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