1. Class 17 Bankruptcy, Spring, 2009 Overview of Plan Process Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

2. October 19, 2015Copyright © 2005-09 Randal C. Picker2 Reorganization Players n Should the prepetition control group remain in control? u If so, debtor in possession under 1101(1), see also 1107 and 1108 u If not, trustee under 1104 with duties defined by 1106

3. October 19, 2015Copyright © 2005-09 Randal C. Picker3 Reorganization Players u If instead more supplemental investigation, use examiner, see also 1104 and 1106 n Historically u Issue of great importance; ch X practice was mandatory trustee, ch XI practice used debtor- in-possession

4. October 19, 2015Copyright © 2005-09 Randal C. Picker4 Trustees & Examiners: Appointment under 1104 n Standard u Standard under 1104(a) is cause, appointment is in the interest of creditors, equity holders or the estate or as an alternative to dismissing the case n Selection u Election under 1104(b) n Examiners u If not trustee, appoint to investigate u Standard: is in the interests of creditors, equity holders or the estate, or on request in large cases

5. October 19, 2015Copyright © 2005-09 Randal C. Picker5 Trustees & Examiners: Appointment under 1104 n Termination under 1105 n Duties under 1106 u Note other duties/rights exist, as many of the provisions are written in terms of what the trustee may do; see, e.g., 1108 wrt operation of the business

6. October 19, 2015Copyright © 2005-09 Randal C. Picker6 Creditors Committees n How should creditors and equityholders express themselves in the case? u Collective action problems for both and solution may be institutional response; u Creditor committees and equity committees, see 1102 and 1103 u Representation issues arise: how representative are the creditors given these roles

7. October 19, 2015Copyright © 2005-09 Randal C. Picker7 Committees n Unsecured Creditors Committee u Creation and Appointment w Mandatory under 1102(a)(1), except, as of 1994 amendments, in small business cases (1102(a)(3)) w Appointed by US Trustees (see below) u Members of Committee w Seven largest willing to serve, unless prepetition committee, continued if fairly chosen and representative

8. October 19, 2015Copyright © 2005-09 Randal C. Picker8 Committees u Duties: 1103(c) w Monitor, consult, participate, investigate

9. October 19, 2015Copyright © 2005-09 Randal C. Picker9 Committees n Other committees u Optional, adequate representation is statutory test under 1102(a)(2)

10. October 19, 2015Copyright © 2005-09 Randal C. Picker10 U.S. Trustee System n Federal administrative wing for bankruptcy; see 28 USC 581-589a u Appointed by US Attorney General for five-year terms u Duties given by 28 USC 586 u Focus on statutory duties conferred by chapter 11: certain ministerial duties, but right to be heard on many issues, see. e.g,. appointment of trustee under 1104(a); US trustee may file motion

11. October 19, 2015Copyright © 2005-09 Randal C. Picker11 Plan Basics n Three Central Steps u Alteration of the Business u Creation of a New Capital Structure u Allocation of the New Rights to Prepetition Creditors n Who gets to propose the plan? (1121)

12. October 19, 2015Copyright © 2005-09 Randal C. Picker12 1121: Exclusivity Period n Who may file a plan u (a) The debtor may file a plan with a petition commencing a voluntary case, or at any time in a voluntary case or an involuntary case. u (b) Except as otherwise provided in this section, only the debtor may file a plan until after 120 days after the date of the order for relief under this chapter.

13. October 19, 2015Copyright © 2005-09 Randal C. Picker13 1121 (cont.) n Who may file a plan (cont.) u (c) Any party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may file a plan if and only if - w (1) a trustee has been appointed under this chapter; w (2) the debtor has not filed a plan before 120 days after the date of the order for relief under this chapter; or w (3) the debtor has not filed a plan that has been accepted, before 180 days after the date of the order for relief under this chapter, by each class of claims or interests that is impaired under the plan.

14. October 19, 2015Copyright © 2005-09 Randal C. Picker14 1121 (cont.) n Who may file a plan (cont.) u (d) On request of a party in interest made within the respective periods specified in subsections (b) and (c) of this section and after notice and a hearing, the court may for cause reduce or increase the 120-day period or the 180-day period referred to in this section.

15. October 19, 2015Copyright © 2005-09 Randal C. Picker15 1121(e): Small Business Debtors n Who may file a plan (cont.) u 1121(e) sets forth different rules for small business debtors (101(51D)) w Pre-2005, these rules were optional w Post-2005, mandatory u Different time periods than standard C11 case, with different standards for extending those periods u Contemplates shorter overall schedule

16. October 19, 2015Copyright © 2005-09 Randal C. Picker16 Classification n Why Do We Care About Classes? u Classes of creditors and shareholders vote on the plan u Individuals vote through their classes on the plan, but not directly n Voting Rules (Sec. 1126) u Creditors: at least two-thirds in amount and more than one half in number u Interests: at least two-thirds in amount

17. October 19, 2015Copyright © 2005-09 Randal C. Picker17 Plan Confirmation n Two Key Paths u Consensual Plan (1129(a)) w Each class of claims and interests has accepted or is not impaired (1129(a)(8)) u Cramdown (1129(b)) w Confirmation over the objection of at least one class w At least one impaired class must approve (1129(a)(10))

18. October 19, 2015Copyright © 2005-09 Randal C. Picker18 1122 n Classification of claims or interests u (a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. u (b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.

19. October 19, 2015Copyright © 2005-09 Randal C. Picker19 1123 n Contents of plan u (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall - w (1) designate, subject to section 1122 of this title, classes of claims, other than claims of a kind specified in section 507(a)(2), 507(a)(3), or 507(a)(8) of this title, and classes of interests; w (2) specify any class of claims or interests that is not impaired under the plan;

20. October 19, 2015Copyright © 2005-09 Randal C. Picker20 1123 (cont.) w (3) specify the treatment of any class of claims or interests that is impaired under the plan; w (4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest;

21. October 19, 2015Copyright © 2005-09 Randal C. Picker21 1123 (cont.) n Contents of plan (cont.) u (a) (cont.) w (5) provide adequate means for the plan’s implementation, such as - (A) retention by the debtor of all or any part of the property of the estate; (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan; (C) merger or consolidation of the debtor with one or more persons; (D) sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the estate;

22. October 19, 2015Copyright © 2005-09 Randal C. Picker22 1124 n Impairment of claims or interests u Except as provided in section 1123(a)(4) of this title, a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan - w (1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or …

23. October 19, 2015Copyright © 2005-09 Randal C. Picker23 1126 n Acceptance of plan u (a) The holder of a claim or interest allowed under section 502 of this title may accept or reject a plan. If the United States is a creditor or equity security holder, the Secretary of the Treasury may accept or reject the plan on behalf of the United States.

24. October 19, 2015Copyright © 2005-09 Randal C. Picker24 1126 (cont.) n Acceptance of plan (cont.) u (c) A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.

25. October 19, 2015Copyright © 2005-09 Randal C. Picker25 1126 (cont.) n Acceptance of plan (cont.) u (d) A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.

26. October 19, 2015Copyright © 2005-09 Randal C. Picker26 1126 (cont.) n Acceptance of plan (cont.) u (f) Notwithstanding any other provision of this section, a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.

27. October 19, 2015Copyright © 2005-09 Randal C. Picker27 1126 (cont.) n Acceptance of plan (cont.) u (g) Notwithstanding any other provision of this section, a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests.

28. October 19, 2015Copyright © 2005-09 Randal C. Picker28 Applying the Voting Rules n Hypo u 10 bonds each with a face amount of $1000 u Distribution w A, 4 bonds; B, 2 bonds, and C, D, E and F, each 1 bond u C, D, E and F vote in favor, A and B against u What happens?

29. October 19, 2015Copyright © 2005-09 Randal C. Picker29 Applying the Voting Rules n Hypo u 10 bonds each with a face amount of $1000 u Distribution w A, 4 bonds; B, 2 bonds, and C, D, E and F, each 1 bond u C, D, E and F vote against, A and B in favor u What happens?

30. October 19, 2015Copyright © 2005-09 Randal C. Picker30 1122 n Classification of claims or interests u (a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. u (b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.

31. October 19, 2015Copyright © 2005-09 Randal C. Picker31 Classification Questions n Who must be classified together? n Who must be classified separately? n What limits are imposed on separate classification or classification together for those not covered by questions 1 and 2?

32. October 19, 2015Copyright © 2005-09 Randal C. Picker32 A Simple Plan n Capital Structure u Firm has $130 in cash u Three creditors, A, B and C, each owed $100 u A and B each own 50 shares of common stock of firm

33. October 19, 2015Copyright © 2005-09 Randal C. Picker33 A Simple Plan n Proposed Plan u Class 1: Unsecured Creditors w Each gets $10 u Class 2: Equity w All equityholders get $1 per share n Voting u A and B vote in favor, C opposes n What happens? (but see 1129(a)(10))

34. October 19, 2015Copyright © 2005-09 Randal C. Picker34 A Simple Plan II n Capital Structure u Firm has $131 in cash u Three bond creditors, A, B and C, each owed $100 u One trade creditor D owed $10 u A and B each own 50 shares of common stock of firm

35. October 19, 2015Copyright © 2005-09 Randal C. Picker35 A Simple Plan II n Proposed Plan u Class 1A: Unsecured Bond Creditors w Each gets $10 u Class 1B: Trade Creditor w Gets $1 u Class 2: Equity w All equityholders get $1 per share

36. A Simple Plan II n Voting u A, B and D vote in favor, C opposes n What happens? October 19, 2015Copyright © 2005-09 Randal C. Picker36

37. October 19, 2015Copyright © 2005-09 Randal C. Picker37 Woodbrook n Core Facts u Single asset real estate C11 u Plan w Classes 1 and 2: Professionals and Other Admin Costs w Class 3: Secured Claim $3.6 million value, paid over 30 years at 7.5% interest

38. October 19, 2015Copyright © 2005-09 Randal C. Picker38 Woodbrook w Class 4: Deficiency Claim 5% plus all cash on hand at confirmation less $100K w Class 5: Project Manager Claim Unsecured, paid in full over one year w Class 6: Related Entity Claim Unsecured, paid monthly until paid in full w Class 7: Trade Creditors Unsecured, paid in full in 30 days

39. October 19, 2015Copyright © 2005-09 Randal C. Picker39 Woodbrook w Class 8: General and Limited Partners Retain interests in full n Key Questions u What is happening here operationally? u Is is the proposed classification of claims proper?

40. October 19, 2015Copyright © 2005-09 Randal C. Picker40 1111 n Claims and interests u (a) 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 title, except a claim or interest that is scheduled as disputed, contingent, or unliquidated.

41. October 19, 2015Copyright © 2005-09 Randal C. Picker41 1111 (cont.) n Claims and interests (cont.) u (b)(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless - w (i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection; or w (ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.

42. October 19, 2015Copyright © 2005-09 Randal C. Picker42 1111 (cont.) n Claims and interests (cont.) u (b)(1)(B) A class of claims may not elect application of paragraph (2) of this subsection if - w (i) the interest on account of such claims of the holders of such claims in such property is of inconsequential value; or w (ii) the holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of this title or is to be sold under the plan.

43. October 19, 2015Copyright © 2005-09 Randal C. Picker43 1111 (cont.) n Claims and interests (cont.) u (b)(2) If such an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed.