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Economic uncertainties and a tight credit market are pushing corporate bankruptcy filings up again, prompting corporations to explore so-called prepackaged or prearranged Chapter 11 filings, which are faster and cheaper corporate reorganization options akin to a litigation settlement. Four prepackaged Chapter 11 cases, which are reorganization plans negotiated with and voted on by a company’s creditors before a court filing, were filed in February, according to the BankruptcyData.com division of New Generation Research Inc. in Boston. That compares with four prepackaged bankruptcies started, and only six such plans confirmed by the U.S. Bankruptcy Court during all of 2007, according to BankruptcyData.com. The research outfit noted that prepackaged filings peaked in 2002 with 40 filings, with much lower filings in the intervening years. Prepackaged and so-called prearranged Chapter 11 cases, which are reorganization plans negotiated with the company’s main creditors before the court filing and voted on afterward, are a mixed bag for lawyers. Although the fast pace translates to lower fees, lawyers collect their payout sooner. The upfront negotiation of most or all of the involved parties means attorneys are likely to face protracted court fights at the tail end of a case over their fees. One of BankruptcyData.com’s listed prepackaged cases, The Wornick Co., is actually a prearranged case, but both categories are growing, said Wornick’s attorney, Kim Martin Lewis of Cincinnati’s Dinsmore & Shohl. Cincinnati-based Wornick, which makes ready-to-eat meals for the military, announced that a high level of debt contributed to its filing and that it expects to emerge from bankruptcy in July. “Maybe more parties are recognizing the advantage from an operational or cost perspective to do a prearranged or true prepack,” Lewis said. Companies with too much debt, but few operational problems, are good candidates for prepackaged or prearranged Chapter 11 filings, said Marcia Goldstein, a New York partner who chairs Weil, Gotshal & Manges’ business, finance and restructuring department. The current scarcity of available credit also makes it difficult for any company, particularly those that are overleveraged, to refinance existing debt. In those cases, a Chapter 11 process, particularly a prepackaged or prearranged option, could be attractive, Goldstein said. “Last year, you didn’t need to do that,” Goldstein said. “There was so much capital available that if you had a problem with your bank debt you got it refinanced. Now we’re in a tighter credit market so [companies] may need to make adjustments and work with their lenders.” Although Goldstein said she couldn’t discuss the firm’s current cases, Weil Gotshal helped Atkins Nutritionals Inc. of Melville, N.Y., confirm a prearranged bankruptcy in about five months, in late 2005 and early 2006. The nutrition and food company founded by the late low-carbohydrate advocate Dr. Robert C. Atkins emerged in January 2006 after reorganizing more than $300 million in debt. In re Atkins Nutritionals Inc., No. 05-15913 (Bankr. S.D.N.Y.). Prearranged or prepackaged cases can be tough to pull off because they require intense negotiation, but companies are also drawn to them because they’re more likely to survive the process, Lewis said. “If it sits in Chapter 11 for a long period of time, the stability of a company is harmed,” Lewis said. “If it’s in and out quickly, the business is not harmed during the Chapter 11 process.” For lawyers, a shorter case means that parties involved in the case are less likely to contest proposed payments to professionals, including lawyers, and court-appointed fee review committees are also less probable. Prepackaged cases, which can sail through the courts in one or two months, usually have broad consensus, said Gregory Gordon, who oversees the business restructuring and reorganization practice in Jones Day’s Dallas office. Gordon said both types of Chapter 11 settlements are on the upswing. Prearranged cases, which can take as little as three months, are also usually consensual, although not to the same degree,” Gordon said. “These should avoid a lot of disputes you might have in court during the course of a bankruptcy case,” Gordon said. Prepackaged bankruptcies aren’t completely immune from in-court disputes if some stakeholders are left out of the money. Last year, a federal judge in Trenton, N.J., rejected a prepackaged Chapter 11 reorganization plan filed by Mercerville, N.J.-based flooring product maker Congoleum Corp. three years earlier. The court identified dissimilar treatment of different creditors as one of the problems. In re Congoleum Corp., No. 03-51524 (Bankr. D.N.J.). A joint plan offered by the company, the official asbestos claimants’ committee and the official bondholders committee was filed with the court last month. In a case filed by a subsidiary of Westmont, Ill.-based relocation and moving services company Sirva Inc. last month, the company has earmarked a different payment structure for separate classes of unsecured creditors. In re DJK Residential, No. 08-10375 (Bankr. S.D.N.Y.). Brad Godshall of Los Angeles-based Pachulski Stang Ziehl & Jones, whose firm represents all the general unsecured creditors, said the company has proposed paying one class 100 cents on the dollar for the money they’re owed and another class zero cents on the dollar. The lenders voted for and approved the plan, but the creditors slated to get nothing will contest the plan in court, Godshall said. “The lenders here who want to own the company prefer to own it as cheaply as possible,” he added. “They’ve identified a group of unsecured creditors they’d prefer not to pay. They’re pushing the envelope seeing what they can do and can’t do.” The court confirmation hearing for the plan has already been pushed back to April 18 from March 21, Godshall noted. “The cost [of this strategy] to the debtor and the lenders who are going to be the new owners means they can’t get their plans approved as quickly,” he said. A company news release has characterized the plan as “an agreement with its lenders to restructure its senior secured debt,” and to cut bank debt by about $200 million. Sirva’s attorney, Marc Kieselstein at Kirkland & Ellis in Chicago, declined to comment on the case.

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