class 17 bankruptcy, spring, 2009 overview of plan process randal c. picker leffmann professor of...

Class 17Bankruptcy, Spring, 2009

Overview of Plan Process

Randal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 20, 2023 Copyright © 2005-09 Randal C. Picker 2

Reorganization Players

Should the prepetition control group remain in control?

If so, debtor in possession under 1101(1), see also 1107 and 1108

If not, trustee under 1104 with duties defined by 1106


Reorganization Players

If instead more supplemental investigation, use examiner, see also 1104 and 1106

Historically Issue of great importance; ch X practice was

mandatory trustee, ch XI practice used debtor-in-possession


Trustees & Examiners:Appointment under 1104

Standard Standard under 1104(a) is cause, appointment is

in the interest of creditors, equity holders or the estate or as an alternative to dismissing the case

Selection Election under 1104(b)

Examiners If not trustee, appoint to investigate Standard: is in the interests of creditors, equity

holders or the estate, or on request in large cases


Trustees & Examiners:Appointment under 1104

Termination under 1105 Duties under 1106

Note other duties/rights exist, as many of the provisions are written in terms of what the trustee may do; see, e.g., 1108 wrt operation of the business


Creditors Committees How should creditors and equityholders

express themselves in the case? Collective action problems for both and

solution may be institutional response; Creditor committees and equity

committees, see 1102 and 1103 Representation issues arise: how

representative are the creditors given these roles


Committees Unsecured Creditors Committee

Creation and Appointment Mandatory under 1102(a)(1), except, as of

1994 amendments, in small business cases (1102(a)(3))

Appointed by US Trustees (see below) Members of Committee

Seven largest willing to serve, unless prepetition committee, continued if fairly chosen and representative


Committees

Duties: 1103(c) Monitor, consult, participate, investigate


Committees

Other committees Optional, adequate representation is

statutory test under 1102(a)(2)


U.S. Trustee System Federal administrative wing for bankruptcy; see

28 USC 581-589a Appointed by US Attorney General for five-year

terms Duties given by 28 USC 586 Focus on statutory duties conferred by chapter

11: certain ministerial duties, but right to be heard on many issues, see. e.g,. appointment of trustee under 1104(a); US trustee may file motion


Plan Basics

Three Central Steps Alteration of the Business Creation of a New Capital Structure Allocation of the New Rights to Prepetition

Creditors Who gets to propose the plan? (1121)


1121: Exclusivity Period

Who may file a plan (a) The debtor may file a plan with a petition

commencing a voluntary case, or at any time in a voluntary case or an involuntary case.

(b) Except as otherwise provided in this section, only the debtor may file a plan until after 120 days after the date of the order for relief under this chapter.


1121 (cont.) Who may file a plan (cont.)

(c) Any party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may file a plan if and only if -

(1) a trustee has been appointed under this chapter; (2) the debtor has not filed a plan before 120 days after the

date of the order for relief under this chapter; or (3) the debtor has not filed a plan that has been accepted,

before 180 days after the date of the order for relief under this chapter, by each class of claims or interests that is impaired under the plan.


1121 (cont.)

Who may file a plan (cont.) (d) On request of a party in interest made

within the respective periods specified in subsections (b) and (c) of this section and after notice and a hearing, the court may for cause reduce or increase the 120-day period or the 180-day period referred to in this section.


1121(e): Small Business Debtors

Who may file a plan (cont.) 1121(e) sets forth different rules for small

business debtors (101(51D)) Pre-2005, these rules were optional Post-2005, mandatory

Different time periods than standard C11 case, with different standards for extending those periods

Contemplates shorter overall schedule


Classification

Why Do We Care About Classes? Classes of creditors and shareholders vote

on the plan Individuals vote through their classes on the

plan, but not directly Voting Rules (Sec. 1126)

Creditors: at least two-thirds in amount and more than one half in number

Interests: at least two-thirds in amount


Plan Confirmation

Two Key Paths Consensual Plan (1129(a))

Each class of claims and interests has accepted or is not impaired (1129(a)(8))

Cramdown (1129(b)) Confirmation over the objection of at least

one class At least one impaired class must approve

(1129(a)(10))


1122 Classification of claims or interests

(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.

(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.


1123 Contents of plan

(a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall -

(1) designate, subject to section 1122 of this title, classes of claims, other than claims of a kind specified in section 507(a)(2), 507(a)(3), or 507(a)(8) of this title, and classes of interests;

(2) specify any class of claims or interests that is not impaired under the plan;


1123 (cont.)

(3) specify the treatment of any class of claims or interests that is impaired under the plan;

(4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest;


1123 (cont.) Contents of plan (cont.)

(a) (cont.) (5) provide adequate means for the plan’s implementation, such as -

• (A) retention by the debtor of all or any part of the property of the estate;

• (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan;

• (C) merger or consolidation of the debtor with one or more persons;

• (D) sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the estate;


1124 Impairment of claims or interests

Except as provided in section 1123(a)(4) of this title, a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan -

(1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or …


1126

Acceptance of plan (a) The holder of a claim or interest allowed

under section 502 of this title may accept or reject a plan. If the United States is a creditor or equity security holder, the Secretary of the Treasury may accept or reject the plan on behalf of the United States.


1126 (cont.)

Acceptance of plan (cont.) (c) A class of claims has accepted a plan if such

plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.


1126 (cont.) Acceptance of plan (cont.)

(d) A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.


1126 (cont.)

Acceptance of plan (cont.) (f) Notwithstanding any other provision of

this section, a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.


1126 (cont.)

Acceptance of plan (cont.) (g) Notwithstanding any other provision of

this section, a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests.


Applying the Voting Rules

Hypo 10 bonds each with a face amount of $1000 Distribution

A, 4 bonds; B, 2 bonds, and C, D, E and F, each 1 bond

C, D, E and F vote in favor, A and B against What happens?


Applying the Voting Rules

Hypo 10 bonds each with a face amount of $1000 Distribution

A, 4 bonds; B, 2 bonds, and C, D, E and F, each 1 bond

C, D, E and F vote against, A and B in favor What happens?


1122 Classification of claims or interests

(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.

(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.


Classification Questions

Who must be classified together? Who must be classified separately? What limits are imposed on separate

classification or classification together for those not covered by questions 1 and 2?


A Simple Plan

Capital Structure Firm has $130 in cash Three creditors, A, B and C, each owed

$100 A and B each own 50 shares of common

stock of firm


A Simple Plan

Proposed Plan Class 1: Unsecured Creditors

Each gets $10 Class 2: Equity

All equityholders get $1 per share Voting

A and B vote in favor, C opposes What happens? (but see 1129(a)(10))


A Simple Plan II

Capital Structure Firm has $131 in cash Three bond creditors, A, B and C, each

owed $100 One trade creditor D owed $10 A and B each own 50 shares of common

stock of firm


A Simple Plan II

Proposed Plan Class 1A: Unsecured Bond Creditors

Each gets $10 Class 1B: Trade Creditor

Gets $1 Class 2: Equity

All equityholders get $1 per share

A Simple Plan II

Voting A, B and D vote in favor, C opposes

What happens?



Woodbrook

Core Facts Single asset real estate C11 Plan

Classes 1 and 2: Professionals and Other Admin Costs

Class 3: Secured Claim• $3.6 million value, paid over 30 years at 7.5%

interest


Woodbrook Class 4: Deficiency Claim

• 5% plus all cash on hand at confirmation less $100K

Class 5: Project Manager Claim• Unsecured, paid in full over one year

Class 6: Related Entity Claim• Unsecured, paid monthly until paid in full

Class 7: Trade Creditors• Unsecured, paid in full in 30 days


Woodbrook

Class 8: General and Limited Partners• Retain interests in full

Key Questions What is happening here operationally? Is is the proposed classification of claims

proper?


1111

Claims and interests (a) A proof of claim or interest is deemed

filed under section 501 of this title for any claim or interest that appears in the schedules filed under section 521(1) or 1106(a)(2) of this title, except a claim or interest that is scheduled as disputed, contingent, or unliquidated.


1111 (cont.) Claims and interests (cont.)

(b)(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless -

(i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection; or

(ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.


1111 (cont.)

Claims and interests (cont.) (b)(1)(B) A class of claims may not elect

application of paragraph (2) of this subsection if - (i) the interest on account of such claims of the

holders of such claims in such property is of inconsequential value; or

(ii) the holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of this title or is to be sold under the plan.


1111 (cont.)

Claims and interests (cont.) (b)(2) If such an election is made, then

notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed.

class 17 bankruptcy, spring, 2009 overview of plan process randal c. picker leffmann professor of...

Documents

appointment of trustee

mandatory trustee

creditors committeeshow

interests of creditors

us trustees

statutory duties

trustees examiners

equity committees