The Enron Bankruptcy
Chapter 11 Reorganization
May 8, 2002 BUSA 405
On December 2, 2001, Enron Corp. filed the largest bankruptcy in U.S. history. The
Enron bankruptcy is also quickly becoming the most infamous and highly publicized bankruptcy
case in history. Mismanagement, poor business and accounting procedures, and plain greed all
factored into the complicated collapse of Enron. The house of cards, so-to-speak, built by
Enron's top managers came crashing down hard, sending repercussions throughout the business
and financial world.
Led by three important executives, Enron became a fast growing energy trading company
that provided "financial resources, ...view middle of the document...
S. company to resolve financial challenges, such as lack of
liquidity or excessive debt. It is quite an understatement to say Enron has some financial
challenges to resolve. The company is saddled with more than $15 billion in debt.
Chapter 11 is the section of the Bankruptcy Code that receives all of the notoriety in the
press. It is under this chapter that we have seen and read about giant companies seeking
financial protection under the federal bankruptcy laws. The aim of Chapter 11 is to allow the
ailing company to reorganize itself under court protection. The process is designed to hold a
troubled company's creditors at bay while it hammers out a plan to reduce debt. Creditors often
have little choice but to accept less than what they are owed. "A Chapter 11 bankruptcy can be
a great thing for a cash-starved company being attacked from all sides," said Nancy Rapoport,
Dean of the University of Houston Law Center. (Seattle Times; Nov. 30, 2001)
To understand why Enron filed Chapter 11 bankruptcy, we first need to look at the laws
surrounding bankruptcy and Chapter 11 in particular. Bankruptcy in the United States seeks to
benefit both debtors and creditors by seeing that debtors get relief from debts they are unable to
pay, and that creditors get paid from the non-exempt assets of the debtor. Generally, the
exemptions provided for under bankruptcy law essentially provide for the debtor to retain those
assets necessary for the debtor to live on. The federal law found in Title 11 of the United States
Code governs bankruptcy.
The type of bankruptcy proceeding used most commonly by a corporate debtor is
reorganization under Chapter 11. Under reorganization, the creditors and the debtor formulate a
plan under which the debtor pays a portion of the debts and the rest of the debts are discharged.
The debtor usually remains in possession of its assets and continues to operate the business,
which is the case with Enron. In cases such as Enron's, creditors are faced with the reality that
getting something is better than nothing. The plan of reorganization, upon acceptance by a
majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to
its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of
the assets, or a merger.
On entry of the order for relief, the debtor generally continues to operate its business as a
debtor in possession (DIP). (Business Law Today; 2000) In filing for relief under Chapter 11,
Enron needed to be a DIP so that it was in a position to begin paying back some creditors and to
allow it to renegotiate with others. Shortly after the Chapter 11 filing, Enron announced that it
had arranged up to $1.5 billion of DIP financing, $250 million of which became available on an
interim basis to help the company fulfill obligations associated with its ongoing business
operations. The rest would become available as Enron provides and completes a satisfactory...