Overcoming Creditors’ Objections to Chapter 11 Plan Confirmation

Chapter 11 bankruptcy is a legal remedy that allows businesses, both large and small, to reorganize and continue their operations while relieving some of their financial difficulties. The U.S. Bankruptcy Code requires that under a Chapter 11 reorganization plan, each creditor will receive at least as much as they would have in a Chapter 7 liquidation. Creditors have the option to object to the court’s confirmation of a Chapter 11 plan that does not meet this requirement. However, in certain cases, the court may approve a plan despite objections.

The following are common grounds upon which creditors can object to a Chapter 11 plan:

• The plan is submitted in bad faith — Debtors may be accused of lack of transparency and honest in presenting an accounting of their financial situation.
• The plan understates the debt — Debtors might fail to include the full amount of their debt in the Chapter 11 petition, which can create an unrealistically optimistic impression of their affairs.
• The plan creates inequitable treatment — Creditors may object if they believe the proposed plan treats them unfairly as compared to other creditors.
• The plan schedules inadequate payments — The plan could be weighted in the debtor’s favor if it does not attempt to pay down debt aggressively enough.
• The payment structure is unsustainable or unfeasible — Creditors may have concerns about the debtor’s ability to implement the proposed plan successfully.

Only impaired creditors can object to a plan. These are creditors whose claims would be negatively affected by receiving less under the plan than what they are owed under their original contracts.

Once impaired creditors object to a Chapter 11 plan, the debtor must take steps to address the objections. If an agreement cannot be reached through negotiations or mediation, the court may still approve the plan through what is known as a “cram down.” For this to occur, the plan must meet certain requirements, namely the following:

• The plan may not unfairly discriminate against one impaired class of creditors in favor of another of equal rank and priority.
• The plan must be fair and equitable as it affects each non-accepting, impaired class.
• The plan must follow the absolute priority rule. That means junior creditors (such as equity holders) cannot receive any distribution under the plan until all senior creditors are paid in full.
• The plan must have the support of at least one class of impaired creditors.

The court’s approval of a cram down allows the debtor to move forward with the plan and reorganize its financial affairs. In a cram down, debt collateral is adjusted to its fair market value, which can reduce the overall amount that the debtor owes.

The Law Offices of Michael Jay Berger in Beverly Hills represents California businesses in Chapter 11 bankruptcy proceedings. To schedule a free consultation, call 310-271-6223 or contact me online today.