Summary from last week 34.1 also look 1144; 35.

5.1 assume Sam Pickens is going to retain some stake in the company/debtor going forward. Also do an analysis from the banks point of view. Final lessons on reshaping the estate > Proposing plans in chapter 11 26 Debtors problems dealing with executor contracts. DIP has a lot of power here can assume, assign, or reject any executry k or uninspired lease for real estate. Rejection - the most counter-intuitive power, but when you think about it it makes a lot of sense. The result is the same as if the debtor breached and paid damages but breach is paid in bankruptcy dollars. If its a seller it can go mitigate its damages. Another advantage: timing. 365 default is that the debtor can decide at any time in the case. Though the other party can force the debtor to decide. Assignment can assign to other parties if still valuable and receive something in turn. Allowed to assign contracts that it couldnt assign outside of bankruptcy. _____ Debtor can avoid the debtors own fraudulent transfers have this power as a DIP but dont have this power outside of bankruptcy. The Supreme Court has banned fraudulent transfer attacks on judicial foreclosures if its valid under state law its not going to meet the lack of reasonable equivalent value prong __ 510(c) equitable subordination statute is not very important because 510(c) basically just codifies case law. Basically just means you get subordinated below general unsecureds Where creditor has exercised degree of control over debtor that makes it look like an equity participant instead of a creditor, which means it has to get paid last. o Also applied when creditor engaged in some sort of equitable conduct. Bowl Trout (?) lied to bureau that represented the creditors about the debtors solvency Intent not necessarily required though investors getting paid at rates of equity before people who were getting paid at the rates of creditors.

o Deal was too good to be true should have put the creditors on notice. o This ends unit on reshaping the corporate estate within a reorganization. Confirming plans in Chapter 11, Part I Problem set 32 feasibility and the best interest test. Each creditor can make these arguments on their own (instead of their treatment as a class). Feasibility 1129(a)(11) whether the debtor has a reasonable chance of succeeding. o Visionary schemes Best interest 1129(a)(7) should sound familiar, also looked at this in ch. 13. General rule: creditor has right to get at least as much as they would have gotten under a chapter 7 liquidation. This is an absolute floor. These give creditors chance to challenge preferences, whereas usually only debtor makes these challenges. 32.1 10,000,000 You take the payment and put it in the numerator and put the unsecured debt in demoninator plus the deficiency of the creditor. 7.5/5 + 7.5 Since we think the 7.5 is a preference its now available for distribution. They have to give back the 7.5 million but this means that they are unsecured for 7.5 million. =60% in a ch. 11. Chapter 11 Plans, Part II 1129 contains two means by which a reorganization plan can be confirmed o (1) meet all 11 requirements of subsection (a), including (a)(8) which requires all impaired classes of claims or interests to accept the plan o (2) meet all the requirements of subsection (b), which incorporates all of the requirements of (a) except for (a)(8) and imposes two additional requirements. (b) is also known as cram down because it permits reorganization over the objections of one or more impaired classes of creditors. In re U.S. Truck Co. Inc., 800 F.2d 581 (6th Cir. 1986) o Teamsters objected that the plan ddi not meet the requirement that at least one class of impaired claims accept the plan, 1129(a)(10) U.S. Truck impermissibly gerrymandered the classes in order to neutralize the Teamsters Committees dissenting vote

o 1122 addresses the problem of dissimilar claims being included in the same class. It does not address the correlative problem of similar claims being put in different classes. o U.S. Truck used its classification powers to segregate dissenting (impaired creditors) from assenting (impaired) creditors by putting gthe dissenters into a class or classes by themselves. It therefore assured that at least one class of impaired creditors would vote for them thus meeting the requirement of 1129(a)(10) Court finds that there must be some limit on a debtors power to classify creditors in such a manner potential for abuse would be significant otherwise. One common theme in pre-Code cases that Congress incorporated into section 1122 the lower courts were given broad discretion to determine proper classification according to the factual circumstances of each individual case Court holds, however, that the plan did not discriminate. While U.S. Truck and other courts have concluded that the debtors may divide creditors into grounds, other courts have been resistant to what they see as financial gerrymandering of classes. o Statute is clear about two elements of classification: 1. Permission to separate the small creditors into a separate class for convenience 2. Prohibition on combining differently situated creditors into a single class o No guidance on when or if legally similar creditors might be allocated to separate classes National Bankruptcy Review Commission concluded that Section 1122 should be amended to provide that a plan proponent may classify legally similar claims separately if, upon objection, the proponent can demonstrate that the classification is supported by a rational business justification. SARE Cases outright dismissed with little inquiry into the facts in the 11th Cir. o Courts are hostile to the use of Ch. 11 to deal with single-asset real estate cases because of its use to strip a commercial mortgage o The principal creditor, a commercial lender, usually votes no on the plan because it wants to foreclose and sell the building itself. The suppliers, trade creditors, and employees will often vote yes if they can be formed into a class because they want to continue to do business with the SARE debtor. In that case, at least one class accepts the plan, so the plan can be confirmed. 1129(a)(10).

If the smaller creditors are grouped together with the commercial lender than even if they vote yes then will lose on dollar amount . o Some courts have been extremely hostile to creating a class of separate unsecured creditors for the purpose of obtaining the necessary approval from one impaired class. o Congress addressed SAREs in Ch. 11 in the 1994 Amendments and in the 2005 revision, aiming to constrict access to Ch. 11 for SAREs. 362(d)(3)-(4). Impairment o refers to whether a creditor class will be completely protected under the plan. o The debtor does not have to get approval from a class this is not impaired. 1129(a)(8)(B). An unimpaired class is deemed to have accepted the plan. 1129(f). Also, if a class is unimpaired, by definition the best interests test of section 1129(a)(7) has been met and need not be separately explored. o Central Q: whether impairment refers to legal impairment, economic impairment, or some combination of the two. Economic impairment shades into legal impairment nice question whether substitution of collateral of equal dollar value is an impairment of legal rights. Chioce btwn looking for legal or for economic impairment is related to the absolute priority and cramdown. Claims Trading Issues o 1. How sharp are the edges of Fighter? Are all purchases to further ones own economic interest in good faith? o 2. Buyers are often looking for relatively short-term returns and have little interest in the long-term potential of the debtor company as a customer or as an investment. Does this not frustrate the very purpose of bankruptcy? o 3. Should there be an regulations on the sale of claims? When parties buy and sell claims against companies in bankruptcy they may be trading in what is effectively the residual ownership of the business but without the rules of stock exchanges, federal and state securities laws, and the oversight of the SEC.

33.1 Debtor has proposed an amended plan that offers 60 cents on the dollar to the unsecureds, although it offers the possibility of full payment if certain profit levels are reached in future years. Practical objection: tax laywer says he would be better off getting paid 60 percent now and writing off the rest as a bad debt against this years income. B/C of the possibility of payment in full, IRS might challenge any attempt to write off the unpaid 40% of the debt until the plan is completed.

Pany - $1,000,000 General Unsecreds - $4,000,000 Total Unsecured - $5,000,000 Pany and other dissenting creditor - $1,600,000 Mortgage Holder classified separately as unimpaired because the plan will cure the default, deaccelerate the debt, and pay it according to is original terms. What arguments can you make for Talbert under 1129(a)? Under 1126(c) you need half the number of claims in the class or 2/3 in amount. Small creditors: If we can get the small creditors kicked out the class the denominator goes from 5 million to 4.3 million. The numerator stays the same and the new percentage is slightly over 1/3 of the debt and the ability to block the plan. How do we get them out? we have two rules under 1122: (a) substantially similar to be in the same class; (b) reasonable and necessary for administrate convenience to put these in a class together. The only reason (b) could possibly do something is because some circuits have local rules about gerrymandering. Argument under 1122(a) personal guarantee gives them a different interest. They have different expectations and interests. Theyre getting paid 100% on the dollar and were getting 60% on the dollar. Argument under 1122(b) this does not prevent the debtor from putting the smaller creditors in the same class as Pany because its permissive. 1122(b) doesnt give the creditor the ability to force the debtor to do that. Are they small creditors impaired under 1124(1)? Artificial impairment (642) debtor giving the unsecured creditor seemingly less favorable terms because the debtor needs at least one of the impaired classes voting yes. Mortgage holder: Argue that under 1124(1) the mortgage holder is impaired because whereas before it could have foreclosed immediately, it now has to let Country cure. 1124(2) certain rights of the creditor that you can change and still not have the interest be impaired. still doesnt count as impairment if you deaccelerate, reinstate, and cure. Alteration of rights not paying them in full solely from the debtors exercise of discretion debtor is choosing not to pay them.

Close case here because the debtor is only able to pay 60% and it is the president that is paying the extra 40%. The artificial impairment test would probably only apply if the debtor could pay the 100% and was instead paying 60%.

Incentives that arise for bifurcated creditors they only vote for their undersecured claim. The debtors are the ones who are creating the plans you could see that in some situations the debtor would prefer the undersecured creditor to be separated from the smaller claims or vice versa. Depending on the circumstances of the case the debtor may have an interest to put them together or to separate them. Buying up the claims Could buy up the small claims until you have 1/3 of the debt. They need 70,000 not a lot to pay when you have a million dollar loan at stake. Will the court allow this? Issue: good faith/bad faith. If theyre already a creditor then theyre more likely to not consider it to be bad faith. Arch type bad faith situation: competitor of the debtor buying up the claims to put the debtor out of business. In our favor: were already an existing creditor, and were just trying to protect our interest. In re Figter Ltd: Not bad faith if youre protecting your interest as a creditor. Dicta: might have to make an offer to all of the $300,000 small creditors, or maybe all $4,000,000. That is a lot more money that the $70,000. So we might run into problems there if the court was relying on a Figter like test. 33.2 (a) proposal for a study: An analysis of bankruptcy cases that put similar claims into separate classes. a. Def. of gerrymandering i. Set up our own classification system b. Objections to being put in separate classes c. What sort of creditors are being separated off into different classes i. Small/Large ii. Bifurcated claims iii. Relationship with debtor continuous v. one time iv. SARE Cases d. Each secured creditor will be in its own class they usually will not be impaired and will not be voting though. When talking about classification were usually talking about unsecured creditors. e. Who wins? (b) reform amendment you would propose in case the board is not prepared to finance the study similar claims may not be put into separate classes unless there is a legitimate business reason. Debtor has the BOP to show that there is a legitimate reason.

a. Good business reason test should be replaced with balancing test shouldnt only be worried about the debtor. b. Sare Cases should be separated out until the 1978 code they were treated entirely separately c. Bifurcated Claims 7th Cir. Treats them entirely differently because they have different interests. d. Littwins idea: if a creditor submits a plan that says lets liquidate, then the debtor is going to have a hard time to confirm. Have an examiner or a trustee set up a classification so that there arent conflicting interests. (c) This is exactly the kind of policy question that will be on the exam.