BKII

Plan may allow debtor, trustee, or by a representative of the estate appointed for such a purpose, to pursue, inter alia, avoidance actions

trustee has power to avoid fraudulent transfers made on or within 2 years before filing for Ch. 11




- if performed transaction over 2 years ago but wasn't perfected until 1.5 year ago, it's subject to 548. (i.e. transfered real estate 28 months before filing Ch. 11 but wasn't recorded until 21 months before filing Ch 11)

preferences




when a trustee may avoid any transfer just cause (Code wants to discourage creditors from racing to dismember debtor and facilitate equality of distribution among creditors of the debtor)

Ps argue its debtor, Cybergenics had a fiduciary duty to pursue fraudulent transfer claims relating to LBO of D. Brought derivate action to avoid the transfers to a third party. 




creditors may have standing to pursue an avoidance action

544(a) DIP

claim.




a "right to payment..."

• 1. a claim against the estate
• 2. either be an administrative expense or a claim against the debtor's postbankruptcy estate.

• -administrative expenses
• -postpetition debt
• - performance due by the estate under an executory contract

put into a trust . want to provide compensation for victims while permitting the rehabilitation of the debtor. 




the debtor is discharged from liability. an issue though is if trust will provide enough money for the victims since size of the fund is estimated. unclear if future victims who have not proved claims should be bound by the discharge 




524 g deals with it some but only with asbestos..what about other mass claims?

the act giving rise to liability takes place

the creditor's formal submission of a claim against the estate

• discharged
• lien survives the discharge.

specific property of the estate

502.

• 502(a) claims are deemed allowed unless a party in interest [debtor, creditors, trustee, etc] objects
• 502(c). if a claim is disputed, resolution can be either by a determination on the merits or, if that would cause undue delay, by estimation of the amount (see Bittner v. Borne, where value of claim estimated at $0 is okay)

after confirmation of the plan, and continue over time as provided for in the plan but payments could be made earlier if appropriate. i.e. administrative expenses are often paid for when incurred, and payments to a secured party may be needed to ensure adequate protection

the collateral or its proceeds. IF there is more than one lien on a pice of property, the secured claims are ranked in accordance with prioirty prescribed by non-bankruptcy law.

paid in full unless holders of the claims agree to the contrary. A plan *cannot* be confirmed f it odes not propose to pay priority claimants in full (in the absence of an agreement otherwise).

when the value of collateral that secures a debt becomes lower than the debt owed; so if a creditor wanted to foreclose on the collateral, he would not be getting the full debt 




- the court may determine the value of the collateral at some time before foreclosure

from the general fund of the estate

• 1secured debt
• 2administrative expenses
• 3 gap admin expenses
• 4 salary and wages unpaid at the time of bankruptcy
• 5 contributions to employee benefit plans
• 8 taxes
• .
• .
• general unsecured claims--usu get no payment at all since bankrupt estates are usually insolvent

as much as they would have been paid if the company was liquidated. If priority claims would have consumed all or a significant portion of the fund, the payment required for unsecured claims would have been correspondingly lessened. **But usually nothing in bankruptcy cases since firms usually don't have the money and it gets used up on priority claims**

• United States v. Ron Pair Enterprises-
• Matter of Terry Limited Partnership-
• Premier Entertainment Biloxi -

• 503(a)- seek payment
• 503 (b)- allowance

• 1. Did the claim arise prepetition?
• ---1141(d)(1)(A) discharges debts from claims that arose before the date of confirmation; courts have had difficulty articulating standard for when claims arise

2. Was the incurring of liability on the claim necessary to preserve the estate?

• Hartford Underwriters Ins. Co
• In re Ames
• U.S. v. Noland

most common basis to subordinate a higher priority claim below a lower priority claim is inequitable or dishonest conduct by the claimant that results in unfair advantage or prejudice to other creditors. must have:

• -wrongful conduct AND
• - prejudice

• Benjamin v. Diamond
• In re SI Restructuring

In re Washington Mutual

claims may be acquired, sold for different reasons (acquire- profit from subsequent sale of claim, etc; sell- let go of claim that may deteriorate in value)




- securities laws are most relevant

• Rule 3001(e)- transferred claims
• In re Revere Copper and Brass, Inc

• some code provisions apply indirectly:
• 1145(b)(1)(A)
• 502(j)
• 1126(e)

• 11 USC 1121(a): who may file a plan
• 1121 (b) debtor may file a plan at any time
• 1121 (c)- parties other than the debtor cannot file a plan unless:- a trustee is appointed OR- debtor failed to file plan within 120 days after the order for relief OR- debtor failed to obtain acceptances of its plan from all impaired classes w/in 180 days after the order for relief

1121 (d)- Exceptions:120, 180 day "exclusivity periods" can be reduced or extended by court "for cause" 

• 1123(a)(5) a plan must have adequate means of implementation
• 1129- confirmation of plan
• 1129(c) Once relevant periods expire, anyone can file plan (confirmation multiple plans)

• In re Express One
• 1. size and complexity of the case
• 2. necessity of sufficient time to permit the debtor to negotiate a plan of reorganization and prepare adequate information
• 3. the existence of good faith progress toward reorganization
• 4. the fact that the debtor is paying its bills as they become due
• 5. whether the debtor has demonstrated reasonable prospects for filing a viable plan
• 6. whether the debtor has made progress in negotiations with its creditors
• 7. the amount of time which has elapsed in the case
• 8. whether the debtor is seeking an extension of exclusivity in order to pressure creditors to submit to the debtor's reorganization demands
• 9. whether an unresolved contingency exists

[Dow Corning notes that 7th and 2nd factor essentially the same]

Filing Chapter 11 plan-extensions as per 11 USC 1121




Two secured creditors objected to debtor's motion  to extend period it could file its Ch 11 plan. Party seeking a change bears burden of proving requisite cause exists. No cause exists when the "size, nature, and complexity" of a case do not call for an extension.  




Note: if debtors do not use period of exclusivity well, undersecured creditors likely to be successful in obtaining relief from the automatic stay under 362(d)(2)

• In re Lehman
• All Seasons- (boat building biz) party seeking change bears burden of proving requisite cause. no cause exists when the "size, nature and complexity" of a case do not call for an extension
• Express One- (airline) 9 factor test for extensions
• Asarco LLC- 1129(c) four factor test when multiple plans confirmable

Even the possibility of creditors forming alternate plans puts pressure on debtor to finalize and file a plan; it doesn't want a plan that would be less favorable to its interests and this affects its negotiations with creditors to file something that creditors would confirm

• 1. type of plan
• 2. treatment of creditors and equity (i.e. equity owners can retain equity, creditors can be fully paid) 
• 3. feasibility (i.e. legal commitments of support from parent's parent company upon confirmation, presence of collective bargaining agreements) 
• 4. preferences of creditors and equity holders

1125 requires the proponent of the plan to craft a disclosure statement containing adequate information that court must approve. It is then distributed to all creditors and equity holders




Prohibits the postpetition solicitation of acceptance or rejections of a plan prior to the dissemination of the plan and the court-approved disclosure statement








adequate information is defined loosely to give court discretion in evaluating disclosure statement

allows the court, on request of a party in interest, to exclude from the vote any entity whose acceptance or rejection was not in good faith

• - a class that is unimpaired- it is conclusively deemed as having accepted the plan (1126(f))
• - a class that will receive or retain no property under the plan is deemed as having rejected the plan

Classification has significant impact on voting rights of parties, so debtor's discretion in establishing classes is controlled to prevent unfair discrimination




1123(a)(1)-- plan must designate classes of claims and interests




1122- claims and interests in a class must be substantially similar (i.e. of same priority and quality so no unsecured and secured claims in same class)




In order to vote on the plan, parties with claims and interests must be divided into classes. A class of claims accepts the plan if at least 2/3 in amount and more than half in number of the voting creditors with allowed claims in that class have accepted the plan.

• debtor controls how the claims and interests are classified
• --if most general unsecured creditors support plan, debtor may draft plan so that all general unsecured claims are in one class--> plan supporters can outvote plan opponents so that class accepts plan
• --if too many general unsecured creditors oppose the plan, a single class made up of all general unsecured claims would reject the plan --> debtor will want to create at least one impaired class that will accept the plan

- debtor can use power to create classes to gain support from creditors because allows debtor to give creditors types of payments they'd want or be okay with




- 1122b- one group of dissimilar may be together but only if court approves--> based on if classification is necessary for administrative convenience




- can have similar claims in different classes, but based on reasonable basis (can't gerrymander just to dilute votes of creditors)




- claims or interests in the same class must be treated equally (1123(a)(4))

Teamsters v. US Truck-debtor attempted approval via cramdown. Teamsters objected; court argues the employees represent by Teamsters have a unique interst in the ongoing biz of the debtor and substantially different interest; court affirms classification but holds there must be a legit biz reason to put substantially similar claims in different classes




Phoenix Mutual- anticipating Greystone (creditor) would reject plan, Phoenix classified them separately from trade creditors so Greystone wouldn't control the class's vote (Greystone was owed much more money than trade creditors); 




-Holding: may put substantially similar claims in different classes, but must be for motive independent of gerrymander

Charter sought to reinstate senior credit facility (keep the same loan they had before filing for bankruptcy). JP represented senior lender and objected saying there were 3 provisions in agreement with debtor that were incurable.




1) default=debtor couldn't pay debts as they became due. Court argues that this provision relates to actual inability to pay  debts that become due not the anticipation that they will default--> not  impaired




2) no other "group" may hold a greater voting percentage than PAul Allen. Court: bondholder's committe, though greater voting percentage, not a "group" under the sec law b//c an ad hoc commttee brought together by circumstances of bankruptcy




3) JP: cross default provision not an ipso facto provision (outlawed by Code) because referred to holding co. not charter ; Court: it is. charter is linked with its affiliates and lender had long linked them together

1124




a claim or interest is not impaired under the plan if the legal, equitable, and contractual rights of the holder are left unaltered.




generally, almost every deviation from the nonbankruptcy rights results in an impairment

conn. gen. life ins

1129




two methods: 




1129(a)- prereqs for confirmation when plan accepted by all impaired classes




1129(b) confirmation when no universal acceptance=cramdown 

• for a AND b
• plan must:
• - be lawful and in good faith
• - give distribution to a dissenter of a value that is at least equal to what she would receive if debtor liquidated
• - apply absolute priority rules in paying creditors and pay them in full
• - have a reasonable prospect of success

if not all classes accept plan, 1129(b)- cramdown

1129(b)




court will still confirm, but plan:

• - must satisfy all of 1129(a) except a(8)
• - must not discriminate unfairly against any impaired class that has not accepted the plan
• - must be fair equitable

if discrimination has some reasonable basis, it is not motivated by bad faith, and it is necessary to the success of the reorganization it likely is not unfair

-liens must be preserved to the full allowed amount of their secured claims and claimants receive deferred cash payments 




OR




sell the property free and clear of all liens so claimant can bid on it




OR 




claimant receives the indubitable equivalent of the claim

- each holder of a claim in the class receives property of value--based on present value




OR




- any junior class retains nothing if the senior dissenting class is not paid in full (absolute priority) and equity wiped out.




--equity can only retain if they contribute new capital to the debtor that is equal to or greater than the value of their interest (new value exception) must be money or money's worth--BUT not all courts follow

creditor has secured claim only to the extent of the collateral's value, so 1111(b) gives the creditor a deficiency claim




if creditors elect for 1111(b) protection, will lose distribution as unsecured creditors and right to vote under that class, but their claims will be fully secured and will be paid the greater of the face value of the allowed secured claim or the present value of the collateral.

-gives the court broad powers to issue any judgment that it believes is necessary to carry out provisions of the code




A.H. Robins- tort victims of debtor who filed Ch.11 (manufactured contraceptive devices) sought to proceed against Robins' co-defendants including debtor's products liability insurance company; Court extends stay against tort victims since, if successful, would reduce  the debtor's property to the detriment of its creditors.

• In re Kmart- Kmart sought to pay some critical vendors in full above others; Court holds that availability of 105(a) does not override priority rules and the equal treatment of classes
• -105(a) implements, not overrides
• - if wanted to treat differently, have to prove:
• 1) but for immediate full payment, vendors would cease dealing and
• 2) the business would gain enough from continued transactions with the favored vendors to provide some residual benefit to the remaining, disfavored creditors.

Lyondell- debtor sought preliminary injunction against guarantee creditors from pursuing remedies against debtor's nondebtor parent; court holds automatic stay doesn't apply to parent using 105(a). applies modified preliminary injunction test (see outline)

It must be "essential for an effective reorganization that is in prospect"