A written tour of business bankruptcy and its alternatives.
This is the latest in the series, Dealing with Distress for Fun & Profit, which you can read from the beginning if you like. In this bat-installment, we turn to what is, theoretically, one of the most important parts of any chapter 11 case: confirming a chapter 11 plan.
Notice our use of the word “theoretically” above? That is because in many chapter 11 cases there never is a plan. Some cases get dismissed. Others get converted. A dismissal or conversion is not necessarily a failure. Like so many things in life, it depends.
Depends on what? Well, it depends on where you sit (you know that expression, “where you stand depends on where you sit”- kind of like why some wealthy Republicans living in California today started out as Hippies in the 1960s and 70s. But we digress…
If you are the senior secured lender who came into the case seeking to maximize the sale price for your collateral and you want to use some of the powers of bankruptcy to do that, then you may not care at all whether a plan is ever confirmed. Indeed, you may prefer that one not be confirmed at all. But that’s a topic for a different article.
At its most basic level, a chapter 11 plan is much like a multi-party contract that binds the various interested parties to specific treatment based on their class of claims against or interests in the bankruptcy estate. There are, however, methods by which a plan can be confirmed over the non-agreement of some parties. This is what cramdown is. For more about cramdown, you can read Cram Down: An Impaired Class of Claims Says “No” But the Plan is Confirmed Anyway.
Chapter 11 plans come in all shapes and sizes.
Let’s examine each.
A major way to distinguish between chapter 11 plans is by reference to the level of agreement there is (or is not) about the plan immediately before the filing of the chapter 11 case:
In days of old (i.e. as recently as the early 1980s), liquidating plans were uncommon. The title of chapter 11 of the Bankruptcy Code is, after all, “Reorganization.”
Times have changed. Today, debtors commonly seek and obtain authority to sell substantially all their assets by way of mere motion (the famous “363 motion”) and then distribute the proceeds of that sale under the terms of a chapter 11 plan- a liquidating plan.
In stark contrast are “plans of reorganization.” These are the classic chapter 11 plans that law students learn about, in which a true reorganization occurs. That is, rather than the assets of the debtor being sold to a third party, prepetition stakeholders retain some significant interest in the company post-bankruptcy (that is, in the reorganized debtor). True plans of reorganization are the exception these days (except perhaps in the context of chapter 11 cases involving single asset real estate).
There are consensual plans and non-consensual plans. Don’t confuse this with the question of whether the plan is pre-packaged, pre-arranged, or “regular.” What we are referring to here is whether the plan needs to be crammed down or not. A non-consensual plan is a plan that has to be crammed down. If you want to read more about cramdown, read Cram Down: An Impaired Class of Claims Says “No” But the Plan is Confirmed Anyway.
The distinctions above are not the only ways to divide chapter 11 plans into buckets, but we’re feeling all bucketed-out so let’s now turn to the hows of the Bankruptcy Code’s structure surrounding chapter 11 plans. Think of the following as a Cliff Notes / Monarch Notes / Spark Notes / Dummies’ Guide / Idiot’s Guide to the provisions of the Bankruptcy Code that deal most with chapter 11 plans:
Think of § 1129(a) as the place you want to start. It refers in its various subsections to all of the other sections we discuss above. When it does that you should go review those sections.
Each subsection sets forth one requirement. Some are easily satisfied (and not litigated all that much) and some are not (and as a result are the subject of more litigation).
Before a plan reaches a confirmation hearing it must be put out for a vote (pursuant to § 1129(a)(8)). If all the impaired classes accept the plan, then the plan is a consensual plan and the court will look at all the other factors under § 1129(a). This should sound familiar (quoting ourselves from earlier in this article, “[t]here are consensual plans and non-consensual plans . . . What we are referring to here is whether the plan needs to be crammed down or not”).
One important point: do not confuse voting with the other confirmation requirements. To be clear, even if everyone votes to accept a plan, that plan still needs to satisfy the other confirmation requirements, and any party in interest (even one who voted to accept the plan) can object to the plan on the ground that it does not do so.
If even one impaired class does not vote to accept the plan, then the plan cannot be confirmed under § 1129(a). But the plan can still be confirmed under § 1129(b). This is the famous (perhaps infamous, depending on your perspective) cramdown. That is, when the plan is confirmed under § 1129(b), it is being crammed down on one or more classes. To do this, the plan proponent must also still satisfy all of the requirements of § 1129(a), other than (a)(8).
Going deeper: if you are the plan proponent you should think of your options for each class as follows (excuse the redundancy, it is intentional):
Section 1129(a) contains a number of other subsections that are commonly litigated. For example, under § 1129(a)(11), the plan proponent must show that the plan is not likely to be followed by a liquidation or further reorganization of the reorganized debtor, unless the liquidation or further reorganization is provided for in the plan. This is known as the feasibility test.
There are other requirements that are worth understanding to be sure, but we are not going to do all your work for you![i] We don’t particularly like this term, however, since it connotes a dire situation. Don’t get us wrong- companies that file chapter 11 tend to be facing dire circumstances. But everything is relative. And while the vast majority of debtors file chapter 11 cases with a general goal in mind, few have the luxury of formulating—let alone seeking the agreement of stakeholders about—a specific chapter 11 plan before filing. This fact alone does not necessarily make these situations more dire than others. [ii] In many, if not most, cases, the plan proponent is the chapter 11 debtor. But other parties may propose plans, including secured creditors, creditors’ committees, or other parties in the case. In some cases, the debtor may work jointly with one or more of these parties to propose a plan.
Jonathan Friedland is a partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…
Jack O’Connor is an associate in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He has been recognized repeatedly as a “Rising Star” by SuperLawyers Magazine in the area of Bankruptcy & Creditor/Debtor Rights and has been named an “Emerging Lawyer,” by Leading Lawyers Magazine.
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