to reorganize and maintain itself as an entity with a going concern after a bankruptcy plan of reorganization is voted on and confirmed. These “chapters” are named that way because they are literally the seventh and eleventh chapters in the bankruptcy code. There are also some lesser-known chapters — Chapter 9 for municipalities, Chapter 12 for a family farmer or fisherman, and Chapter 15 for cross-border insolvencies. On Feb. 1, 2017, Vanguard Natural Resources, LLC (based in Houston) filed Chapter 11 bankruptcy. It sold its noncore assets and filed a plan of reorganization, which was ultimately confirmed on July 18, 2017. On Jan. 29, 2019 (the eve of the two- year statute of limitations from the Feb. 1 filing date), Vanguard sued more than 250 entities who received allegedly preferential transfers in the 90-day preference period. On March 31, 2019, only two months later, Vanguard did the unthinkable — it filed another Chapter 11. Bankruptcy professionals have deemed this second filing Chapter 22. There is no Chapter 22 of the bankruptcy code; it is merely But have you ever heard of Chapter 22?
a euphemism developed from the idea that one Chapter 11 plus another Chapter 11 equals a Chapter 22. Funny, right? Vanguard’s creditors didn’t think so. Believe it or not, there is no time limit a company must wait before filing another Chapter 11. Individual debtors have to wait a specific number of years before they are allowed to file again to avoid serial filing, but that rule is not applicable to Chapter 11.
to see it in the oil and gas sector. There are several other recently reorganized oil and gas companies who we believe are at risk of following in Vanguard’s footsteps. As professionals who often find ourselves in the creditor position in these cases, we must become more diligent than ever when reviewing the strength of a company exiting Chapter 11. Do they have cash? Do they have producing assets or jobs lined up? Do you need to tighten credit terms? Do you really want to extend favorable credit terms in exchange for critical vendor status or other elevated treatment in the first Chapter 11? Do you need to demand prepayments to eliminate the risk of preference exposure? Nothing would be more difficult than explaining to your CFO why you are getting hit with a second preference lawsuit when you haven’t even settled the first Chapter 11’s preference lawsuit. In the end, the best thing you can do is check your lien rights, check your preference exposure, and hire an experienced bankruptcy attorney. After all, as the Houston bankruptcy judge put it on the first day of the second Vanguard case, one of the main goals of Chapter 22 is to avoid Chapter 33.
“There is no Chapter 22 of the bankruptcy code; it is merely a euphemism developed from the idea that one Chapter 11 plus another Chapter 11 equals a Chapter 22.”
There is an eight-year time limit to obtain a second discharge only if that company sold all of their assets in the first Chapter 11, which didn’t apply to Vanguard. In 2014, an NYU professor named Edward I. Altman published a study called “Revisiting the Recidivism - Chapter 22 Phenomenon in the U.S. Bankruptcy System,” which found that approximately 15 percent of all debtors who emerge as continuing entities from reorganization under Chapter 11 bankruptcy eventually file for bankruptcy protection again.
So while this phenomenon has been around for decades, we are only now beginning
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