 A Federal Judicial Center Orientation Series for United States Bankruptcy Judges Chapter 11 Reorganization, The Basics and the Judicial Role with the Honorable Nancy C. Dreher, United States Bankruptcy Judge for the District of Minnesota and George M. Treister, Attorney at Law, Los Angeles, California Judge Dreher was appointed to the bankruptcy court in 1988 She received a B.A. from the University of Wisconsin in 1964 and her J.D. from its law school in 1967 The District of Minnesota has four authorized bankruptcy judges who hear cases in Minneapolis and St. Paul and two other locations Mr. Treister is of counsel and a founding member of the law firm Stutman, Treister and Glatt He received a B.A. from the University of California at Los Angeles in 1943 and his L.L.B. from Yale University in 1949 Welcome! In this program, we'll discuss the basics of a typical Chapter 11 reorganization case and specific challenges that Chapter 11 cases present for judges Under Chapter 11, unlike Chapter 7, the debtor is usually attempting to continue to operate as an ongoing concern Chapter 11 allows the debtor to do so by reorganizing and restructuring its debts rather than undergoing a complete liquidation But keep in mind that a debtor may use Chapter 11 for liquidation rather than reorganization Particularly when a business is to be sold as a going concern or when liquidation is going to be conducted over an extended period of time Chapter 11 cases often involve small businesses In such smaller cases, insiders may have an interest in maintaining control over the ongoing company often because of tax problems In addition, there are usually only a few large creditors often including a bank that has been the principal lender and the taxing authorities The larger cases, or even the mega cases in contrast, often have truly active creditors' committees many more claims against the estate than in a typical case the possibility of many disputes and adversary proceedings and large administrative expenses We'll address some of the special problems in the small and large Chapter 11s alike Recognizing that in most bankruptcy courts, the large or mega case is the exception Specifically, we'll discuss how a Chapter 11 case begins The players financing the debtor, operating the debtor as the case moves to formulation and confirmation of a plan the plan and the disclosure statement and confirmation both consensual confirmation and cram down We encourage you to talk to your mentor judges and to your colleagues at greater length about the issues that we bring up in this program You may find, as I did, that hearing different perspectives helps as you develop an approach to handling Chapter 11 cases that works for you Also, in this program, we refer to the United States trustee system knowing that courts in Alabama and North Carolina operate with estate administrators We do so in the interest of time Okay, let's start our discussion of how the case begins with the fundamental question Who's eligible to file under Chapter 11? The most typical Chapter 11 debtor is a partnership or a corporation An individual, whether engaged in business or not, may be a debtor under Chapter 11 but those cases are relatively infrequent Also not typical are railroad cases, which are rare and are handled under a special subpart of the code Certain financial institutions such as insurance companies, banks, savings and loans are also some kinds of debtors that are not eligible for Chapter 11 An involuntary case is possible but most Chapter 11 cases begin with a voluntary petition The debtor files the petition, it acts as an order for relief The debtor must file with the petition a list containing the names, addresses and claims of the creditors that hold the 20 largest unsecured debts This list should not include insiders Within 15 days after filing the petition, the debtor has to file schedules of assets and liabilities schedule of current income and expenditures schedule of executory contracts and unexpired leases and a statement of financial affairs Companies that are related to each other must file separate petitions but separate cases may be either administered jointly for procedural purposes with the assets and liabilities of each debtor treated separately or in an unusual situation separate cases may be substantively consolidated into a single estate in which all creditors of the various debtors share together in all the assets Substantive consolidation is considered extraordinary It has the potential to wrongfully disadvantage creditors of one or more of the consolidated estates It should be done, if at all, only after notice to all affected creditors and equity owners and with extreme caution Now let's take a look at the key players in Chapter 11 They are the debtor in possession, creditors committees, trustees and examiners other professionals such as attorneys and accountants and the United States trustee In the typical Chapter 11 case, there is no trustee Rather, the debtor remains in possession in control of its assets as a debtor in possession and with virtually all the powers and responsibilities of the trustee The debtor in possession can operate its business without first having to obtain court approval It can bring actions to set aside preferences, fraudulent conveyances and other avoidable transfers even if the debtor made the transfers voluntarily before filing the petition The code contemplates that committees will be important players in Chapter 11 particularly the unsecured creditors committee However, in many smaller cases creditors are just not willing to serve and so no effective committee functions which leaves a void in the case In a small business case with debts under $2 million the court may dispense with the creditors committee for cause When it's possible as a practical matter to have a committee the United States trustee appoints an unsecured creditors committee to represent that group's interests The committee generally consists of holders of the seven largest unsecured claims willing to serve but the United States trustee has wide discretion to alter the size or the makeup of the committee to ensure adequate representation of all types of unsecured creditors claims and to avoid conflicts of interest The appointment of the unsecured creditors committee is not subject to court approval Once the committee has been established, what's its role? The committee investigates the debtor's management and its prospects and negotiates a reorganization plan with the debtor Its role is a good example of the general philosophy underlying Chapter 11 The outcome of the case should be the result of a bargain struck between consenting parties rather than a solution imposed by the court Judge, let me ask you what your experience has been with cases in which there's no active unsecured creditors committee Do you play some special role in those cases or do you just leave it up to the parties to do as they will? This type of case is one where the judicial role is especially critical and more oversight is necessary This could be in the form of holding status conferences or asking questions of the parties at hearings as the case proceeds I will often ask the parties what effect a particular ruling they're asking me to make may have on unsecured creditors While this means there's a bit more administration of the case on my part It's critical, in my view, to keeping the represented parties from taking actions that may injure the unsecured creditors or other unrepresented parties Upon request of a party in interest the court can order the United States trustee to appoint additional committees necessary to ensure adequate representation of other creditors' interests and of equity owners' interests Such additional committees are rare except in the larger or mega cases Sometimes the court is asked to order the appointment of a trustee or an examiner The request for such appointment is made by motion by a party or by the United States trustee The court may also decide to order the appointment of a trustee on its own or suesponte Grounds for appointment of a trustee include fraud, dishonesty, incompetence or gross mismanagement on the part of the current management Grounds also include anything that indicates that the appointment is in the best interest of the debtors' creditors, shareholders, or the estate The wrongful activity by the current management can have occurred either before or during the case The appointment of a trustee is not frequent Ordinary inadequate management before or during the case usually is not enough to warrant it The court's role is solely to determine whether a trustee should be appointed and if it so concludes, order the appointment The US trustee then selects a disinterested trustee after consultation with the parties in interest subject to the court's approval Courts sometimes are reluctant to order appointment of a trustee even when there are grounds for doing so A trustee is going to have a new learning curve If a trustee is appointed the trustee displaces the debtor in possession and takes possession of the debtor's property and takes over the management of the business and may take over the primary responsibility for proposing the reorganization plan Examiners are appointed even less frequently than our trustees The court will appoint an examiner if it doesn't think the facts call for the replacement of the debtor's management by a trustee but finds that a neutral party is needed to inquire into possible irregularities or serious mismanagement If the debtor's unsecured debt for loans exceeds $5 million an examiner must be appointed if one is requested by a party in interest or by the United States trustee On the other hand, if the borrowed indebtedness is less than $5 million the test is whether the appointment is in the best interests of creditors, stockholders, and the estate The examiner's duties are to investigate things such as honesty and competence of the debtor's current or former management and the debtor's prospects for reorganization and whatever other duties the court orders Unlike the Chapter 11 trustee the examiner does not displace the debtor's management or take over the debtor's business Judge, what's your experience been with motions to appoint trustees and examiners? Actually, they've been rare I've never appointed an examiner at all let alone one with expanded powers The few times that motions have been made to appoint trustees it was crystal clear that because of serious fraud or very bad acts on the part of current management there was no way the case could proceed without some neutral who could secure the confidence of the creditors Very often such trustees are the local turnaround managers who can do a very good job of pulling the pieces together Going on to another group of players the debtor in possession and the official committees may retain professionals such as attorneys and accountants All professionals must file an application for approval of employment Prior court approval is mandatory If court approval is not obtained prior to the rendition of services professionals may lose their right to compensation from the estate Professionals must satisfy two criteria They first must be disinterested as a matter of law and second must not hold or represent an interest adverse to the estate Disinterested is a statutorily defined term The definition section of the code contains a specific list of disqualifying circumstances mostly having to do with activities that the professional performed for the debtor pre-petition The list includes anyone who is a creditor so if a lawyer has unpaid bills and is a creditor literally the lawyer could not qualify as disinterested But the code also states that a person is not disqualified solely because of such person's employment by or representation of the debtor before the commencement of the case Courts are split on how to harmonize these provisions Some adopt a per se approach whereby the professional must be completely disinterested Others adopt a case-by-case analysis The second criterion that the professional must not hold or represent an interest adverse to the estate is not a defined term and is thus much more difficult to apply Holding a claim clearly disqualifies the professional Representing an interest adverse to the estate essentially means having a disqualifying conflict because of other clients or relationships including the debtor or its principles But precisely what those other relationships are is not always clear Courts have different views on what disqualifies a professional I think a fair bottom line seems to be that a professional is disqualified if there are other past or present business relationships that actually or potentially impact on the professional's undivided loyalty to the debtor Periodically all professionals must file an application for compensation with the court Ordinarily the application may not be made until 120 days after the commencement of the case It must specifically define the services rendered the time expended and expenses incurred in addition to the amount of compensation requested If the professional should not have been retained because the professional was disqualified because of a lack of disinterestedness or adverse interest or a failure to make adequate disclosures in the application for employment then the court may deny fees altogether or reduce them Courts usually allow fees based on a load star evaluation of work that is, hour spent times reasonable hourly rates But the compensation statute gives wide discretion to the court to consider other factors such as the special quality of the work and the results accomplished Normally professionals are allowed reasonable fees even though the case fails and needs to be converted In other words, the risk of a failed attempt to reorganize does not usually fall on the debtor's professionals so long as they were not disqualified and conducted their work in a professionally competent way The court's supervisory role sometimes comes into play with its control over approval of the retention of professionals and the allowance of fee applications The applications for retention of professionals are reviewed by the United States trustee The rules clearly provide that allowance of fee applications the obtaining of a post-petition retainer or the application of a pre-petition retainer may not occur without notice to creditors What kind of problems have you had with the fee application process? Usually the professional was qualified to serve but he's done a decent job sometimes under very difficult circumstances One of my most difficult jobs is deciding to deny a professional fee or worse yet, requiring disgorgement When, in retrospect, it turns out that the professional was in a position of conflict It's really important for the bankruptcy court and the United States trustee to have some system that requires the parties to take full disclosure of potential conflicts when the application for retention is first filed If procedures are in place and attorneys and other professionals get used to the idea that they must disclose at the beginning of the case many of the problems with wrongful retention of professionals can be avoided As you may recall from the program on the role of the United States trustee the United States trustee's statutory duty is to supervise the administration of the case In brief, the United States trustee may review applications for compensation and reimbursement and, as appropriate, file comments and objections with the court Monitor plans and disclosure statements and file comments with the court Ensure that all reports, schedules, and fees are properly and timely filed Monitor creditors' committees Notify the United States attorney of the occurrence of any action which may constitute a crime Monitor the case's progress and prevent undue delays in such progress And monitor applications for employment of professional persons and file comments with the court In practice, different offices of the United States trustee take differing roles in the Chapter 11 process Some carefully review the accuracy of disclosure statements and some don't Most quite carefully review fee applications and most take an active role in moving the cases along by constantly prodding the debtor to explain and justify delays Now that we have the players in mind we'll discuss how the debtor in possession goes about conducting the Chapter 11 case Because the debtor is attempting to continue in business it always needs to use existing assets and usually to incur new debt These actions have an obvious impact on creditors and some require special attention from the court We'll look at two areas in particular Cash collateral orders and post-petition financing by means of new borrowing We'll also take a few minutes to discuss first-day orders which are increasingly common What is cash collateral? Cash collateral includes cash or it's equivalent in which some creditor has a lien can be voluntary such as a security interest or an involuntary one such as a tax lien Cash collateral also includes proceeds, rents, or the like Cash collateral may be in cash form when the petition is filed but when any kind of collateral turns into cash even during the case it becomes cash collateral For example, when inventory on hand at the time of bankruptcy is subsequently sold creating receivables and the receivables are later collected at the point of collection the proceeds become cash collateral The debtor can use cash collateral only with the prior consent of the secured creditor or lienholder or with the court's approval The creditors, even those who are willing to consent ordinarily will want the comfort of the court's approval Depending on the kind of business involved the debtor typically files a motion early in the case to use cash collateral to buy inventory pay rent meet the payroll and so forth Often the creditor or the lienholder and the debtor agree on the terms and condition for the use of cash collateral and very often they reach this agreement well before the case is filed In particular, they often stipulate that the secured creditor or lienholder will receive a replacement lien in the debtor's free assets or in its post-petition assets This kind of lien replaces the cash collateral as it is used but it may very well reduce the assets otherwise available for unsecured creditors In order to protect the other creditors the bankruptcy rules provide that motions for authority to use cash collateral must be made on 15 days notice to creditors The creditors must also be given at least 15 days notice of the entry of any agreed upon cash collateral order As a practical matter the debtor or trustee usually can't wait this long because it has payroll to meet or it has other pressing demands Typically, the debtor moves for approval of a stipulation for the use of cash collateral on an expedited basis At the same time, it seeks authority for interim use of the cash collateral until a final hearing may be held The court can grant these motions but only in an amount necessary to avoid immediate and irreparable harm to the estate If an agreement can't be reached the debtor or trustee must prove at a contested hearing that the interest of the lien holder in the cash collateral is adequately protected by means of liens and other assets replacement liens or the like The burden of proof will become an important issue here The debtor bears the burden as to adequate protection The party asserting the lien in the cash collateral bears the burden on the issue of the validity, priority and extent of its lien If the debtor can't satisfy its burden of proof then it can't use the cash collateral and the results of such a failure are, first of all, the cash collateral must be segregated as it comes in and second, as a practical matter the case is doomed unless there is other available financing In your years on the bench you've seen a large number of these early motions to use cash collateral What do you focus on when you hear those motions? Well, first of all, most debtors will avoid a contested cash collateral hearing They'll enter into a stipulation, usually lengthy which does more than simply grant replacement liens to the secured creditor Usually the motion or the stipulation for use of cash collateral comes very early in the case before the creditors are organized That's the reason for the rules that allow only interim relief until a final hearing It seems to me that it's very important to take a practical approach I usually allow the stipulation for use of cash collateral on an interim basis with the qualification that nothing beyond the allowed use of the funds and the provision of replacement liens is final until the final hearing Then I make sure that the debtor serves notice of the final hearing and the terms and conditions of the cash collateral stipulation on all interested parties the committee, creditors and the United States trustee In my view, the judge's role here is really as a protector of the parties who are involved but not yet organized namely the unsecured creditors Usually the United States trustee won't be reviewing the terms of cash collateral agreements although that differs from district to district In addition to financing through the use of cash collateral the debtor may finance the operation by obtaining new post-petition loans or credit Post-petition obligations may range from the acquisition of new inventory on credit in the ordinary course of business to elaborate new institutional long-term secured financing Ordinary course on secured credit arrangements such as the incurring of trade debt don't require court approval even though the post-petition creditor will become a first priority administrative claimant as a matter of law Credit arrangements out of the ordinary course of business and secured credit arrangements must have the prior approval of the court Two common examples of credit arrangements outside the ordinary course are to meet its payroll the debtor proposes to borrow money from a principal shareholder on an unsecured basis in exchange for an administrative claim Second example the debtor proposes to give a post-petition lender a security interest in free assets or a junior lien in already encumbered assets Any kind of credit arrangement out of the ordinary course of business must have prior court approval This prior approval is going to be needed whether the arrangements are secured or unsecured How should the court decide whether to approve credit on an out of the ordinary course basis? The code uses the least disruptive approach available rule If credit is available on an unsecured administrative expense basis the debtor or the trustee cannot give a lien to a post-petition lender If free assets are available the debtor can't use assets subject to liens of other creditors to fund post-petition operations If financing on the basis of a junior lien is available the debtor can't secure credit by liens that are equal to or superior to those of existing lenders Lastly, let's say a debtor seeks to give a post-petition lender a lien in assets already subject to the lien of another creditor and the post-petition lien is going to be equal to or superior to that of the existing lender In this case if the existing creditor objects the debtor must sustain the burden of showing by a fair preponderance of the evidence that the interest of the existing lender in the collateral will be adequately protected This is often a difficult burden to meet which is why the parties seek to get agreed upon orders As with agreed upon cash collateral orders agreed upon stipulations for post-petition financing may not be approved by the court unless creditors have received 15 days notice and an opportunity to be heard Similarly, relief on an expedited and interim basis is available on a showing of irreparable harm Typically debtors try to expedite the process cutting it down to a request for immediate relief with little or no notice to other interested parties These so-called first-day orders are increasingly common These agreements for post-petition financing may contain terms which can be detrimental to other creditors The bankruptcy court may be asked to bless the arrangements on a very short timeline The problem confronting the court is who is protecting the other creditors The court should be cognizant of the fact that the debtor needs money and the secured creditor has the upper hand The creditor may seek to overreach by placing provisions in the stipulation that purport to validate the creditor's lien even though it may be subject to legitimate challenges It is for this reason that new judges should make clear what they will and they will not approve Examples of arrangements Some courts do not routinely approve our in-your-written materials Once financing is in place the debtor operates the business in the normal course It cannot, however, pay pre-petition debt Borrow, sell, or lease assets or otherwise take action out of the ordinary course without court approval This almost always requires notice and hearing Often, however, the debtor needs to pay unpaid pre-petition wages to employees The debtor often files a motion to pay employees based on the so-called necessity doctrine Courts differ on whether they will allow this The practical solution is to allow the debtor to pay pre-petition wages up to the amount that the employees would be entitled to receive on a priority basis and excluding any employees who are insiders or upper management A similar type of relief is often sought to pay critical vendors or pass-through insurance premiums This sort of relief is much more problematic It may be, for example, just a hold-up of some suppliers who are unhappy with the fact that a petition for bankruptcy relief has been filed The case could, however, fail if the court refuses to allow these payments If the debtor is leasing its operating space it's common for the debtor to move to assume or reject leases early in the case If the debtor doesn't assume or reject a lease for non-residential real property within 60 days of the order for relief then the lease is deemed rejected unless the court grants an extension for cause This means that if the debtor doesn't make the proper motion early in the case it risks losing the right to remain in its place of business When the debtor is a retail chain the ability to assume leases at profitable locations and reject leases at unprofitable locations is crucial to the case While it is generally the case that the debtor can operate in the ordinary course without court interference the bankruptcy court has specific statutory authority to monitor case progress through the use of status conferences The court may suesponte or upon request of a party in interest hold a status conference The conference's purpose is to ensure that the case is handled expeditiously and economically Your written materials contain a list of some of the topics judges have identified that they discuss at status conferences A common order that follows the status conference is an order establishing a deadline for the debtor to file a plan and disclosure statements Courts differ significantly in how they handle status conferences Some rely entirely on the United States trustee's office Others use the conferences as a tool to keep the case moving Do you use status conferences much? Hardly ever I've made it very clear that whenever my cases are languishing the United States trustee should come in with motions to dismiss or convert in order to keep the case on track However, my colleague in the same building uses them in virtually every case and has opined to me that the real advantage of the status conferences is to get the parties focused and talking together in one room I think it's purely a matter of style Up to now we've been discussing the part of chapter 11 that has to do with keeping the debtor alive long enough to work out the ultimate salvation through a reorganization plan Let's now look at the plan process itself and the effect of a successful confirmation The heart of chapter 11 is the plan process There are three basic aspects here Proposal of the plan Approval of the disclosure statement and the voting on the plan and confirmation and discharge which we'll get to a little bit later Usually it's the debtor who proposes the plan Under section 1121 the debtor generally has the exclusive right to propose a plan for the first 120 days of the chapter 11 case The debtor has a further exclusivity period of 180 days from the order for relief to obtain the requisite acceptances The debtor's exclusive right to propose a plan is automatically terminated if a trustee is appointed but not by the appointment of an examiner Any party in interest may seek to have the exclusivity period shortened or terminated for cause As a practical matter, in a case of any size the debtor realistically can't propose a plan within 120 days It's going to take at least that long to turn the business around Therefore debtors commonly seek extensions of the 120-day and 180-day exclusivity periods While such extensions are only granted for cause the court has a great deal of discretion in defining cause in this context Sometimes, especially when there's little or no creditor activity extension just happens because the creditors have no interest in filing a plan Thus, usually a debtor in a chapter 11 case by court order or by reason of creditor inactivity will have a considerable period of time in which to propose and get acceptance of a plan One year is not uncommon in a case of any size Once the exclusivity period or any extension expires or the period is otherwise terminated it can't be reinstated Thereafter, any party in interest including the debtor can propose a plan That's to say, the debtor doesn't lose the right to file a plan by either the expiration of the exclusive period or the appointment of a trustee All the debtor loses is the right not to have to deal with plans filed by other parties in interest Section 1123 sets out what must be in a plan and what may be in a plan in some detail The plan has to set up classes of creditors and equity security owners or owners Classes are the base on which the plan is put together and confirmed They're drawn in a way that's specific to any given case and classification is an area for great creativity by plan drafters The code's not very specific about what is a proper classification We do know that within a given class all the claims or ownership interests in that class must have similar legal rights or priorities We also know that the plan must provide the same treatment for every member of the class unless a given member individually agrees to less favorable treatment than the other members Among other things, those principles require that each secured claim ordinarily will be placed in a class by itself Since each secured creditor ordinarily has different collateral or a different priority One classification issue that has generated a lot of litigation is whether claims of the same kind usually hear general unsecured claims which can be classified together because they are legally similar to each other have to be classified together Most courts agree that if there's a legitimate business reason for doing so as opposed to a separate classification for the purpose of gerrymandering the vote then claims of the same kind may be placed in separate classes A proposed plan also should set out the methods by which it will be implemented The permissive plan provisions make it clear that the plan proponent can be very flexible in drafting the plan The plan may leave any class of creditors or equity interests unimpaired That is, it may leave their rights unaffected by the plan regardless of whether a senior class or junior classes are impaired by the plan A Chapter 11 plan doesn't have to provide the continuation of the debtor as a going concern Instead, it can provide for the orderly liquidation of the debtor's assets and distribution of the proceeds The plan can contain any other provision that the proponent wants and is able to negotiate with the interested parties so long as the provisions are consistent with the purposes of Chapter 11 Although the code doesn't say that a plan has to contain its effective date it's a good idea for it to do so The effective date triggers a number of obligations usually on the part of the debtor Specifying the effective date is especially important if it's a date other than the confirmation date Most of the time, the plan is not going to be negotiated or vote solicited until after the case has been filed In this typical kind of case, a separate document known as a disclosure statement must be filed along with the plan or within the time fixed by the court The disclosure statement's purpose is to enable the typical creditor or equity owner to make an intelligent decision whether to vote for or against the plan In general, the view is if those affected by the plan approve it after full disclosure the court should not substitute its judgment for that of the parties Under the code, after bankruptcy no one can solicit a vote for or against any proposed Chapter 11 plan until all affected creditors and equity interests have been given a disclosure statement approved by the court A special rule applies when the debtor has elected to be treated as a small business something that rarely occurs and is left to your written materials The hearing on the disclosure statement approval is a crucial step in the Chapter 11 plan process All creditors, equity owners and other parties and interests are entitled to at least 25 days' notice of the hearing They may receive copies of the proposed disclosure statement upon request If an objection is raised to the proposed disclosure statement a contested matter ensues What's adequate information for purposes of approval of the disclosure statement? This varies from case to case Obviously, a great deal more information will be required for a complicated plan involving a debtor owing millions of dollars to thousands of creditors than for a simple plan for a mom-and-pop grocery store However, at minimum the disclosure statement should describe the debtor's business the debtor's history the reasons for the bankruptcy the reasons why the debtor's problems are cured the plan the plan proponent how the plan affects each class of creditors and equity owners the means by which it will be implemented and who will own and manage the reorganized debtor Because voters are being asked in essence to determine if they're better off with this plan than with the Chapter 7 liquidation the disclosure statement should also contain a liquidation analysis and a description of how the debtor and its creditors would fare in a hypothetical Chapter 7 case As to financials the disclosure statement should usually have a reasonably current balance sheet and income statement and projections sufficient to allow voters to measure the plan's feasibility Analogies between the disclosure statement and prospectuses and proxy statements under the securities laws are obvious but the securities laws requirements don't apply when determining whether a disclosure statement should or should not be approved Indeed, the disclosure statement process is exempt from both state law and securities laws requirements By the same token a disclosure statement need not be a neutral sterile document It's an opportunity for the plan from Ponan to advocate the proposed plan There's nothing wrong with that It's important for the court to keep in mind what it's doing at the hearing on the disclosure statement It is not approving or disapproving the plan itself That should be done at the confirmation hearing All the court is doing at this stage is determining the adequacy of the information that is being given to those people being asked to vote on the plan The court should not allow the disclosure statement hearing to be turned into a rump confirmation hearing on the plan's merits The confirmation dispute should wait until those classes of creditors and equity owners affected by the proposed plan have had a chance to express their approval or disapproval of it with their votes Some courts however refuse to approve a disclosure statement if it reflects a plan that is patently non-confirmable The thought is that the time and money that it will take to obtain confirmation should be saved where confirmation is not possible in any event In your experiences are a detailed review of the proposed document at the disclosure statement hearing In my experience, most debtors have either worked out the language that the United States trustee has looked at it and been satisfied or the debtors must meet some objections on file Usually debtors are more than happy to disclose most anything that an objecting creditor asks for My role is one of making sure that the debtor changes the wording to meet the objections and that the document on the overall makes sense and contains the basics Most courts take the position I think that if everyone has been noticed and all objections have been met especially if the unsecured creditors are active and satisfied the court will not nitpick the wording of the disclosure statement That's not uniformly true I have a colleague who takes offense at long definitions at the beginning of the disclosure statement and at statements of what the law provides I don't think there's wide discretion here For the sake of completeness I should also point out that we haven't discussed the relatively rare case of the prepackaged plan one that the debtor negotiated and obtained acceptance before before the case was filed The written materials have some treatment of this type of case Coming back to the typical case Once the disclosure statement is approved the proponent may begin to solicit acceptance of the plan and opponents can begin to solicit rejections The next step is confirmation Again, all the creditors the equity owners and other parties in interest are entitled to at least 25 days notice of the confirmation hearing Everyone who's to vote on the plan should be sent a package which will include the plan disclosure statement After the disclosure statements approved in addition to setting the date for the confirmation hearing the court should determine who's to mail the package that is whether it should be the plan proponent the clerk of the court the debtor or somebody else the court should determine who will receive and count the ballots In some districts this is determined by a local rule The court should also fix the last date for both ballots and for objecting to confirmation and if it hasn't done so earlier set a bar date for filing proofs of claim or equity interest That date should coincide with the last date for the ballots These details are often covered in a form which the judge uses in Chapter 11 cases Now what does it take to confirm a plan? There are two ways to do it What I call the easy way which is a consensual plan and a hard way which is a crammed down plan Regardless of the method used Section 1128 of the code says the court shall hold a confirmation hearing Most courts interpret this to mean that a hearing is required even if no objection to confirmation is filed If an objection to confirmation is filed it gives rise to a contested matter and an evidentiary hearing will be required The easy way to confirm a plan is possible only if all the affected classes have accepted or are deemed to have accepted the plan Then the plan is a consensual plan and can be confirmed under Section 1129A alone Otherwise confirmation may only occur the hard way and the proponent has to satisfy the crammed down requirements of Section 1129B Let's start with what it means for a class to have accepted A class has accepted the plan when the requisite majority vote of that class has been obtained What is the requisite majority? This depends on whether you're referring to a class of creditors' claims or to a class of ownership interests For creditors' claims acceptance by the requisite majority means that more than 50% of the number of the claims and at least two-thirds in the amount of the claims within the class have voted to accept the plan We count only those creditors who actually cast a ballot Those who don't vote aren't counted for this purpose For a class of interest acceptance by the requisite majority means two-thirds in the amount of the interest in the class that have voted to accept the plan Class of interest refers to ownership interests such as stockholders in a corporate case or general partners in a partnership case So in a corporate case the required votes is two-thirds of the number of shares in the class that vote However, if a class or interest is unimpaired a defined concept will visit in just a minute then that class and all members within that class are conclusively presumed to have accepted the plan Finally, if a plan provides nothing for a given class then that class is deemed conclusively to have rejected the plan even if the class actually wanted to accept it This means that whenever a plan proposes to wipe out a class of creditors or more commonly wipe out a class of stockholders you automatically have to go to cram down because the wiped out class will necessarily be a non-accepting impaired class This encourages the bargaining process to give something to every class so as to avoid cram down That is if you want to avoid cram down you probably are going to have to give something to every impaired class Non-impariments the second concept that's important at confirming a plan the easy way the code deals with non-imperiment and defines what it means there are two kinds the first is more or less what the word suggests if the plan doesn't alter the legal contractual or equitable rights of the members of the class the class is not impaired for example if the plan provides for the payment of a certain secured claim which is the only creditor in its class provides for payment exactly in accordance with the contract terms that class is not impaired this kind of non-imperiment has to do with non-alteration of rights if the plan proposes any change in the class's rights even if the change is a beneficial one then there's an impairment take another example a class consisting of note holders if a plan proposes only to increase the interest rate on the notes and otherwise leave the notes the same there's an impairment even though the class has been benefited by the proposed change obviously extending the maturity of the notes is an impairment the second kind of non-imperiment has to do with reversing acceleration that is where an obligation or a class of obligations has been accelerated as a result of a default there's no impairment if the plan proposes to cure the default compensate the claimant for any damage suffered as a result of the default reinstate the obligation as it originally stood before the default and otherwise not alter any of the claimant's rights that's a counter-intuitive use of the term because the the acceleration actually changes the class's legal rights but by definition if the acceleration's merely reversed there's a non-imperiment this is important as a practical matter particularly where there's no right under the applicable non-bankruptcy law to reinstate an obligation a plan may be confirmed the easy way when each impaired class of creditors and equity owners has accepted it provided the other requirements of section 1129a for confirmation are satisfied this is true even though within the classes that have accepted by the majority vote members who may vigorously oppose the plan and oppose confirmation in other words a majority of a class may bind the minority if you look at section 1129a you'll notice it sets forth 13 numbered requirements for confirmation the easy way the court has an obligation to satisfy itself that each one of these requirements has been met although there has been no objection to confirmation many such requirements tend to be extremely routine and non-problematic these include the first three requirements that the plan complies with chapter 11 law that the proponent complies with chapter 11 law and that the plan was proposed in good faith and not by any means forbidden by law among other things additional provisions mean that the plan's classification of claims and interests is legally permissible and that the disclosure requirements for soliciting votes have been complied with these first three requirements are not often contested additional, usually routine requirements are that professional fees and costs have been disclosed and have or will be approved by the court before they are paid that the people who are going to conduct the debtor's business after confirmation have been identified and their employment is consistent with the interests of creditors stockholders and the public that if, as is rarely the case the debtor is a regulated industry requisite pre-approval of any needed rate changes have been obtained that statutory fees have been paid specifically including the quarterly fees owed to the United States trustee until the case is closed and that if the debtor has a benefits plan for its former employees or its retirees which most debtors don't the plan provides protection for them also the plan was proposed to pay in full priority claims such as administrative expenses employee priority claims and taxes administrative expenses must be paid in full in cash as of the plan's effective date unless the particular claimant individually agrees to waive this requirement which is not typical with respect to priority taxes the plan may provide for an extension of time to pay the tax claims without the taxing agency's consent the period over which the taxes may be extended under this provision is six years and the six year period runs from the date of the assessment of the tax if the tax payments are deferred the plan was factory and inappropriate interest rate this is to comply with the codes requirement that the stream of payments has a present value as of the plan's effective date equal to the full allowed amount of the claim the most difficult requirements for the debtor or other plan proponent are usually the remaining four requirements the first of the four requirements section 1129 810 applies only if the plan has one or more impaired classes of claims which is probably the typical case if so at least one of the impaired creditor classes must have accepted the plan by the requisite majority vote not counting any insider vote in that class next is the so called feasibility requirement of section 1129 A11 the court must find that confirmation of the plan is not likely to be followed by liquidation or further need for reorganization this means that the court must find it reasonably likely that the reorganized debtor both can perform what the plan proponent has promised in the plan and that the debtor will emerge from chapter 11 as an economically viable entity this provisions purpose will minimize the chances that undesirable social and economic consequences will follow from a subsequent business failure third section 1129 A7 is a financial fairness standard it's sometimes called the best interest of creditors test its purpose is to protect non accepting minorities within the accepting classes unfair imposition by the majority by a non accepting minority I mean those creditors within an accepting class who have not actually voted to accept the plan the plan must provide these creditors with a distribution having a present value as of the plan's effective date of not less than what they would have been entitled to in a chapter 7 liquidation case in other words without a creditors affirmative consent the creditor can't be forced in chapter 11 by a majority of its class even by an overwhelming majority to accept less than the creditor would get in a hypothetical chapter 7 liquidation that's the financial floor finally section 1129 A8 requires that each class of claims are interests must either have accepted the plan or not be impaired while debtors can usually though not always obtain the requisite acceptance in one impaired class and so satisfy the requirement that there be at least one accepting class getting all impaired classes to do so may not be so easy remember if you have a non accepting impaired class you can only confirm the crammed down way all of that sounds rather daunting what usually happens in an uncontested confirmation hearing when all 13 requirements for confirmation the easy way have been satisfied confirmation hearings everything's been resolved with each creditor group all in the context of the foregoing rules about fair treatment of classes all that happens is the debtor testifies to the formalities of the confirmation requirements the point is to make sure that the debtor has sworn under oath as to certain matters that must be met to make the findings necessary to confirm a plan the ballot report is usually read at the beginning and the court must accept or reject it in order to determine what elements of the confirmation process have to be met but generally ballot counting is not disputed in the confirmation hearing is anticlimatic I believe the course most important function in an uncontested confirmation hearing may be to make clear to the debtor by the formality of the proceedings and the necessity to testify under oath that this is a serious business a binding contract and that the debtor must make every effort to keep the promises made in the plan suppose it's not possible to achieve a fully consensual plan under section 1129a in other words all the requirements have been met except that one or more impaired classes has not accepted the plan if all the requirements have been met except 1129a8 it's possible to confirm the plan the hard way this is known as cram down cram down is complicated and relatively rare so in the interest of time we've put a detailed discussion of it in your written materials rather than deal with it here finally and very briefly what's the effect of confirmation the plan's provisions bind the property dealt with by the plan and bind all involved parties the owners as well as the creditors if the debtor is a partnership or a corporation all the debts that arose before confirmation are discharged by the order of confirmation this is subject of course to the constitutional requirement the proper new process notice was given if the debtor is an individual confirmation doesn't discharge the laundry list of debts that would be non-dischargeable in a chapter 7 case in other words the individual debtor comes out of chapter 11 with any unpaid non-dischargeable claims remaining enforceable against him in closing we hope you have found this overview of the basics of a typical chapter 11 case helpful chapter 11 cases present a specific set of challenges for bankruptcy judges but you'll find as time goes on that you develop an approach to handling them that works for you again we encourage you to talk to your mentor judges and to your colleagues about the issues that we've brought up in this program thank you and good day