Reorganization Plan

At the heart of every Chapter 11 bankruptcy is the reorganization plan, the plan by which the debtor, usually a business, intends to pay its creditors over time by using its assets and its income. A reorganization plan and a disclosure statement that gives enough information about the plan to creditors must be submitted and approved by the court. The disclosure statement is then sent to creditors who vote on the plan. If approved, the court confirms the plan, the debtor receives a discharge of its debts, then it must carry out the plan under the oversight of the U.S. Trustee and the court. When the plan is successfully consummated, the court issues a final decree, ending its oversight.

Who Can File a Plan

The debtor, other than a small business debtor, has a 120-day period during which it has an exclusive right to file a plan. This exclusivity period may be extended or reduced by the court. But, in no event, may the exclusivity period, including all extensions, be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. The U.S. Trustee, however, is not permitted to file a plan.

A chapter 11 case may continue for many years unless the court, the U.S. Trustee, the committee, or another party in interest acts to ensure the case's timely resolution. The creditors' right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.

Cash Collateral, Adequate Protection, and Operating Capital

Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise. If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court.

A debtor in possession may not use cash collateral without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected. Section 363 defines cash collateral as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor's security interest.

If the debtor in possession wants to use the cash collateral, as is often the case, the secured creditors are entitled to receive additional protection under section 363 of the Bankruptcy Code. The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide adequate protection to the creditor.

Adequate protection may be required to protect the value of the creditor's interest in the property being used by the debtor in possession, especially if there is a decrease in value of the property. Adequate protection may be provided by making periodic or lump sum cash payments to the creditor, or by providing an additional or replacement lien on the debtor's property.

Usually, the debtor in possession will need operating capital to run its business. So that the debtor can obtain fresh financing, lenders who loan money to the debtor during bankruptcy can either get a lien on unencumbered property of the debtor or the lender can get, with court approval, super-priority of its claims over those of other unsecured creditors, in which case, the lender will be paid before any unsecured creditors.

Disclosure Statement

The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization.

A small business debtor may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan.

The contents of the plan must include a classification of claims and must specify how each class of claims will be treated under the plan. Creditors whose claims are impaired, which are those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan, vote on the plan by ballot. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan.

Plan Acceptance and Confirmation

As noted earlier, only the debtor may file a plan of reorganization during the first 120-day period after the petition is filed (or after entry of the order for relief, if an involuntary petition was filed). The court may grant extension of this exclusive period up to 18 months after the petition date. In addition, the debtor has 180 days after the petition date or entry of the order for relief to obtain acceptances of its plan. 11 U.S.C. §1121 The court may extend (up to 20 months) or reduce this acceptance exclusive period for cause. 11 U.S.C. §1121 In practice, debtors typically seek extensions of both the plan filing and plan acceptance deadlines at the same time so that any order sought from the court allows the debtor two months to seek acceptances after filing a plan before any competing plan can be filed.

If the exclusive period expires before the debtor has filed and obtained acceptance of a plan, other parties in interest in a case, such as the creditors' committee or a creditor, may file a plan. Such a plan may compete with a plan filed by another party in interest or by the debtor. If a case trustee is appointed, the trustee must file a plan, a report explaining why the trustee will not file a plan, or a recommendation for conversion or dismissal of the case. §1106(a)(5) A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and solicitation.

In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a Chapter 7 liquidation. It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case.

Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a chapter 11 plan, and section 1123(b) lists the discretionary provisions. Section 1123(a)(1) provides that a chapter 11 plan must designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured priority creditors, general unsecured creditors, and equity security holders.

Under section 1126(c) of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than ½ in number of the allowed claims in the class. Under section 1129(a)(10), if there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims. Moreover, under section 1126(f), holders of unimpaired claims are deemed to have accepted the plan.

Under section 1127(a) of the Bankruptcy Code, the plan proponent may modify the plan at any time before confirmation, but the plan as modified must meet all the requirements of chapter 11. When there is a proposed modification after balloting has been conducted, and the court finds after a hearing that the proposed modification does not adversely affect the treatment of any creditor who has not accepted the modification in writing, the modification is deemed to have been accepted by all creditors who previously accepted the plan. Fed. R. Bankr. P. 3019 If it is determined that the proposed modification does have an adverse effect on the claims of non-consenting creditors, then another balloting must take place.

Because more than one plan may be submitted to the creditors for approval, every proposed plan and modification must be dated and identified with the name of the entity or entities submitting the plan or modification. Fed. R. Bankr. P. 3016(b) When competing plans are presented that meet the requirements for confirmation, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm.

Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on confirmation of a plan. If no objection to confirmation has been timely filed, the Bankruptcy Code allows the court to determine whether the plan has been proposed in good faith and according to law. Fed. R. Bankr. P. 3020(b)(2) Before confirmation can be granted, the court must be satisfied that there has been compliance with all the other requirements of confirmation set forth in section 1129 of the Bankruptcy Code, even in the absence of any objections. In order to confirm the plan, the court must find, among other things, that:

  1. the plan is feasible;
  2. it is proposed in good faith;
  3. the plan and the proponent of the plan are in compliance with the Bankruptcy Code.

In order to satisfy the feasibility requirement, the court must find that confirmation of the reorganization plan is not likely to be followed by liquidation or the need for further financial reorganization. If reorganization is not feasible, the debtor can choose to liquidate under Chapter 11, which has some advantages over a Chapter 7 liquidation.