Chapter 11 / Reorganization Plan -
In the first few months, the debtor has at least a brief respite from the stress of defending creditor activity including collection calls and letters, lawsuits, wage garnishments, levies on assets, foreclosures, repossessions of automobiles and equipment, evictions, and court-ordered judgment debtor examinations. He has an opportunity to realistically assess his true financial condition and the viability of ongoing operations, under court supervision and without a requirement of paying pre-petition unsecured debts.
Many of the preliminary matters will have been taken care of, including cash collateral agreements and orders, agreements with secured creditors for adequate protection on properties the debtor intends to keep, analysis of the claims filed versus the scheduled claims, appraisal of the merits of possible avoidance actions, including fraudulent conveyances and preferences, orders allowing DIP financing, and turnover of property in the hands of a custodian.
The debtor will have undergone some initial restructuring by virtue of taking care of the Chapter 11 "housekeeping" chores, like opening a DIP account, filing monthly operating reports, paying U.S. Trustee fees, and appearing at status conferences before the court. The debtor will have had the benefit of the insight of the compassionate staff at the U.S. Trustee's Office, the creditors committee, and sometimes the Court, on the debtor's true prospects for recovery.
The debtor will have had time to adapt to his new role as DIP, requiring him to have regard not only for his personal financial well-being, but for the fair and equitable treatment of his creditors.
When Can Debtor File a Plan?
Congress, realizing the importance of the "breathing spell" for the debtor in Chapter 11 cases, has enacted Bankruptcy Code Section 1121(b). This section provides for a 120-day "exclusivity period", during which the debtor, and only the debtor, is entitled to file a Chapter 11 plan. If the debtor files a plan within the first 120 days, then he has an additional 60 days to obtain confirmation of the plan, and other parties are precluded from filing competing plans during this extended period. The exclusivity period expires on the first to occur of: the appointment of a trustee; failure of debtor to file a plan within 120 days; failure of debtor to obtain plan confirmation within 180 days after the filing.
After the exclusivity period expires, Bankruptcy Code Section 1121(c) allows a plan to be filed by any party in interest, including the debtor, creditors, creditors committee, and equity security holders committee. There is an outside deadline of 18 months for the filing of a plan by any party, and 20 months for confirmation of the plan.
When Can Creditors File Plans?
Creditors sometimes believe that the exclusivity law
provides the debtor with an unfair advantage in a particular case. They may charge,
rightly or wrongly, that the debtor is manipulating this provision by trying to
strong-arm creditors into accepting a plan that is not quite as advantageous to
them as it should be, and having the court "cram down" the plan over
Congress enacted Bankruptcy Code Section 1121(d), which provides that the exclusivity period can be changed by the court, after notice and a hearing, "for cause". The term "cause", is not defined. It is left in the good hands of the bankruptcy judiciary. The courts generally hold that "cause" is found if alteration of the period would facilitate moving the case forward to its ultimate denouement. Some questions they ask include:
Competing Chapter 11 Plans
In a few of the larger Chapter 11 cases,
once the exclusivity period has expired, there are competing plans
of reorganization filed. Under Bankruptcy Rule 3016(b), each such
plan is required to be dated and its proponent identified. Each such
plan is required to meet all of the requirements for confirmation,
including the approval of a disclosure statement, and obtaining the
requisite number of votes. If competing plans reach the confirmation
hearing having met all of the requirements for confirmation, the court
will decide which plan to confirm, taking into account the interests
of the creditors and equity security holders.
Written by Henry Rendler
Written by Henry Rendler
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