Chapter 4 Confirmation Issues and Consensual Confirmation
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Chapter 4: Confirmation Issues and Consensual Confirmation
While an individual chapter 11 debtor may commence a case to invoke the automatic stay, the key to exiting the bankruptcy process successfully is through confirmation of a plan of reorganization. This following chapter focuses on issues that may arise in individual cases that may be less common in typical business reorganizations.
I. Disclosure Statement
The confirmation process begins with the disclosure statement. The disclosure statement is a document intended to provide information regarding a proposed plan of reorganization that would assist "a hypothetical investor typical of the holders of claims or interests in the case" to make "an informed judgment about the plan."68
A. Adequate Information Generally
In most cases, the Bankruptcy Code provides that acceptances or rejections of a plan of reorganization may not be solicited after the commencement of a case until the bankruptcy court has approved a disclosure statement containing "adequate information" for use by a hypothetical investor.69
The determination of whether a disclosure statement contains adequate information within "necessarily entails two stages of analysis."70 First, if the disclosure statement describes a plan that is so "fatally flawed" that confirmation is "impossible," the court should refuse to consider the adequacy of the disclosure.71
If the court finds that the plan is not facially deficient, then the court must evaluate the adequacy of the disclosure statement based on the unique facts of the cases.72 The court's approval or disapproval generally requires a consideration of all the facts and circumstances in a particular case.73
This two-step process ensures that plan proponents have some level of assurance regarding the sufficiency of their plans of reorganization, and have received feedback from the bankruptcy court and interested parties regarding the sufficiency of their disclosures, before engaging in the time-consuming and costly process of circulating final documents and soliciting ballots.
B. Combining the Plan and Disclosure Statement
An exception to this two-step process exists for chapter 11 reorganizations that qualify as "small business cases." A small business case is defined as a case where noncontingent, liquidated, secured and unsecured claims total less than $2 million as of the petition date.74
In a small business case, a plan proponent may combine its plan and disclosure statement into a single document when a bankruptcy court finds that the plan itself provides adequate information, and that a separate disclosure statement is not necessary.75
Alternatively, a plan proponent in a small business case can propose a separate disclosure statement for use in soliciting ballots on its plan, and combine the hearing on plan confirmation with the hearing to determine the adequacy of the disclosure.76
II. Disclosure Issues Arising in Individual Chapter 11 Cases
The Judicial Conference of the United States has approved an official form disclosure statement for small business cases.77 The disclosure requirements for a typical chapter 11 small business case will include the following:
• a description and history of the debtor's business;
• a discussion of the "insiders" of the debtor;
• a discussion of a debtor's management, both before and during the bankruptcy;
• a description of the events leading up to the chapter 11 filing;
• a discussion of significant events that occurred during the bankruptcy case;
• projects regarding anticipated recoveries from avoidance actions; and
• current and historical financial information.78
Naturally, disclosure requirements in individual chapter 11 cases focus on individuals rather than "businesses" For example, an individual debtor may be required to provide information on his personal ability to fund "new value" contributions under a plan.79 An individual may also be required to provide adequate information concerning nondebtor family members who might otherwise not satisfy the statutory definition of "insider."80 An individual debtor may also be required to disclose connections with companies with which a related debtor entity does business, and may be required to provide disclosures beyond those in a corporate bankruptcy.81
Most jointly administered chapter 11 cases involved either affiliated companies or individual spouses. However, it is possible for a bankruptcy court to order joint administration of an individual/ corporate hybrid case.82
III. The Plan: Basic Contents
In order to confirm a chapter 11 plan, a plan proponent must produce evidence demonstrating the satisfaction of 16 subsections of 11 U.S.C. § 1129(a).
A. The Catchall Provision: Plan Compliance with the Bankruptcy Code
Section 1129 begins with a catch-all provision that requires a finding that a plan "complies with the applicable provisions of this title."83
An issue that arises in individual chapter 11 cases involves attempts to modify obligations related to a debtor's principal residence. The Bankruptcy Code prohibits such modifications,84 and courts have denied confirmation of plans that violate that restriction under this catch-all provision.85 Likewise, courts have relied on this subsection to deny confirmation of plans with repayment terms that exceed five years.86
B. The Second Catchall Provision: Plan Proponent Compliance with the Bankruptcy Code
In keeping with the requirement that a plan meet all the requirements of the Bankruptcy Code, § 1129 next requires that the plan proponent comply with such requirements.87 In the context of individual cases, at least one court has held that the requirements of chapter 11 may be less onerous than those of other chapters.88
C. The Third Catchall Provision: Good Faith
The third requirement of § 1129(a) is that a plan must be "proposed in good faith and not by any means forbidden by law."89 The concept of "good faith" is flexible. Moreover, at least one court has held that while the disposable-income test set forth in chapter 13 may not have applied to cases under chapter 11 (as discussed below, that has since changed), the test nevertheless provides a useful guideline for determining whether a case was commenced in good faith.90
IV. Reasonable Payments by a Plan Proponent
The fourth requirement for plan confirmation, and the first addressing a specific obligation of the debtor, provides that any payment by a plan proponent "for costs and expenses in or in connection with the case," or "in connection with the plan and incident to the case," must be approved by the bankruptcy court as reasonable.91 The best example of such expenses involves fees and costs payable to professionals employed by the estate.92
In the context of individual chapter 11 cases, it appears that the only court to comment on this section simply confirmed that a payment by a separate corporate debtor directed by an individual chapter 11 debtor did not trigger this provision.93
V. Disclosure of Post-Confirmation Management
Section 1129(a)(5) provides that a plan proponent must disclose the identity and affiliations of "any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor," as well as any "affiliate of the debtor participating in a joint plan with the debtor, or a successor to the debtor under the plan."94 Obviously, a nondebtor individual cannot serve as a "director" or "officer" of an individual chapter 11 debtor. A nondebtor individual, however, may be able to serve as a "voting trustee."95 Nevertheless, any such appointments must be "consistent with the interests of creditors and equity security holders and with public policy."96
Section 1129(a)(5)(B) provides that a plan proponent must disclose the "identity of any insider that will be employed or retained by the reorganized debtor, and the nature of any compensation for such insider." While there do not appear to be any published decisions discussing the requirements of § 1129(a)(5) in the context of individual chapter 11 cases, these provisions could be triggered by a debtor operating as a sole proprietor or other unincorporated business.
VI. Regulatory Approval of Rates Charged by a Debtor
Section 1129(a)(6) provides that a plan cannot be confirmed unless a debtor has received regulatory approval of any rate change that may be required under the plan or unless a plan provides that it is expressly conditioned on such approval.
As of this writing, it does not appear that any bankruptcy court has authored an opinion regarding the effects of § 1129(a)(6) in the context of an individual chapter 11 case. Neverthless, one can imagine a scenario in which a sole proprietor operating in a regulated industry could be affected by this provision.
VII. The Best-Interests Test
Section 1129(a)(7) provides an important safeguard for creditors who do not vote to accept a plan, known as the "best-interests test." Simply stated, a plan cannot be confirmed over the objection of a creditor who will not receive a distribution that is at least equal to what it would receive in a chapter 7 liquidation.97
A. Post-Petition Earnings in the Best-Interests Test
Prior to 2005, there was some question as to whether an individual chapter 11 debtor's post-petition earnings would constitute property of the estate, and should thus be included in a best-interests test analysis.98 BAPCPA, however, resolved that debate by requiring that individual chapter 11 debtors include, as property of the estate, "earnings from services performed by the debtor after the commencement of the case, but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first."99
B. Avoidance Actions Against Insiders in the Best-Interests Test
At least one court has held that any detailed examination of the best interests of creditors requires a discussion of potential claims against insiders.100 This requirement may be a source of...
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