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Business Insolvency Options: A Comparison of Wisconsin Statutes Chapter 128 and Chapter 11 of the United States Bankruptcy Code

By: Ryan T. Carlson

Chapter 11 of the United States Bankruptcy Code has historically been utilized as the principal option for an insolvent company, seeking to either reorganize its operations, or sell its assets free and clear of liens, with the liens attaching to the proceeds of the sale.  However, the Wisconsin statutory  alternative, Chapter 128, which is historically derived from the Bankruptcy Act of 1898, may provide a lesser known, but conceivably better option for an insolvent troubled company.

Both the Federal and State Options Have Similar Procedural Steps

Under Chapter 11, the case is overseen by a federal bankruptcy judge, and in most instances the debtor remains in possession of its business.  However, a trustee may be appointed when it is in the “best interests of creditors or for cause”.  A Chapter 11 proceeding offers a business the opportunity to continue operating and propose a plan to restructure its debt payments, or otherwise liquidate or sell its assets on a going concern or orderly basis.  However, for the plan of reorganization to be approved, a requisite number and amount of creditors must vote to approve the plan, there must be a showing that the plan is viable, and that the reorganized debtor may continue to operate with positive cash flow, and make its payments as called for by the plan.  Without such a showing, the likely result is a liquidation of the company assets.  The case would then be converted to a Chapter 7 proceeding, or dismissed, followed by creditors exercising their collection remedies against the company, with conversion or dismissal of Chapter 11 cases occurring frequently.

Alternatively, an Assignment for the Benefit of Creditors under Chapter 128 of the Wisconsin Statutes is overseen by a state court judge and a Receiver is appointed.  The Chapter 128 process affords a company, troubled by its inability to make debt service payments and with mounting accounts payable, to obtain relief from its debt(s) by way of a going concern sale of the assets of the company, or orderly liquidation of the assets.  If the on-going viability of the company is suspect, as viewed by interested purchasers, the Chapter 128 proceeding, much like a Chapter 11, may result in a liquidation of the company.

The Substantive Protections Compare Favorably

Despite the considerable length of the United States Bankruptcy Code versus the relatively short statutory provisions of Chapter 128, both proceedings afford similar protections for the debtor(s) either by statute or order of the court.  First and foremost, for the debtor to continue to operate, without creditor interference, an “automatic stay” is imposed pursuant to section 362 in a Chapter 11 proceeding, while section 128.14 of the Wisconsin Statutes prevents creditor litigation in a Chapter 128 proceeding.  Furthermore, both types of cases allow for the sale of assets free and clear of all liens, claims and encumbrances with all liens, claims and encumbrances attaching to the proceeds of the sale in the order of priority.  A sale may occur by operation of section 363 in a Chapter 11 case.  Additionally, “preferential transfers”, essentially property transferred while the debtor was insolvent, may be recovered in both types of proceedings; in a Chapter 11 proceeding a transfer may be recovered if made within 90 days of the filing pursuant to section 547 of the Bankruptcy Code, and in a Chapter 128, a transfer may be recovered if made within four months of the filing of the petition pursuant to section 128.07 of the Wisconsin Statutes.

Wisconsin Chapter 128 Can Offer More Efficient Relief

Perhaps the key difference between federal bankruptcy under Chapter 11 and proceeding under Wisconsin’s Chapter 128 is the time and expense necessary to complete the cases.  A Chapter 11 requires preparation of a Disclosure Statement and Plan of Reorganization, plus monthly reporting regarding the financial status of the company, which is then available to the court, Office of the United States Trustee and creditors.  It is not uncommon for a Chapter 11 debtor to take considerable time to develop a plan, which further may require multiple attempts.  Comparatively, a Chapter 128 sale occurs on Motion of the Receiver, and by order of the Court. Those types of sales may routinely be completed within 90 to 120 days, resulting in considerable savings of time and far less burdensome administrative sale expenses.

Accordingly, if a company is insolvent and troubled by continuous debt service payments and mounting accounts payable, a Chapter 128 proceeding may be a better option.

If you have any questions regarding this article, please contact your Davis|Kuelthau attorney, the author noted above or our Litigation Chair linked here.