The Chapter 11 Plan of Reorganization and Voting Process

The goal of Chapter 11 generally is to restructure a Chapter 11 debtor’s monthly debt service and thereby improve cash flow to maintain a viable business. This can be accomplished by reducing principal owed, extending the length of a loan, and reducing the interest rate. The Chapter 11 Plan of Reorganization outlines these new terms that will form the basis for the new contractual rights between the debtor and creditors.

The debtor, a creditor, or another party in interest may file a Chapter 11 Plan. However, only the Debtor is permitted to file a Plan during the first 120 days after the Chapter 11 case is filed, or 180 days in a small business case.  After this exclusivity period expires, a creditor or party in interest may propose a Plan. Practically speaking a creditor rarely proposes a Plan, and therefore the Debtor is typically the “plan proponent”.

The Plan outlines the substantive rights of the debtor and creditors. In conjunction with the Plan, depending on the complexity of the case, the debtor must also prepare and file a Disclosure Statement to give more information to creditors regarding the debtor and the proposed Plan. After notice and a hearing the Bankruptcy Court determines whether or not to approve the Disclosure Statement as containing adequate information under 11 U.S.C. § 1125.

Once the court approves the Disclosure Statement, the Debtor provides the Plan and Disclosure Statement to each creditor in the case along with a ballot for voting to accept or reject the Plan. In order to successfully obtain confirmation of a Plan of Reorganization, Section 1129(a)(10) of the Bankruptcy Code requires that the plan proponent obtain the acceptance of at least one impaired class. This is assuming at least one class of claims under the Plan is impaired, which is virtually certain to be the case in most any Chapter 11 Plan.

Although one class in the Plan may contain multiple claims, typically, most classes in a Plan will contain the claim of a single creditor. Therefore, to meet this requirement outlined in Section 1129(a)(10) only one creditor must vote to accept the Plan in order to reach confirmation.  Although a Plan accepted by one creditor may technically meet the confirmation requirements, in practice a court may not confirm a Plan that merely meets the minimum requirements.

Where a class in the Plan contains only one creditor, calculating the acceptance or rejection of that class is straightforward. This will be the case for most secured claims, which are loans secured by collateral such as a house, car, building, equipment, or inventory. Unlike secured claims which are each placed in their own respective class, the class of general unsecured claims will contain many unsecured claims. Thus, the calculation of class acceptance or rejection may require a calculation consistent with 11 U.S.C. § 1126. This Code Section provides that a class has accepted the Plan if at least two-thirds (2/3) the dollar amount and greater than one-half (1/2) in number have accepted the Plan.

As an example, assume the Debtor owes four unsecured debts, Creditor A – $10,000, Creditor B – $15,000, and Creditor C – $25,000, and Creditor D – $50,000. If Creditor A & B accept and Creditor C & D reject the Plan, the unsecured class has rejected the Plan as only 1/2 the number of claims has accepted and the number must be greater than 1/2 the number of claims. If Creditor A, B, and C accept and Creditor D rejects then more than 1/2 the number has accepted, but less than 2/3 the dollar amount has rejected and therefore the unsecured class has rejected.

If Creditor A, B, and D accepts and Creditor C rejects then the conjunctive requirements for class acceptance have been met, 3/4 of the dollar amount has accepted and 3/4 of the number of claims has accepted, and therefore the unsecured class has accepted. As a final illustration, if three of the creditors were to abstain from voting, and Creditor A were to accept, the unsecured class would therefore accept the Plan under Section 1126 as only those claims that accept or reject are counted when calculating the class acceptance or rejection. Even though Creditor A held the small claim of $10,000, since the other creditors failed to vote, this creditor dictates the outcome of the voting.

This voting process is only one of the many aspects of a Chapter 11 case. At Mickler & Mickler, we deal with these issues in Chapter 11 cases on a daily basis. We hold the knowledge to guide an individual or business through this complicated process. Contact us at 904.725.0822 or should you need counsel regarding your financial situation. The consultation is free.

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