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2. 2 William M. LeRoy - Moderator President & CEO American Legal & Financial Network “ALFN” Lee S. Raphael, Esq. - Panelist Principal Prober & Raphael, ALC Melissa A. Vermillion, Esq. - Panelist Associate Prober & Raphael, ALC

3.  Chapter 11 bankruptcy is a type of bankruptcy reorganization available to individuals, corporations and partnerships.  A Chapter 11 filing is a reorganization chapter, similar to a Chapter 13, but with more extensive requirements. 3

4. Chapter 11 Overview Cont.  Chapter 11 is probably the most flexible of all the bankruptcy chapters, and as such, it is the hardest to generalize about.  Its flexibility often makes it more expensive to both the creditor and debtor.  There are also administrative burdens which must be met:  United States Trustee fees  Administrative fees 4

5. Chapter 11 v. Chapter 13  Individuals who exceed the debt limits of Chapter 13 bankruptcy and would like to reorganize their debt rather than liquidate the bankruptcy estate under a Chapter may file under chapter 11.  Chapter 13 debt limits 11 U.S.C. §109(e)  Individuals who have more than $360,475 in unsecured debt or $1,081,400 of secured debt, cannot file a Chapter 13 bankruptcy. 5

6. Chapter 11 v. Chapter 13 Advantages for a debtor filing Chapter 11 rather than a Chapter 13:  Chapter 11 has no limits on the amount of debt and timeline for repayment (unlike Chapter 13).  Debtor becomes the “Debtor in possession” and has all of the rights and duties of a trustee. 11 U.S.C. §1107.  Debtors are able to modify the mortgages on their rental properties without the five year limitation of Chapter 13 but cannot modify their primary residence. 11 U.S.C. §1123(b)(5). 6

7. Automatic Stay Just like in Chapters 13 and 7:  Filing Chapter 11 invokes the Automatic Stay preventing creditors from collecting debts.  Creditors must stop all collection actions, including pending foreclosure sales, against any property of the Debtor. 7

8. Relief from Automatic Stay Just like in Chapters 13 and 7:  A creditor has the option to move the Court for relief from the automatic stay:  ( d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay –  (1) for cause, including the lack of adequate protection of an interest in property of such party in interest;  (2) with respect to a stay of an act against property under subsection (a) of this section, if –  (A) the debtor does not have an equity in such property; and  (B) such property is not necessary to an effective reorganization 11 U.S.C. §362(d)(1) and (d)(2) 8

9. Security Interest in Rents/Profits  “Cash Collateral” means 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, and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest... 11 U.S.C. §363(a)  The interest in “cash collateral” will be found in the deed of trust or mortgage securing the creditor’s interest in the property  A Notice of Security in Rents and Profits may be filed with the Court to provide notice to the Court, the bankruptcy estate, and any other parties in interest that you have an interest in the cash collateral 9

10.  When "cash collateral" is used or spent, the entities that have a security interest in the property (secured creditors, lien creditors) are entitled to receive additional protection.  Failure to provide this protection is “cause” to lift the automatic stay under 11 U.S.C. §362(d)(1) 10

11. Exclusivity Period  Debtors have a 120-day period during which it has an exclusive right to file a reorganization plan. This period commences with the initial filing of the bankruptcy. 11 U.S.C. §1121(b).  This exclusivity period may be extended or reduced by the court, following notice and a hearing, but it can be no longer than 18 months after the initial filing of the bankruptcy. 11 U.S.C. §1121(d)(2)(A).  After the exclusivity period has expired, any party in interest may file a competing confirmation plan. 11

12. Multiple Goals and Options  Relief from the Automatic Stay  Relief allows Secured Creditor to proceed against the property with any and all remedies under the original loan documents and state law that would be available but for the bankruptcy filing.  Relief from the stay does not remove the property from the estate and, as such, the property may still be treated in a Chapter 11 Plan if the foreclosure process is not completed.  Stipulation or Order –  The Debtor and the Secured Creditor may enter into a Stipulation and Order which settles the dispute as to the secured creditor’s interest. The Stipulation must be presented to and approved by the Court.  Stipulations could include any issues which need to be resolved:  Relief from Automatic Stay  Interim Adequate Protection payments  Use of Cash Collateral  Valuation of the Property  Plan treatment 12

13.  Creditors are entitled to payments during the pending Chapter 11 Matter to ensure that their position is protected and remains unharmed  Debtors will often enter into an Adequate Protection Order requiring payments following the filing of a Motion for Relief  This typically allows the Debtor more time to show the Court that there is an “effective reorganization” in prospect  Delay relief from stay under 11 U.S.C. §362(d)(2)  The Court will typically order adequate protection payments when a Motion for Relief is filed early in the Chapter 11 case, and the exclusivity period has yet to run  The Adequate Protection payment amount is the amount required to ensure that a creditor’s lien remains in the same position but for the bankruptcy filing. This amount is determined on a case by case basis, based on the circumstances of the case 13

14. Single Asset Real Estate Cases  The term “single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental. 11 U.S.C. §101(51B)  Most residential bankruptcy filings do not fall within the single asset real estate case.  The most typical single asset real estate cases are condominium or apartment complexes. There may be a rare instance in which a borrower has transferred his/her interest in commercial property to an LLC or corporation, and then files bankruptcy.  A Single Asset Real Estate bankruptcy has expedited time lines which the Debtor must meet. The most significant one is within 90 days of filing the bankruptcy, or within 30 days of the Court’s determination that the case is a single asset filing, the Debtor must either file a Plan of Reorganization, or commence monthly payments in an amount equal to interest at the non-default contact rate on the value of the creditor’s interest in the real estate.  If these requirements are not met, the Court shall lift the automatic stay. 14

15. Cash Collateral Typically, one of the first Motions filed by the Debtor is a Motion for Use of Cash Collateral  As already discussed above, cash collateral is typically any rents and profits generated on the encumbered property. 11 U.S.C. §363(a)  A Debtor may not use, sell or lease cash collateral unless each entity that has an interest in such cash collateral consents; or The court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section  A debtor must segregate and account for any cash collateral in their control  A debtor will file a budget with the motion to show how the cash collateral will be used 15

16.  The budget will provide:  1. The rents generated on the property each month  2. The specific uses of the rents proposed by the Debtor  Typically the use of rents is for maintenance, taxes, insurance, management fees, HOA fees, mortgage payments, etc This is a determination of the Court made on a case by case basis  The Court will review the budget and will determine whether use of cash collateral is in the best interest of the estate  The Motion for Use of Cash Collateral should explain how the Debtor will adequately protect the creditor’s interest in the Property and the rents  If equity cushion exists, the Court may determine that use of cash collateral to maintain the property is in the best interest of the creditor and the estate, and allow use without payment 16

17. Disclosure Statement  A disclosure statement must include adequate information for creditors and shareholders to make an informed judgment about a plan of reorganization.  A disclosure statement provides the story of how the debtor came to be in bankruptcy, provides a Chapter 11 plan overview, and provides a liquidation analysis which shows the Court that the Plan is in the best interest of the creditors  The Court must approve the adequacy of the disclosure statement before it is sent to creditors. Upon approval, creditors may vote or object to the plan. 11 U.S.C. §1125(b) 17

18.  The simplest way for creditors to begin protecting their rights in bankruptcy cases is by properly filing a proof of claim.  A proof of claim provides notice to the Debtor and the Court of the amount of creditors claim  A proof of claim must be timely filed  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 tile, except a claim or interest that is scheduled as disputed, contingent, or unliquidated. 11 U.S.C. §1111(a).  However, the amount stated in the Schedules will be deemed to be correct. If there is a discrepancy, a proof of claim stating the correct amount of the claim should be filed. 18

19.  Objecting to the Disclosure Statement The Court will set a hearing on the adequacy of the disclosure statement prior to allowing solicitation of votes in favor of the Plan There are pros and cons to objecting to the Disclosure Statement:  In the event the disclosure statement is wholly inadequate, objecting is reasonable  Objecting to the Disclosure Statement also provides notice to the Debtor that the proposed plan treatment is insufficient and allows you to get a head start on negotiations of plan treatment  However, the threshold the Debtor must meet to have the Court approve the Disclosure Statement is relatively low – the Disclosure Statement must merely provide sufficient information to allow a creditor to make an informed decision about the plan  Many of the core issues and objections a creditor has with its treatment are not disclosure statement issues, but plan treatment issues, and a Court will approve the disclosure statement despite objections 19

20.  Thus, objecting to the disclosure statement may incur unnecessary expense that could be avoided with the same outcome by waiting for approval of the disclosure statement and then objecting to plan confirmation  This is an issue that is best determined on a case by case basis after review and discussion with your attorney 20

21. Chapter 11 Plan – Impaired v. Unimpaired  A Chapter 11 Plan provides the Debtor’s ongoing proposal to repay creditors  The Chapter 11 Plan will divide creditors into classes and classify them as impaired or unimpaired  An Unimpaired class leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim. These claimants are deemed to accept the plan, and are unable to vote in favor or against the plan.  Payment of a claim in accordance with the original loan documents, with or without arrearages is typically unimpaired  An Impaired class is one whose rights are altered under the plan.  Payment of a claim at a reduced value, interest rate, or extended period of time  Payment of a claim following a sale period in which the Debtor locates a suitable purchaser for the property 21

22. Confirmation Requirements  A debtor must meet specific criteria in order to confirm the plan  These criteria are outlined in 11 U.S.C. §1129  The most relevant criteria to our discussion are:  The Plan must be proposed in good faith  Each creditor must be treated fairly  Each creditor must receive at least what they would receive in a Chapter 7 liquidation 22

23. Once the Disclosure Statement is approved, the Debtor may solicit votes in favor of the Plan 11 U.S.C. §1125(b) This is most often accomplished by negotiations for plan treatment of specific claims Each impaired creditor is given the opportunity to vote in favor or against confirmation of the Plan 23

24. If a class does not vote in favor of the plan, the Court can still approve the plan, over the objections of the dissenting class provided: That the Chapter 7 liquidation test is met Treatment is fair and equitable There is a consenting impaired class 24

25. Principal Residence  A plan may modify the rights of holders of secured claim, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, 11 U.S.C. §1123(b)(5)  When is the determination made as to principal residence?  This is unsettled law  time of filing the bankruptcy  origination of the loan  time of confirmation 25

26.  With a Chapter 11 filing, a debtor has the ability to cramdown rental or vacation property to the property’s market value.  A Motion to value the property may be filed by the Debtor  The Debtor will provide the Court with a determination of fair market value of the property  Creditors will have an opportunity to provide a conflicting valuation of the property  If the parties cannot agree, the Court will set an evidentiary hearing to determine value  The parties will be required to file their respective appraisals and present evidence and testimony of their respective appraisers as to the value of the property  The Court will weigh the evidence and make a finding as to the value of the property which will permit modification of the loan and constitute the valuation for plan purposes  The Debtor and Secured Creditor will also have an opportunity to negotiate and determine the interest rate and term of the repayment  In the event the Parties cannot agree, an evidentiary hearing will be set and the repayment terms will be determined by the Court 26

27.  Risk Assessment Factor: This formula …begins by looking to the national prime rate… it [then requires the creditor to present evidence to] adjust the prime rate according[]…[to] such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan…courts have regularly approved adjustments of 1% to 3%.” Till v. SCS Credit Corp., 541 U.S. 465, 478-480 (U.S. 2004).  Currently, the prime rate is 3.25%.  The Risk Assessment Factor is based on the Debtor’s specific circumstances and it is the creditor’s burden to present evidence.  The Court must determine what would be available to a person in similar circumstances in today’s market.  As these debtors are in bankruptcy, and the property which is encumbered is often over-encumbered, an argument for a higher interest rate is feasible. 27

28. Amended Disclosure Statement/Amended Plans The proponent of a plan may modify such plan at any time before confirmation. 11 U.S.C. §1127(a). If the debtor is an individual, the plan may be modified at any time after confirmation of the plan but before the completion of payments under the plan, whether or not the plan has been substantially consummated, upon request of the debtor, the trustee, the United States Trustee, or the holder of an allowed unsecured claim – to— (1) Increase or reduce the amount of payments on claims of a particular class provided for by the plan; (2) Extend or reduce the time period for such payments; or (3) Alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim made other than under the plan. 11 U.S.C. §1127(e). 28

29. The plan, as modified, shall become the plan only after there has been disclosure under section 1125 as the court may direct, notice and a hearing, and such modification is approved. 11 U.S.C. §1127(f)(2). Substantial Consummation – (a) Transfer of all or substantially all of the property proposed by the plan to be transferred; (b) Assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; (c) Commencement of distribution under the plan 11 U.S.C. §1101(2). 29

30. Discharge  In a case in which the debtor is an individual –  Unless after notice and a hearing the court orders otherwise for cause, confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan 11 U.S.C. 1141(d)(5)(A)  “all payments” under a Plan could extend the discharge for 30 years or more  Some Courts will close the matter without discharge, and require that upon payment of all payments in 30 years, the Debtor will have to move the Court to reopen the matter and obtain a discharge  Other Courts will allow discharge based on substantial consummation of the plan payments  This is determined on a case by case basis from the language in the specific Chapter 11 Plan and/or Order Confirming Plan 30

31.  Discharge before payment in full  At any time after the confirmation of the plan, and after notice and a hearing, the court may grant a discharge to the debtor who has not completed payments under the plan if:  The value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 on such date; and  Modification of the plan under section 1127 is not practicable; and  Unless after notice and a hearing held not more than 10 days before the date of the entry of the order granting the discharge, the court finds that there is no reasonable cause to believe that –  Section 522(q)(1) may be applicable to the debtor; and  There is pending any proceeding in which the debtor may be found guilty of a felony of a kind described in section 522(q)(1)(A) or liable for a debtor of the kind described in section 522(q)(1)(B). 31

32.  The Effective Date of the Plan is defined within each Plan and differs based on the definition of the Plan  The effective date is the date the Plan becomes effective, and the date from which payment of claims is determined based on the Plan treatment  Example: Payment shall begin on the first day of the first month following the Effective Date 32

33. Final Decree  The final decree is filed by the Debtor to inform the Court that it has complied with the Plan, and to request a discharge  The Debtor will receive a discharge of all debt listed on the Schedules and paid in accordance with plan treatment 33

34. Other Issues and Terms Creditors’ Committee  A Creditors’ committee is appointed by the U.S. Trustee and consists of unsecured creditors  The committee will have its own attorney to appear at hearings and argue in favor of the Chapter 11 Plan  In most Individual Chapter 11 plans, a Creditors’ committee will not be formed.  The US Trustee will file a statement that states there is not enough support to form a committee  Typically, the committee is a large investment of time and money with small returns 34

35. Election under §1111(b) A strategic move in a chapter 11 matter that can be discussed in detail when the option is presented in a cramdown as there associated benefits and risks that will be case specific. 35

36. Absolute Priority Rule  The absolute priority rule, which does not apply in individual cases, requires that classes of higher priority be paid before classes of junior priority.  Example: a first lien must be paid the full amount of its secured claim (in a cramdown situation, the fair market value of the property) before a second lien claimant can be paid  This is typically not an issue in a personal Chapter 11 filing as the Debtor will typically cramdown the value of the first lien and deem the second lienholder unsecured 36

37. Appointment of Chapter 11 Trustee  At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee—  For cause, including, fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case.  If such appointment is in the interests of creditors, any equity security holders, and other interest of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or  If grounds exist to convert or dismiss the case under section 1112, but the court determines that the appointment of a trustee or an examiner is in the best interests of creditors and the estate.  Basically, a trustee can be appointed to take the place of the Debtor in possession for cause  This will increase administrative fees payable first out of the estate 11 U.S.C. §1104. 37

38. Motion to Sell Free and Clear  The debtor needs permission from the bankruptcy court to sell any property of the bankruptcy estate free and clear of liens and encumbrances. 11 U.S.C. §363(b).  The property may be sold only if:  Applicable non-bankruptcy law permits sale of such property free and clear of such interest;  Such entity consents;  Such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on the property  Such interest is in bona fide dispute;  Such interest could be compelled to accept a money satisfaction of such interest 11 U.S.C. §363(f). 38

39. Motions to Assume/ Reject Lease  Debtors are still required to fulfill all obligations of a signed lease.  The trustee, or debtor in possession, subject to court approval, may assume or reject any executory contract or unexpired lease of the debtor 11 U.S.C. §365(a).  Assumption or Rejection of a lease may occur at any time prior to confirmation 11 U.S.C. §365(d)(2).  Examples:  Leases on Rental Property 39

40. First Day Motions  “ First Day” motions are motions filed by the debtor on the date of filing of the bankruptcy.  Typical examples :  Application to Employ Debtor’s Counsel  Motion for Use of Cash Collateral  Motion to Pay Salaries  Motion to Value Property 40

41. Liquidation Plan  A liquidation plan is one in which the Debtor intends to liquidate his assets to repay creditors in full 41

42. If you have any further questions that were not addressed in this presentation, or want to contact one of our speakers, please email Matt Bartel, COO of ALFN, at mbartel@alfn.org. Thank you for your participation in this webinar. Please complete the brief survey which you will be directed to at the conclusion of this presentation. ALFN provides the information contained in these webinars as a public service for educational and general information purposes only, and not provided in the course of an attorney-client relationship. It is not intended to constitute legal advice or to substitute for obtaining legal advice from an attorney licensed in the relevant jurisdiction. Use of ALFN Webinar Materials The information, documents, graphics and other material made available through this Webinar are intended for use solely in connection with the American Legal and Financial Networks (hereinafter “ALFN”) educational activities. These materials are proprietary to ALFN, and may be protected by copyright, trademark and other applicable laws. You may download, view, copy and print documents and graphics incorporated in the documents from this Webinar ("Documents") subject to the following: (a) the Documents may be used solely for informational purposes related to the educational programs offered by the ALFN; and (b) the Documents may not be modified or altered in any way. Except as expressly provided herein, these materials may not be used for any other purpose, and specifically you may not use, download, upload, copy, print, display, perform, reproduce, publish, license, post, transmit or distribute any information from ALFN Webinars in whole or in part without the prior written permission of ALFN. 42