SEVEN CONCEPTS
class , more than ½ of the creditors voting must vote to accept the plan . Also , more than 2 / 3 of the dollar amount voted by creditors plus $ 1 must vote to accept the plan . One large unsecured creditor can make or break a plan . If the unsecured creditor class votes to reject the plan , then equity ( the individual debtors ) have to infuse what is called “ new value money ” into the plan and most individual debtors lack new monies .
So , what do you do to get enough votes to confirm a plan ? A couple of small steps are to build the debtors ’ credibility by making sure that they perform . Also , you should speak with creditors . Actually , you should listen to them .
The major step is classification of claims . For the Smiths , here is one way to set up the classes . Class 1 would be the class holding the claim of the senior lender . You could negotiate s o m e changes to the payment terms with the lender and you would likely have an accepting ( a n d impaired ) class voting to accept the plan . Class 2 would be the claims of all unsecured creditors . You could take the position that the junior lender ’ s claim is entirely unsecured and place its claim in Class 2 .
In this model , there are two classes .
Class 2 would be the problem . Remember how voting works . If the junior lender votes its claim against the plan , then Class 2 has voted to reject the plan . This model gives to much power to the two lenders . The plan will fail unless the debtors have outside money - the new value . The odds that they have outside money is low . The court would either convert or dismiss this case .
Here is a second model for how to classify the claims . Class 1 will remain the same - the senior lender . For a new Class 2 , compromise as early as possible in the case with the junior lender . Give it both a secured claim and an unsecured claim and specify the payment terms and interest rate in the compromise . For example , the junior lender could hold a secured claim of $ 100,000 payable at 6 % interest , interest only for 7 years
“ In chapter 11 , the court must find that reorganization is not likely to be followed by liquidation , the feasibility requirement like in chapter 13 . Identify the problems which led to the chapter 11 filing and be prepared to discuss why the problems occurred .”
and then due in full . Class 2 would hold the junior lender ’ s secured claim ; it ’ s unsecured claim would be placed in Class 3 . One requirement of the compromise is that the junior lender agree to vote its secured and unsecured claims in support a plan which did not materially impact its treatment in Class 2 . 11 Class 3 would consist of all unsecured claims including the unsecured claim of the junior lender . The junior lender ’ s claim , when voted to accept the plan , would satisfy the 2 / 3 voting requirement . The Smiths would still need to actively obtain accepting ballots from other creditors .
Remember that at least one impaired class must vote to accept the plan . With the second model above , the plan could have three impaired classes all voting to accept the plan .
You must be considering all of this before the case begins . Many chapter 11 cases fail at plan confirmation because too often this part of the thought process does not occur until too late in the case .
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Some case law holds that sophisticated parties can reach a compromise early in a case with the creditor to vote its claims to accept a plan which does not materially impact the compromise . Duff v . U . S . Trustee ( In re California Fed .), 198 B . R . 567 ( 9 th Cir . BAP 1996 ); Century Glove , 860 F . 2d 94 ( 2d . Cir . 1999 ); and In re Snyder , 51 Bankr . 432 ( D . Utah . 1985 ) There is contrary authority .
46 CONSUMER BANKRUPTCY JOURNAL Spring 2018 National Association of Consumer Bankruptcy Attorneys