CHAPTER 8, B. A Solution for Future Claims, Notice Issues and "Unimpaired" Plans

• Jurisdiction: United States

B. A Solution for Future Claims, Notice Issues and "Unimpaired" Plans

ABI Journal

January 2019

Karen Cordry

National Association of Attorneys General

Washington, D.C.

Chapter 11 filings are increasingly being handled through prepackaged "float through" bankruptcies that are handled in an expedited time frame that are being resolved just as quickly as or quicker than a no-asset chapter 7 case. While a discharge in an uncomplicated chapter 7 case takes 80-100 days, recent chapter 11 cases often move much faster. For example, Rand Logistics Inc.¹ was filed on Jan. 29, 2018, the plan was confirmed on Feb. 28, and it went effective on March 1, 2018, barely a month after the petition date.

These plans are typically used to implement a restructuring of a debtor's major financial debts, with the consent of all but a minimal number of dissenters who are crammed down at confirmation. In order for the case to proceed quickly and at the least cost, the claims of trade creditors, consumers, tort victims and the like are allowed to "float through" the bankruptcy unimpaired, with payment in full. Accordingly, those creditors are not allowed to vote on the plan — but are still subjected to a wide array of injunctions, exculpations and third-party releases. Opt-outs might be allowed in some cases, but since these creditors do not receive ballots, to do so they must file separate pleadings — a far more difficult and costly proposition. As such, it can be assumed that few, if any, such creditors will object or opt out.

If these creditors are paid in full, why should they care if they do not get to vote or are barred from suing a third party, since those issues are presumably moot? While this might sound logical, the reality is more complicated. First, while § 1124(1) of the Bankruptcy Code defines "impairment" to mean that a plan must leave the creditor's "legal, equitable, and contractual rights" unaltered, the plan need only pay a creditor the reduced amounts required under § 502(b)(6) since it is the Code, and not the plan, that limits the creditor's claim.² Even assuming that "unimpaired" does not legally mean quite what it sounds like, there are other ways in which these plans can be problematic, even assuming that creditors understand that term when they are deciding whether to opt out.

For starters, the much-publicized promises that existing parties will be automatically taken care of becomes more confusing once one starts to read the fine print of these plans. In Rand, the plan only "discharged" claims (as defined in § 101(5); see § 6.1). However, the plan also defined "causes of action" in terms that extended much further than the basic claim definition, including recoupment, defenses, franchises and licenses (none of which are "causes of action" in any normal parlance), as well as any matters "existing or hereafter arising ... based in whole or in part upon any ... event occurring prior to the Petition Date." While the plan only discharged "claims and interests" as to the debtors, it also imposed a much lengthier injunction (see § 6.6(b)) on any party holding a claim with respect to all "causes of action" that party held, not just as to the debtors, but also as a broad range of additional released parties with respect to any claims that would be discharged or released under the plan. The plan also contains an even longer third-party release (see § 6.4(b)) applicable to the holder of any unimpaired claim or interest that does not object to the plan.

How could this language be a problem? Well, take a small business that signed a contract with the debtor two years pre-petition and had a few invoices outstanding on the petition date. The small business files a proof of claim, it was paid in the ordinary course just as the disclosure statement said it would be, and the small business does not even consider objecting to the plan.

Two years after confirmation, the debtor breaches the contract and the small business files suit, only to be met with an answer asserting...