google5a0f0671afafcf86.html google-site-verification: google5a0f0671afafcf86.html
top of page

Chapter 11 Can Be a Game Changer for Nashville Companies Embroiled in Costly Litigation


Legal disputes can be a significant financial burden on companies, often draining their resources and diverting attention from core business operations. Chapter 11 is a legal mechanism that can provide a lifeline for companies facing costly litigation. While commonly associated with reorganization and debt restructuring, a Chapter 11 filing can also serve as a powerful tool for companies to defend themselves against legal challenges, mitigate financial losses, and protect their long-term viability. In this article, we explore how Chapter 11 can be a game changer for companies facing high-stakes litigation.


1. Automatic Stay and Breathing Room

One of the immediate benefits of filing for Chapter 11 protection is the automatic stay, which halts virtually all collection actions and legal proceedings against the company. This provision provides much-needed breathing room for the company to assess its legal situation, marshal resources, and devise a strategy. The automatic stay stops litigation against the company, giving management immediate relief from the cost and distraction of lawsuits, as well as time to negotiate with creditors and restructure its operations.


2. Consolidation of Litigation

Chapter 11 enables a company to consolidate multiple litigation claims into a single forum, known as the bankruptcy court. This consolidation streamlines the legal process, eliminating the need for simultaneous litigation in various jurisdictions. Centralizing the litigation allows for more efficient case management, reduces legal costs, and minimizes the risk of inconsistent rulings from different courts. By addressing all legal challenges within the bankruptcy framework, the company can develop a comprehensive resolution plan that considers the interests of all stakeholders.


3. Claims Process

Once Chapter 11 is filed, most causes of action and pending lawsuits for damages become simply “claims” to be addressed in the Chapter 11 case, and the adverse litigation party becomes simply a “creditor.” With, or shortly after the Chapter 11 filing, the company is required to submit lists of parties holding claims against it, and designate whether the claims are disputed, unliquidated, or contingent. If a creditor disagrees with the amount or characterization, it must file a proof of claim before the deadline established by the court. At that point the parties either reach an agreement, or the bankruptcy court will determine whether the claim should be allowed and in what amount. Importantly, the claims process in bankruptcy court is typically truncated and more efficient compared with litigation in other courts.


4. Mediation and Settlement Opportunities

Chapter 11 bankruptcy provides a unique environment for negotiation and settlement discussions. The debtor, creditors, and other interested parties can engage in mediation or alternative dispute resolution mechanisms to explore potential resolutions. Mediation can be particularly effective in complex litigation scenarios, as it allows the parties to work collaboratively toward mutually beneficial outcomes. By using the Chapter 11 process as a platform for settlement negotiations, companies can achieve favorable outcomes, resolve disputes more efficiently, and potentially reduce their financial burden.


5. Ability to Reject or Modify Contracts

Chapter 11 allows a company to reject or modify existing contracts, including those related to litigation. This power enables the company to shed burdensome agreements that may have contributed to the financial strain. By renegotiating or terminating contracts that drain resources, companies can better allocate their limited funds towards their legal defense, increasing their chances of a favorable outcome.


6. Enhanced Negotiating Position

Filing for Chapter 11 protection can significantly enhance a company's negotiating position with plaintiffs or creditors in litigation. The restructuring process provides an opportunity for the company to present a reorganization plan that shows how it intends to address its financial obligations and become financially stable. This plan, along with the potential for the rejection or modification of contracts, can encourage parties involved in the litigation to negotiate and potentially settle the case on more favorable terms. Chapter 11 empowers the company to restructure its debts, demonstrate its commitment to fulfilling obligations, and strengthen its bargaining power.


7. Litigation Financing Options for Nashville Companies in Chapter 11

Companies in Chapter 11 may have access to litigation financing options that can help fund their legal defense. Litigation funders, which provide non-recourse funding, may be more willing to invest in a company's legal proceedings if it is under bankruptcy protection. This type of funding can cover litigation expenses, including attorney fees, expert witness fees, and court costs, reducing the financial strain on the company while still allowing it to vigorously defend itself against costly litigation.


8. Cramdown and Plan Confirmation

Chapter 11 allows a company to propose a reorganization plan that, in many cases, can be forced on dissenting creditors or litigants who may not agree with the proposed resolution. By seeking court approval for a plan, the company can potentially force a resolution that is fair and equitable while avoiding the risk of an adverse judgment or crippling damages. This power can be particularly valuable when facing litigation where the outcome is uncertain, as it provides an opportunity to fashion a resolution that balances the interests of all parties involved.


Conclusion

While Chapter 11 is commonly associated with financial restructuring, it can also serve as a game changer for Nashville companies defending costly litigation. The automatic stay, claims process, settlement options, enhanced negotiating position, litigation financing options, and the cramdown provisions provide companies with valuable tools to effectively navigate and defend against legal challenges. By leveraging the benefits of Chapter 11, companies can protect their financial stability, concentrate on their core business operations, and emerge from the litigation stronger and more resilient.

 
EmergeLaw, PLC's life ring logo, helping businesses right-size debt and emerge from financial distress

About EmergeLaw, PLC

EmergeLaw is a boutique law firm that represents small and middle market businesses and their owners in debt workouts, Chapter 11 reorganizations, Subchapter V restructurings, and other proceedings to help them deleverage and reposition for future success. Applying decades of experience and a specialized toolkit, our Nashville insolvency attorneys help entrepreneurs, family businesses, private equity funded companies, and real estate investors maximize value in ways that many clients find unexpectedly efficient and effective.


Comments


bottom of page