Chapter VII Plan Negotiations
| Jurisdiction | United States |
Chapter VII Plan Negotiations
A. Negotiating Plan Organization with a Debtor
A primary role of a committee is to negotiate with a debtor on the terms of a plan of reorganization. A committee's role in the plan process is probably the committee's most important role in any bankruptcy case.158 Indeed, a central purpose of a committee's investigative function (discussed in Chapter III) is to provide it with sufficient information to arrive at the ultimate objective, a plan of reorganization that is satisfactory to unsecured creditors.159 A committee may also comment on and make recommendations to a debtor with respect to the content of the disclosure statement that will accompany the debtor's plan of reorganization to ensure it contains adequate information.
The committee will consider whether the debtor can and should advantageously remain as a separate, independent entity or have its business and property sold to a third party or merged with some other entity. The resolution of these choices is part of the committee's plan-negotiation process, and its decisions on these issues will normally be based on the goal of maximizing the total reorganization value of the debtor for the benefit of unsecured creditors. Other considerations may include whether the debtor can emerge as a viable company with which unsecured creditors can continue to do business and benefit from an ongoing relationship.
In negotiating with a debtor or other plan proponent, a committee usually wields significant power by virtue of the relatively large size of its members' claims and its ability to influence other unsecured creditors to vote for or against acceptance of a plan of reorganization. Acceptance of a plan of reorganization by all impaired classes is necessary for the plan to be confirmed as a consensual plan rather than through the cramdown provisions of § 1129(b) of the Bankruptcy Code. Thus, the votes of committee members and their potential influence on whether other creditors will accept a plan of reorganization will often be very important to the debtor or other plan proponent.
Normally, the committee will not support a plan that does not provide unsecured creditors value in excess of what they would receive if the debtor were liquidated under chapter 7. Thus, in negotiating a plan with a debtor, a committee will start with a floor of what distribution unsecured creditors would receive in a chapter 7 liquidation. The committee will then negotiate up from that floor to realize as much value as possible for unsecured creditors in excess of the liquidation value.
The Bankruptcy Code gives the parties a high degree of flexibility in structuring a plan of reorganization that permits the value of the reorganized debtor to be distributed among the various creditors and equity security-holders. In order to participate effectively in the formulation of a plan, committee counsel should make sure that the members of the committee are generally familiar with the basic legal standards for confirmation of a plan under the Bankruptcy Code.160 In particular, the committee should have a basic understanding of the acceptance requirements for confirmation of a consensual plan of reorganization,161 the "best interests" test,162 and the cramdown provisions for a nonconsensual plan.163
Ultimately, a plan of reorganization may, and often will, substantially dilute the interests of unsecured creditors. However, almost all consensual plans of reorganization involve senior claimants leaving some value on the table for unsecured creditors in order to achieve confirmation without prolonged litigation, such as a fight over the valuation of the debtor or litigation over affirmative claims that may exist against the debtor's lender.
Nothing precludes a debtor from filing a plan of reorganization without a committee's support. However, if a committee is unable to negotiate an acceptable plan with the debtor, it may propose its own plan once the debtor's exclusive period to file a plan of reorganization expires or is terminated.164 Although the Bankruptcy Code grants a debtor in possession the exclusive right to file a plan of reorganization for 120 days after an order for relief and to obtain acceptances of a plan for 180 days after an order for relief,165 this exclusivity period may be reduced or increased by a bankruptcy court for cause, upon the request of the committee or any other party in interest.166 The initial 120-day time limit serves as an incentive for the debtor to expeditiously formulate and propose a plan of reorganization.
The right to propose its own plan of reorganization or seek to terminate exclusivity gives a committee some leverage in negotiations with a debtor. However, the amount of leverage a committee will have depends on a number of practical considerations, including the court's view of competing plans of reorganization, the ability to generate a meaningful disclosure statement without the assistance of the debtor, and the need to retain management to implement a plan.
Once a plan of reorganization has been formulated, the committee's functions include advising unsecured creditors of its determinations with respect to the plan and whether the committee recommends that unsecured creditors vote to accept or reject the plan.167 In fulfilling this function, the committee, like other parties, is entitled to limited immunity with respect to soliciting acceptances or rejections of a plan of reorganization as long as it does so in good faith and in compliance with the Bankruptcy Code.168 However, this limited immunity is accompanied by the committee's fiduciary duty to unsecured creditors, as discussed in Chapter I.
Unsecured creditors voting on a plan of reorganization may or may not follow the committee's recommendation. In most instances, however, committee support of a plan of reorganization will greatly increase the chances of its acceptance by unsecured creditors. Acknowledging this fact, a debtor will sometimes seek authority from the bankruptcy court to include in its proposed plan of reorganization solicitation packages a letter of support from the committee addressed to unsecured creditors and urging them to vote in favor of the debtor's proposed plan. Alternatively, if the committee has proposed a plan of reorganization, it might similarly seek to include such a letter in its solicitation packages.
B. Plan Contents and Alternative Plan Structures
1. Plan Contents
The contents of any chapter 11 plan of reorganization necessarily depends on the legal requirements of the Bankruptcy Code and a number of practical factors, including the debtor's financial condition, its relationships with its creditors, and its goals and prospects for the future. Prior to formulating a plan of reorganization, the debtor will analyze its prospects and determine whether it can propose a feasible plan, or whether a sale or a liquidating plan may be necessary or appropriate. In most cases, the debtor will seek the committee's input in formatting a plan of reorganization, or will at least share a draft of the plan with the committee prior to filing it and consider the committee's comments or suggested revisions to the plan. In most cases, the goal of a debtor is to propose a plan of reorganization that makes economic sense, complies with the requirements of the Bankruptcy Code, and will either be (1) supported by a sufficient number of the debtor's various constituencies to garner acceptance by each class of claims and interests that is eligible to vote, or (2) capable of being "crammed down" on a dissenting class or classes pursuant to § 1129(b) of the Bankruptcy Code.
As a starting point, a chapter 11 plan of reorganization must contain all of the provisions mandated by § 1123(a)169 of the Bankruptcy Code, and it may contain the additional provisions permitted by § 1123(b) of the Bankruptcy Code. So long as the mandatory provisions are included, the plan's ultimate structure, form and effect are left to the plan's proponent. The following sections identify the mandatory and certain permissive provisions that a committee should consider in evaluating and/or developing a plan of reorganization.
a. Mandatory Provisions
Under § 1123(a) of the Bankruptcy Code, a plan of reorganization must designate classes of claims and equity interests.170 Certain claims, including professional fee administrative expenses, cannot be designated as a separate class of claims. Rather, such claims are grouped separately in categories of unclassified claims because payment of these claims in full, in cash, is a prerequisite to confirmation of a plan of reorganization.171 A plan of reorganization must also specify the treatment of each class172 and provide the same treatment for each claim or interest of a particular class, unless the holder of the claim or interest agrees to less-favorable treatment.173 A plan of reorganization may impair or leave unimpaired any class of claims or interests and must specify any class that is not impaired.174
A plan of reorganization must also provide for adequate means for its implementation.175 The Bankruptcy Code sets forth a nonexclusive list of illustrations of adequate means of implementation that may serve as a useful guide for a plan proponent. For example, a plan of reorganization may provide that the debtor is to retain all or any part of the property of an estate or that all or part of the property of the estate will be transferred to a third party.176 A plan of reorganization may provide for the sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of the property among holders of claims or interests.177 A plan of reorganization may provide for satisfaction or modification of any mortgage, security interest or other lien,178 cancellation or modification of any indenture or similar instrument,179...
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