Robert S. Bernstein, Moderator

Panelists:

Brittany S. Ogden, Murphy Desmond S.C., Madison, WI

Bari Gambacorta, Stark and Stark, Princeton, NJ

Robert Bernstein Brittany Ogden Bari Gambacorta

Ms. Ogden is a shareholder that concentrates her practice in business and commercial litigation, administrative agency disputes, bankruptcy and creditors' rights matters, including the representation of bankruptcy trustees and creditor committees. She has over 14 years of experience with matters involving shareholder and partner disputes, breach of duty and contract claims. She also represents clients in a variety of regulatory investigations. And, she has significant experience with financial leasing matters representing companies in state and federal disputes concerning the enforcement and interpretation of lease agreements. Her agricultural background also provides a unique perspective to many of her clients. Ms. Ogden is a shareholder at Murphy Desmond S.C. and is active in the community. She has been named a “Rising Star” by Wisconsin Super Lawyers since 2006.

A shareholder and member of Stark & Stark’s Bankruptcy & Creditor’s Rights and Collections Groups where he concentrates his practice in leasing matters, foreclosures, bankruptcies, collections and replevins. He has lectured on these topics for New Jersey’s Institute of Continuing Legal Education, the New Jersey Banker’s Association, The National Association of Retail Collection Attorneys and the Camden County Bar’s Debtor-Creditor Relations Committee. 

Mr. Gambacorta is a frequent contributor to LEAN's Newsletter. You can read Mr. Gambacorta's most recent blog post here. 

LEAN member Bob Bernstein, Managing Partner at Bernstein-Burkley, P.C., has volunteered to moderate the webinar discussion.

Bob is a qualified member of the panel of the e-discovery special masters for the Federal Court in the Western District of Pennsylvania and has been involved in and managed the review of a production of more than 8 million pages of documents, as well as having managed the autopsies of a number of bankrupt companies as plan administrator or commercial counsel.

While fulfilling his duties as managing partner of Bernstein-Burkley, P.C., Bernstein represents other businesses of all sizes and types in many areas of their operation, including representation in reorganization proceedings. He has extensive experience in credit recovery matters, including collection, secured transaction and mortgage foreclosure.

Congress enacted the Bankruptcy Code ◦ Uniform federal law that governs all bankruptcy

cases◦ Federal Rules of Bankruptcy Procedure

(“Bankruptcy Rules”) govern procedural aspects of bankruptcy cases

There is a bankruptcy court for each federal judicial district in the country◦ Each state has one or more districts◦ Each district may also have local rules

The commencement of the case creates the bankruptcy “estate.”

The “estate” is comprised of all property of the debtor, “wherever located and by whomever held”. The estate is comprised of:

o All legal and equitable property interests of the debtor as of the time of the commencement of the case

o Property of the debtor recoverable from third parties

o Proceeds, rents, profits from property of the estate

Estate is the basis for generating and/or measuring creditor recoveries under a Plan.

Creation of the Bankruptcy Creation of the Bankruptcy EstateEstate

United States Bankruptcy Judge ◦ Decides matters connected with a bankruptcy

case ◦ Large part of bankruptcy process is

administrative, and not conducted in court

Office of United States Trustee ◦ Part of Department of Justice—responsible for

overseeing administration of bankruptcy cases

◦ Reviews debtor filings, monitors trustee and attorneys fees in bankruptcy cases, pursues civil sanctions for violations of bankruptcy laws

United States Trustee maintains a panel of Trustees who are appointed by the Court in Chapter 7, 12, and 13 cases

Role of panel Trustee:◦ Administer case◦ Investigate and liquidate available assets◦ Distribute assets to allowed creditors

Chapter 7: Liquidation◦ Trustee takes over assets of the estate, reduces them

to cash and makes distributions to creditors◦ Individual debtor is entitled to:

Exempt certain assets Discharge of debts Must qualify for relief under “means test”

Chapter 13: Adjustment of Debts◦ Debtor proposes a “plan” to repay creditors over time

(3-5 years)◦ Debtor remains in possession of property◦ Individual debtor receives discharge after completion

of plan

Chapter 11: Reorganization◦ Continued operation of commercial enterprises ◦ Repayment of creditors through court-approved

plan of reorganization

Chapter 12: Adjustment of Debts for Farmer◦ Similar process to Chapter 13, but limited to

family farmers and fisherman with regular income◦ Debtor can continue operation of farming/fishing

business while in bankruptcy

Chapter 9: Municipal ◦ Similar to reorganization under Chapter 11, but

for a municipality ◦ State law must authorize municipality to file

Chapter 15: Cross-Border Cases◦ Where debtor has property that is subject to the

laws of the US and one or more foreign countries

Automatically triggered by the filing of a bankruptcy petition. See 11 U.S.C. §362.

Operates as an injunction against all actions affecting the debtor or its property.

A respite and breathing spell for the Debtor.

Halts actions by creditors to obtain satisfaction of their claims using the remedies available under state law.

Effective regardless of whether a creditor has notice of the filing of the petition.

Automatic StayAutomatic Stay

Any action taken in violation of the automatic stay is void.

Persons violating the automatic stay can be held liable for damages.

Under the automatic stay, the holder of a security interest in the debtor’s property may not foreclose or repossess that property without permission of the bankruptcy court. (i.e. an “order for relief from the stay”)

Under the automatic stay, acts to create or perfect a lien on the debtor’s property are generally stayed.

Automatic Stay- Automatic Stay- continuedcontinued

Executory contract is a contract or lease where the parties have continuing obligations to perform

Debtor in possession must decide to:◦ Assume (bind or agree to continue performing duties

under contract or lease)◦ Assign (transfer rights & duties under contract or

lease to a third party)◦ Reject (cease performing duties under contract or

lease, entitling other party to claim for damages to be paid through plan)

11 U.S.C. §365.

• Debtor must obtain court approval to assume or assign a contract or lease.

• If there is an existing default, the debtor cannot assume or assign the contract or lease unless the debtor:

o Cures the default;

o Compensates the non-debtor party for actual pecuniary loss resulting from the default; and

o Provides adequate assurance of future performance under the contract or lease.

• By assuming the contract, the debtor (or assignee) and all other contracting parties remain bound by the terms of the original agreement.

Court Approval Required to Assume or Court Approval Required to Assume or Assign Contract or LeaseAssign Contract or Lease

• Debtor is not obligated to make decision to assume, assign or reject a contract until confirmation of a Plan or certain statutory period is reached.

• A party bound under a contract or lease with the debtor may file a motion to establish a date certain on or prior to which the debtor must assume, assign or reject the contract or lease. The Court has complete discretion in granting these motions.

• In general, a clause providing that insolvency or bankruptcy shall be an event of default creating a right of termination or modification of the contract or lease (a so-called ipso facto clause) is not enforceable in bankruptcy. Exceptions include: If the contract or lease is to extend a loan or financial accommodation to the debtor, to issue a security on the debtor’s behalf, or to perform uniquely personal services for the debtor. 11 U.S.C. §365(e).

• Clauses prohibiting the assignment of a contract are also unenforceable, with certain exception. 11 U.S.C. §365(c), (f).

Court Approval Required to Assume or Court Approval Required to Assume or Assign Contract or Lease- Assign Contract or Lease- continuedcontinued

• Important distinction, especially if the owner/lessee of the asset files for bankruptcy

• Proper test to apply depends on the reason for characterizing the transaction

• Fact-specific inquiry pursuant to U.C.C. §1-203

• A “Lease” is defined by the U.C.C. §2A-103(j) as:

[a] transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.

• The key is whether or not a security interest is created. See definition in U.C.C. §1-201(35).

True Lease or a Disguised True Lease or a Disguised Financing Transaction?Financing Transaction?

• UCC creates a 2-part test for determining whether a transaction is a loan or a lease.

• Any transaction satisfying the 2-part test creates a security interest and is a loan as a matter of law

• Focus on whether the alleged lessor retains an interest in the goods (i.e. the residual value)

• If there is a realistic chance that the lessee will return something of value to the lessor, the lease will likely be deemed a “true lease”

• The 2-Part test is not absolute – UCC gives courts the flexibility to look at the facts of each case. It is possible that while the application of the test does not result in the transaction being characterized as a loan, the court may look at all of the facts and circumstances and determine that it is a loan after all.

Lease or Loan? UCC TestLease or Loan? UCC Test

Part One: Does the lessee have the option of terminating the lease early?

• If the lessee has the right to terminate the lease at any time without significant penalty, the transaction will not be deemed a loan.

Lease or Loan? UCC Test- Lease or Loan? UCC Test- continuedcontinued

Part Two: The second part of the test is satisfied if the answer to any of the following questions is yes:

1.Is the lessee required to purchase the goods?

If the lessee is required to purchase the goods, the lease is not a true lease.

2.Is the lessee required to lease the goods for their full economic life?

If nothing of value is left to be returned to the lessor and the lease is not a true lease.

3.Does the lease contain a Nominal Renewal or Nominal Purchase Option?

A reasonable lessee would be certain to exercise an option: (1) that allows it to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal consideration; or (2) that allows it to become the owner of the goods for no additional or for nominal consideration. Accordingly, no lessor under any lease that contains either of these options can expect to receive anything of value from the lessee at the end of the lease term; these leases are deemed to be loans rather than true leases.

Lease or Loan? UCC Test- Lease or Loan? UCC Test- continuedcontinued

• Establishes the overall amount owed to creditors as of the filing date of the bankruptcy petition.

• Each creditor has the opportunity to file a Proof of Claim

• The Debtor has the right to object to a Proof of Claim

• On the Bankruptcy Court’s entry of final order(s) debtor and creditors know the full amount and scope of the claims against the debtor.

The Claims ProcessThe Claims Process

• Debtor must file schedules listing all creditors.

• Proof of Claim is a written statement setting forth the nature and amount of the creditor’s claim against the Debtor. The Official Form B-10 is most commonly used.

• If the creditor does not dispute the characterization of its claim by the Debtor, it need not file a proof of claim. See 11 U.S.C. §1111(a).

• Proofs of Claim must be filed by the “bar date” set by the Court.

• A failure to file a proof of claim may cause the claim to be disallowed, impact voting rights, or modify the creditor’s interests.

Filing of ClaimsFiling of Claims

• A claim is “unsecured” where it is not secured by collateral.

• A claim is “secured” if its claim is secured by a lien on the debtor’s property – it is secured to the extent of the value of the collateral.

• If the value of the collateral is less than the debt owed, the balance of the debt is treated as unsecured.

• To the extent the value of a secured creditor’s collateral is greater than the amount of its secured claim, the creditor can also recover post-petition interest (usually at the contract rate) and its reasonable expenses (including counsel fees) to the extent provided in the agreement giving rise to the security interest.

• The debtor may recover from a secured creditor’s collateral the costs of preserving the collateral for the benefit of the secured creditor. 11 U.S.C. §506(c).

• Post-petition interest is generally not recoverable.

Secured vs. Unsecured ClaimsSecured vs. Unsecured Claims

• If their contracts allow, creditors may collect their reasonable collection costs

• Over-Secured Creditors are normally allowed to recover their reasonable attorneys’ fees to the extent of the excess collateral value. 11 U.S.C. §506(b).

• Unsecured and under-secured creditors normally cannot obtain collection costs.

Attorney’s FeesAttorney’s Fees

• Debtor can require creditors asserting a claim arising from the providing of goods to the debtor in the ordinary course of debtor’s business within 20 days prior to the filing (a §503(b)(9) claim) to include their proof of delivery on the proof of claim form.

• Creditors must attach supporting documentation – i.e. promissory notes, purchase orders, invoices, judgments, mortgages, security agreements.

Further Proofs RequiredFurther Proofs Required

• Debtor may object to filed Proofs of Claim.

• Unless otherwise permitted by the Court, a single objection cannot include objections to more than 1 claim.

• Objections which must be included in a single objection are:

o Objections to litigation claims;

o Claims that need to be reclassified to the proper priority;

o Claims that should be asserted against a different debtor; and

o Claims that should be reduced in amount based on the debtor’s books and records.

• Many debtors will file a motion establishing claims settlement procedures that, if approved by the court, can be used by the debtor to resolve claims expeditiously.

Claims ObjectionsClaims Objections

Claims Objections- Claims Objections- continuedcontinued

• Fed. R. Bankr. P. 3007(d) provides that objections to more than one claim may be joined in an omnibus objection if all claims were filed by the same entity, or the objections are based solely on the grounds that the claims should be disallowed, in whole or in part, because:

o They duplicate other claims;o They have been filed in the wrong case;o They have been amended by subsequently filed proofs of

claim;o They have been satisfied or released during the case;

• If the creditor agrees with the objection, no action is required.

• If the creditor disagrees with the objection, a reply must be filed with the Court unless the creditor is able to resolve the objection with the debtor’s counsel.

Tips of Protecting ClaimsTips of Protecting Claims

• Carefully review the notice of the bar date and comply with the procedures set forth therein for filing the Proof of Claim.

• File the Proof of Claim in advance of the bar date to ensure it is timely filed.

• Send the completed and executed Proof of Claim form to the correct recipient (bankruptcy court, claims agent, debtor’s counsel).

• Sign and date the Proof of Claim form.

• When representing a claimant, review any omnibus objection received to determine whether an objection has been filed and comply with the procedures for filing a reply.

• If a creditor has a security interest rather than a “true lease” the debtor may use that equipment without payment so long as there remains adequate value in the equipment (owed less than value)

• In lieu of providing adequate protection, Debtor can seek to show that the value of the collateral greatly exceeds the amount of the secured creditor’s debt (i.e. demonstrate that there is an equity cushion).

• In the event that the grant of adequate protection is shown to be inadequate, the secured creditor’s claim for its lost collateral value will be treated as a “super priority” claim and expense of the case. 11 U.S.C. 507(b).

Adequate Protection for Adequate Protection for Secured Creditors (11 U.S.C. Secured Creditors (11 U.S.C.

§361)§361)

• Examples of adequate protection by a Debtor include:

o Providing the creditor with an additional or replacement lien on other property of the estate to the extent that the stay results in a decrease in the value of the creditor’s interest in its collateral; or

oGranting the secured creditor such other relief as will result in the creditor’s realization of the “indubitable equivalent” of the value of the creditor’s interest in its collateral.

Adequate Protection for Adequate Protection for Secured Creditors (11 U.S.C. Secured Creditors (11 U.S.C.

§361)§361)

• Upon filing of case, debtor automatically assumes an additional identity as the “debtor in possession”◦ Debtor retains possession and control of its assets and

continues operating its business while undergoing a reorganization

• Written disclosure statement and plan of reorganization must be filed with the Court◦ Disclosure statement contains information on assets,

liabilities, and business operations sufficient to allow creditor to make informed judgment about the plan of reorganization

• Provides a meaningful opportunity to preserve the Debtor’s business as a going concern by restructuring its debt and equity interests to better reflect the actual (and usually diminished) ability of the Debtor to service debt, and to retain or create equity value for shareholders.

• The Chapter 11 Plan can provide for number of changes, including:o Changes in the amounts, interest rates or maturity dates of

outstanding debtso Reinstatement of favorable existing contracts notwithstanding

defaultso Satisfaction or modification of lienso Rejection or assumption of contracts and leaseso Attraction of new credit with senior liens

• Existing creditors typically see their debt claims reduced or modified.

• A business need not be insolvent to obtain Chapter 11 relief. Solvent companies can file voluntarily for liquidation or reorganization purposes.

Purpose and Process of Purpose and Process of Chapter 11Chapter 11

Classification of claims Specification of how each class of claims

will be treated under the plan Voting by ballot on plan by creditors whose

claims are “impaired” (contractual rights are to be modified or who will be paid less than full value of claim)

Votes are tallied, and Court holds hearing on confirmation of plan

The Debtor in Possession or Trustee

Creditors’ Committee and other official committees

o Appointed by the United States Trustee.

o Consists of creditors holding unsecured claims (usually the 7 largest unsecured creditors). See 11 U.S.C. §1102.

o Monitors the debtor’s ongoing operations, consults with the debtor on major decisions.

o With Court approval, can hire attorneys, accountants, investment bankers, and other agents to perform work on its behalf. See 11 U.S.C. §1103.

o At the discretion of the US Trustee, committees representing other constituencies (i.e. equity security holders) can be appointed in the case. See 11 U.S.C. §1102(a)(2)

Primary Parties in the Reorganization Primary Parties in the Reorganization Process Process

United States Trustee

o Serves in various administrative capacities.

o Responsibilities include:

Monitoring employment and compensation of professionals hired in the case by the Debtor or the official committees

Monitoring the filing of required financial schedules and reports by the debtor

Appointing and monitoring the members of the official committees

o Can also comment on the feasibility of the Plans and the adequacy of disclosure statements.

Other Parties in Interest

Primary Parties in the Reorganization Primary Parties in the Reorganization ProcessProcess

- continued - continued

Strong Arm Powers• Debtor has the power to avoid liens, transfers and obligations

that, under applicable bankruptcy law would be deemed junior in right to various “hypothetical lien creditors.”

• “Hypothetical Lien Creditors” against whom the rights of others are measured are:

1. Judicial creditor obtaining a lien on all property of the debtor as of the commencement of the case;

2. A creditor extending credit and obtaining an execution against the debtor that is returned unsatisfied;

3. A bona fide and perfected purchaser of real property at the commencement of the case.

Special Powers of the Debtor Special Powers of the Debtor in Possession or Trusteein Possession or Trustee

• Debtor’s status as “hypothetical lien creditor” allows it to wipe clean any liens, claims or transfers that are legally inferior under state law.

• The “strong arm” powers are most commonly exercised where a secured creditor has failed to take the appropriate steps under state law to properly perfect its lien or when a previously-perfected security interest has lapsed due to the creditor’s failure to file a “continuation statement” required under state law.

Special Powers of the Debtor in Special Powers of the Debtor in Possession or Trustee- Possession or Trustee- continuedcontinued

Preferences

• A “preferential transfer” is a transfer of the Debtor’s property to, or for the benefit of a creditor, within 90 days prior to the commencement of the bankruptcy

• Subject to certain exceptions, these transfers can be undone and the property recovered for the benefit of the estate. 11 U.S.C. §547.

• Examples of preferential transfers:

o Late payment of trade debt

o Granting of a security interest to a previously unsecured or under-secured lender

o Delayed perfection of a security interest granted by the Debtor contemporaneously with the incurrence of debt

Special Powers of the Debtor in Special Powers of the Debtor in Possession or Trustee- Possession or Trustee- continuedcontinued

Voluntary Petitions

The debtor files a petition for relief with the Clerk of the Bankruptcy Court. The filing of a voluntary petition automatically constitutes entry of an “order for relief” opening the case. See 11 U.S.C. §301.

Involuntary Petitions

Commenced when someone other than the debtor, usually creditors, files a petition against the debtor.

Most involuntary cases are filed under Chapter 7, but can also be filed under Chapter 11. See 11 U.S.C. §303(a).

Typically, a minimum of 3 creditors with “bona fide unsecured claims” of at least $14,425 in the aggregate are needed to file an involuntary petition against a debtor. See 11 U.S.C. §303(b)(1).

Voluntary vs. Involuntary Voluntary vs. Involuntary PetitionsPetitions

Involuntary Petitions

The Debtor in an involuntary case may contest the filing of the involuntary petition.

If the Debtor contests the filing of the involuntary petition, the petitioning creditors must establish:

a) The debtor “is generally not paying [its] debts as they become due,” unless those debts are the subject of a “bona fide dispute;” or

b) A non-bankruptcy trustee or receiver has taken charge of substantially all of the debtor’s property within the preceding 120 days.

If the debtor fails to contest the petition timely, or if the court decides that the statutory criteria have been met, the court will enter an “order for relief” and the case will proceed like a voluntary Chapter 11 case.

Voluntary vs. Involuntary PetitionsVoluntary vs. Involuntary Petitions- continued- continued

• Schedules of Assets and Liabilities.

• Schedule of Executory Contracts and Unexpired Leases.

• Statement of Financial Affairs (“SOFA”).

• These filings provide information about the debtor’s financial condition as of the filing date.

• Must be filed within 14 days of filing a voluntary petition, if they are not filed with the petition.

Required Filings by a Chapter 11 Required Filings by a Chapter 11 DebtorDebtor

• Lists all secured creditors, including those holding any type of security interest in the debtor’s property:

oMortgages

oDeeds of trust

oSecurity interests

o Judgment liens

oStatutory liens

oProperty taxes

oOther security interests evidenced by perfected financing Statements

Schedule “D”Schedule “D”

• Schedule “E” lists all creditors entitled to priority pursuant to 11 U.S.C. §507(a), and can include:

oWages, salaries and commissions, vacation, severance and sick leave;

oMoney owed to employee-benefit plans for services rendered within 180 days immediately preceding the filing; and

oTaxes, customs, duties and penalties owed to federal, state, and local governments.

Schedule “E”Schedule “E”

• Lists claims that are not secured and not entitled to priority

oUnsecured trade payable claims

oContract rejection damage claims

oLitigation claims

• Debtor can asserts that claims on Schedules “D”, “E” and “F” are “contingent”, “unliquidated” or “disputed.”

Schedule “F”Schedule “F”

• During the first 120 days after the commencement of the case, the Debtor has the exclusive right to propose and file a Plan. 11 U.S.C. §1121(b).

• The 120-day period is the “exclusivity period”.

• The “exclusivity period” cannot be extended beyond a date 18 months following the commencement of the Chapter 11 case. 11 U.S.C. §1121(d)(2)(A).

• A creditor may file a plan only if the “exclusivity period” has expired or been terminated by the Court, or if a trustee has been appointed in a case.

• In larger Chapter 11 cases, fights over extending the “exclusivity period” are often contested by creditors who want to file their own Plan.

Who May File a Plan?Who May File a Plan?

• A Chapter 11 Plan may provide for:

o Comprehensive changes in the financial and business structure of the debtor;

o Sale of assets;

o Cancellation of debt;

o Curing or waiving of defaults;

o Satisfaction or modification of liens;

o Changes in the amount, interest rate or maturity of outstanding debt;

o Issuance of new debt or equity securities of the debtor in replacement of existing claims and equity interests; and

o A creditor’s claim will be reduced or paid back over a greater period of time or at a different rate of interest.

Elements of a Chapter 11 PlanElements of a Chapter 11 Plan

• A Chapter 11 Plan is submitted to a vote by all creditors and shareholders who are adversely affected by its terms.

• If certain conditions are met, a Plan can be imposed on a creditor (or sometimes the debtor) even if certain parties object.

• A primary benefit of a Chapter 11 Plan is the ability to impose a comprehensive financial restructuring.

Elements of a Chapter 11 Elements of a Chapter 11 Plan- Plan- continuedcontinued

• Claims are grouped into one or more classes, depending on their nature. 11 U.S.C. §1123(a)(1).

• Claims that are grouped together must be “substantially similar”.

• Plan must provide for the same treatment of each claim or equity within a particular class

• Classification is important because a Plan must be separately voted on by each class of creditors and shareholders.

• Generally, each secured claim is placed in its own class.

• General Unsecured Creditors are ordinarily placed in the same class.

• Some courts will approve classifications which place unsecured creditors in separate subclasses, if the financial interests of the separately classified creditors are sufficiently different to warrant separate class voting on the Plan.

Classification of Claims and Equity Classification of Claims and Equity InterestsInterests

• Only classes of creditors or shareholders having claims or equity interests that are “impaired” under the plan are entitled to vote.

• A claim is “impaired” if it is paid less than the full or an otherwise modified amount.

• The Bankruptcy Code requires that, before voting on a Plan, holders of claims and equity interests must receive a court-approved disclosure statement containing “adequate information” concerning the debtor and the Plan.

• To be “adequate”, the information is enough that would enable a hypothetical investor to make an informed judgment about the treatment of its claim under the Plan. 11 U.S.C. §1126.

Voting on the Plan – Voting on the Plan – 11 U.S.C.§112611 U.S.C.§1126

• The disclosure statement need not comply with formal securities law disclosure requirements.

• Each holder of a claim or equity interest votes on the Plan with other members of the applicable class.

• Acceptance by a class of claims requires consent by holders of claims equaling at least 2/3 in amount and a majority (more than ½) in number of the claims in the class that are actually voted. 11 U.S.C. §1126(c).

• A class of impaired equity interests will be found to have accepted the Plan upon the vote of 2/3 of the allowed amount of such interests. 11 U.S.C. §1126(d).

Voting on the Plan – Voting on the Plan – 11 U.S.C.§1126 - 11 U.S.C.§1126 - continuedcontinued

• The Court must make specific findings in order to confirm (approve) a Plan and make it binding on all parties.

• The Court must find that the Plan is feasible, and has been proposed in good faith.

• For a Plan to be feasible, it must appear that the Debtor has a credible business plan and can reasonably be expected to perform its obligations.

• If an individual creditor votes against the Plan, the Plan must also pass the “Best Interests of Creditors Test.”

• If a class of creditors votes to reject the Plan, the Plan can nevertheless be imposed on the class if the Plan passes the “fair and equitable test”. This is called a “cram down.”

Basic Test for Confirmation – Basic Test for Confirmation – 11 U.S.C. §1129 11 U.S.C. §1129

• Even if all classes entitled to vote on the Plan have voted to accept it, the court must still determine whether the Plan is in the “best interests” if there are any individual dissenting creditors or shareholders. 11 U.S.C. §1129(a)(7).

• The “Best Interest of Creditors” Test requires the court to determine that the dissenting creditors or shareholders are receiving under the Plan at least as much (in present value terms) as they would receive if the debtor were instead liquidated under Chapter 7.

• If the Court determines that the distribution under the Plan is equal to or more than the holder would receive in Chapter 7, the reorganization is in the “best interests of creditors” because they will receive at least as much as they would have received had the business been shut down and liquidated.

““Best Interests of Creditors” Best Interests of Creditors” Test Test

11 U.S.C. §1129(a)(7)11 U.S.C. §1129(a)(7)

• If an impaired class votes, as a whole, to reject the Plan, the Plan can nevertheless be imposed on the entire class if:

1. At least one (1) impaired class has voted to accept the plan; and

2. The court finds that the treatment provided for the objecting class under the Plan does not discriminate unfairly and is “fair and equitable.”

• Ordinarily, similar claims or equity interests must be treated similarly.

• Determination depends on whether the class is secured or unsecured.

““““Fair and Equitable Test” Fair and Equitable Test” 11 U.S.C. §1129(b)(1)11 U.S.C. §1129(b)(1)

• Cramdown of a secured class will be permitted if the Plan provides:

1. The secured creditors in the class will retain a lien to the extent of their secured claim and will receive deferred cash payments which have a present value equal to the value of their interest in the collateral;

2. For the sale of the secured creditors’ collateral with the creditors’ security interests attaching to the proceeds; or

3. For the realization by the secured creditors of the “indubitable equivalent” of their secured claims.

• The general rule is that the secured creditor should receive at least the value of their security interest in the collateral.

““Fair and Equitable Test” Fair and Equitable Test” 11 U.S.C. §1129(b)(1)- 11 U.S.C. §1129(b)(1)- continuedcontinued

• Cramdown of an unsecured creditor or shareholder will be permitted, generally, where the Plan provides either:

1. The creditors in the class receive (over time) case payments equal to the present value of their full unsecured claims; or

2. The creditors in the Plan are not recovering (over time) payment in full that at lease classes junior to the class in question receive nothing under the Plan.

• Equity security holders can be similarly crammed down. 11 U.S.C. §1129(b)(2)(C)

• Test also referred to as the “Absolute Priority Rule” – as a general rule, junior classes cannot receive anything unless and until senior classes are paid in full, or voluntarily agree to a different treatment.

• Priority of classes in Bankruptcy is the same as non-bankruptcy: secured claims 1st, unsecured claims 2nd and equity interests 3rd.

““Fair and Equitable Test” Fair and Equitable Test” 11 U.S.C. §1129(b)(1)- 11 U.S.C. §1129(b)(1)- continuedcontinued

• Debtor coordinates with major creditor groups prior to commencing a Chapter 11 case.

• Work out a consensual reorganization ahead of time.

• Debtor files the pre-negotiated Plan with the court on the 1st day, as well as votes confirming the Plan.

Pre-Packaged BankruptciesPre-Packaged Bankruptcies