CHAPTER 11 ISSUES
Prepared by:
Prepared for:
Michael J. Pankow
Brownstein Hyatt Farber Schreck, LLP
Bench-Bar Conference
Facility of Federal Advocates
October 25, 2013
Lee M. Kutner
Kutner Brinen Garber, P.C.
Hon. A. Bruce Campbell
U.S. Bankruptcy Court of
The District of Colorado
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I.
SECTION 1111(b) ELECTION
A.
Operation
Pursuant to normal operation of Bankruptcy Code section 506(a), the claim of an
undersecured creditor is bifurcated into secured and unsecured claims. A section 1111(b)(2)
election allows a creditor to opt out of that treatment.
If a creditor makes an 1111(b) election, it will retain its lien for the entire face
amount of its debt. In exchange, it will forego the unsecured claim it would otherwise receive
pursuant to section 506(a).
In a plan, a creditor who properly makes the 1111(b) election must receive a
payment stream with payments (without regard to interest) that total the face amount of the debt.
The present value of those payments must equal the value of the collateral.
Example: Creditor holds a note secured by real estate. $1 million is owing on the
note. The real estate collateral is worth $550,000. Pursuant to section 506(a), the claim would
normally be split into a $550,000 secured claim and a $450,000 unsecured claim. In a plan, the
creditor would be entitled to a note in the principal amount of $550,000 with fair and equitable
terms. Its lien after plan confirmation would secure only the $550,000. The creditor would also
have rights of voting and distribution in respect of its $450,000 unsecured claim.
Upon an 1111(b) election, the plan must provide that the creditor retains its lien for
the entire $1 million. The creditor would receive no distribution or voting rights with respect to
the $450,000 deficiency. Instead, the creditor would be entitled to receive periodic payments of
a $1 million over time so long at the payments have a present value of $550,000. E.g., payments
of $50,000 per year for 20 years would comply, but only if the court finds that payment stream to
have a present value of $550,000. That in turn depends upon what the Court finds to be the
appropriate discount rate. How is the interest rate determined? Can the debtor prepay the
portion of the debt equal to the value of the collateral and leave the balance of the claim secured
by the property?
B.
Pros
1.
A secured creditor should consider the election if it believes the collateral
will increase in value
2.
Lien must be satisfied upon the sale, foreclosure, or refinance. Upon any
of those events, the creditor would be entitled to its full $1 million.
3.
The election, if available, can provide significant leverage for a junior lien
position.
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C.
Cons
Despite the apparent benefits, actual section 1111(b) elections remain rare. This
is likely because the creditor gives up the substantial benefits and leverage associated with its
deficiency claim.
1.
By giving up unsecured vote, the creditor often would give up the right to
block acceptance by the unsecured class and thereby force the debtor to comply with the absolute
priority rule (or new value exception) and to find another accepting class for purposes of
Bankruptcy Code section 1129(a)(10).
2.
Creditor also gives up distribution on unsecured claim.
3.
In a 203 No. LaSalle auction for the new equity, the creditor may be able
to effectively “credit bid” its unsecured claim. A creditor making the election gives this up.
D.
May a creditor revoke election?
1.
Same plan.
2.
An election probably does not apply to a different plan, i.e., it is probably
plan specific.
E.
II.
When Election not Permitted
1.
Debt is contractually recourse and property is to be sold under Plan
2.
Lien is of inconsequential value
SALE MOTIONS
A.
Stalking Horse Bid protections
1.
Expense Reimbursement.
2.
Break-up Fee.
3.
Match Right
4.
Other rights in procedures
All of these protections are designed to protect the party making the stalking horse
bid. Expense reimbursements are typically designed to allow the bidder to recover out of pocket
costs and expenses incurred in making the bid. These are generally allowed. Break up fees are
more of a challenge in getting approval. They must be found to be reasonable. A delicate
balance must be drawn to protect the bidder and provide incentive in attracting a stalking horse
bidder yet not discouraging competitive bidding that may benefit the estate. What limitations are
people seeing in gaining approval of these provisions? What procedures are judges using?
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B.
Lease Assignments With Sale
1.
When Stalking Horse selects prior to sale motion- Generally the leases
and contracts to be assumed are pre-selected and the amount of the cure must be included in the
bid if the debtor does not otherwise have the funds to cure. How does this impact competitive
bidders if they select a different group of contracts.
2.
When Stalking Horse does not select prior to sale motion- Does the
motion to approve the sale contain a procedure for the subsequent assumption and assignment of
leases and contracts. How are the cure amounts to be funded. How will a competitive bid be
evaluated.
3.
Process to accommodate competing bids. The comparison of
competitive bids can become fairly complicated when each bidder is seeking to obtain different
contracts and leases. It is generally advisable to fix a definite procedure prior to the solicitation
of competing bids.
C.
One Motion or Two?
1.
Lease Assignments in same motion as “core” section 363 motion or
separate?
2.
Bid Procedures in same motion or separate?
What are people’s experiences with using one or two motions with respect to the
sale of assets and the assignment of leases and contracts.
D.
“Private Sale” The private sale process to a preselected buyer may be used but
still requires court approval. Generally, if objections are filed the debtor will need to justify and
support the private sale. This may involve evidence showing that the market has been evaluated
or tested as to the selected assets and will not provide a higher sale price. Alternatively the
debtor may have obtained relatively recent appraisals demonstrating that the sale price is fair and
reasonable. Have people used this process or seen it used and what results are encountered? Do
people see more objections to the private sale?
III.
PLAN ISSUES
A.
Disclosure Statement in Small Business Cases. §1121(e)(1) is the exclusivity
period for small business cases. It provides that only the debtor may file a plan for the first 180
days of the case, unless extended or the court orders otherwise. §1121(e)(2) goes on to provide
that the plan and a disclosure statement, if any, shall be filed not later than 300 days following
the entry of the order for relief. These provisions appear to mean that while the debtor may enjoy
the exclusivity period for the first 180 days of the case, a plan does not have to be filed within
this period. One court interpreting this provision has held that the requirement that a plan be filed
within 300 days following the entry of the order for relief applies only to a plan filed by the
debtor and that there is no statutory deadline for filing a reorganization plan by any party in
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interest other than the debtor. In re Florida Coastal Airlines, Inc., 361 B.R. 286, 290-91 (Bankr.
S.D. Fla. 2007).
i. Timing is everything in these cases. The plan confirmation hearing must occur
within 45 days of the date on which the plan is filed. The disclosure statement
may be conditionally approved and final approval may occur at the confirmation
hearing. However, a conditionally approved disclosure statement must be mailed
to creditors no later than 25 days before the confirmation hearing. Assuming the
plan and disclosure statement are filed on the same day, the disclosure statement
must be conditionally approved and mailed within 20 days. Our Local Rules are
designed to get you around this problem. They allow for the filing of the
disclosure statement with the plan attached as an exhibit. This eliminates the 45day problem and gives you time to gain conditional or final approval of the
disclosure statement at which time the plan can be filed and the 45-day period
commenced. What happens when you bump up to the 300 day requirement for
filing the Plan?
B.
Reservation of Claims and Causes of Action. A number of cases indicate that if
the disclosure statement does not describe or discuss the claims which a debtor intends to pursue
and the plan is confirmed, the claims may be lost. Various cases test the limits to this
requirement and the amount of discussion that may be required to preserve the claims. Has
anyone seen a claim lost due to a failure to disclose?
C.
Absolute Priority Rule in Individual Cases. The fair and equitable test with
respect to gaining confirmation of a plan over the dissent of a class of unsecured creditors has
been modified with respect to individuals. §1129(b)(2)(B)(ii) allows the debtor to "retain
property included in the estate under section 1115". While a split exists among courts as to
whether this language eliminates the absolute priority rule in individual cases, this question has
been answered in the Tenth Circuit. The answer is that the absolute priority rule continues to
exist. In re Stephens, 704 F.3d 1279 (10th Cir. 2013). While the rule is subject to certain
limitations, the decision does present a number of problems for debtors. The larger looming
question is how does one confirm a plan for an individual when the vote of the unsecured
creditor class cannot be obtained?
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