CONFIRMATION OF CHAPTER 11 PLAN
Confirmation Hearing: After proper notice, the bankruptcy court conducts a
hearing to determine whether a proposed plan satisfies the elements
necessary for confirmation. An objection to confirmation may be
filed by any party in interest.
Requirements for Confirmation: A plan will be confirmed
only if it satisfies the following statutory requirements:
a. Plan complies with Code provisions: the plan must comply with the
applicable provisions of the Bankruptcy Code, such as the
requirements for classification of claims and the mandatory contents
of a Chapter 11 plan.
b. Proponent complies with Code provisions: The proponent of the plan
must comply with the applicable provisions of the bankruptcy code, such as
those concerning disclosure and solicitation of acceptances.
c. Plan in good faith: The plan must be proposed in good faith by
the bankruptcy lawyer for the debtor
d. Payment for services or expenses approved: All payments for
services or expenses related to the plan (e.g., attorney's fees)
must be approved by the court as reasonable, where the payments are
made by the proponent of the plan, the bankruptcy debtor, or a person issuing
securities or receiving property under the plan.
e. Officers, directors, insiders disclosed: The plan must disclose
the names and affiliations of all individuals who will be officers,
directors, or voting trustees of the debtor or a successor to the
debtor after confirmation (consistent with the interests of
creditors, equity security holders, and public policy), and the
names and proposed compensation of all insiders who will be employed
or retained by the reorganized debtor.
f. Rate change approved: Where the debtor's rates are regulated by a
governmental commission, any rate change proposed by the plan must
be approved by the commission.
g. "Best interests of creditors test" met: Each holder of a claim or
interest of an impaired class either must (i) have accepted the plan
or (ii) receive under the plan property having a present value, as
of the effective date of the plan, of not less than the amount that
the holder would receive in a Chapter 7 liquidation. (This element
of confirmation usually is called the "best interests of creditors
( 1 ) Exception: Where a holder has made the election under section
1111(b) of the bankruptcy code, the plan must provide that she receive property having a
present value, as of the effective date of the plan, of at least the
value of the collateral securing her claim.
h. All impaired classes accept plan: Each class of claims or
interests must have accepted the plan or be unimpaired under the
( 1 ) Note: If this element (section 1129(a)(8)) is the only element
not met for confirmation of a proposed plan under section, the plan
might still he confirmed by a cram down under section bankruptcy
code 1129(b) .
I. At least one impaired class of creditors accepts plan: the plan
impairs any class of claims, then the plan must be accepted by at
least one class of claims that is impaired, excluding any
acceptances by insiders of the consenting class. This element has
the effect of preventing a cram down (i.e. , confirmation under
Bankruptcy Code section 1129(b); under circumstances where
none of the impaired classes of claims has accepted the plan.
j. Administrative expenses and involuntary gap claims provided for:
Each claim that is entitled to priority as an administrative expense
or as an involuntary case gap claim must be paid completely in cash,
on the effective dale of the plan, unless the holder of the claim
consents to different treatment.
k. Third, fourth, fifth, and sixth priority claims provided for:
Each class of claims entitled to priority for wages, contributions
to an employee benefit plan, grain farmers or United States
fishermen, or consumer layaways must he dealt with as follows,
unless the holder of a particular claim consents to different
(I) If the class has accepted the plan, each claimant is entitled to
receive deferred cash payments having a present value, as of the
effective date of the plan, equal to the allowed amount of her
(1) Until class has rejected the plan, each claimant must receive
total payment of her claim, in cash, on the effective date of the
Seventh priority tax claims provided for: Unless it consents to
different treatment, each tax claimant that is entitled to seventh
priority must receive deferred cash payments having a present value,
as of the effective date of the plan, equal to the allowed amount of
the claim. The payout period may not extend beyond six years
following the date that the tax was assessed. While the cases vary
on the amount of what interest rate to apply, it has been held that
the prevailing market rate for a loan of similar duration and risk
is appropriate. (Note: Although the interest rate prescribed by 26 U.S.C. section 6621 for delinquent tax claims is relevant to
ascertaining the prevailing market rate, it should not be
conclusive, since it usually lags behind the current market rate and
fails to account for factors such as risk and the length of time
allowed for payment under the plan.)
Plan is feasible: The bankruptcy plan must be feasible, which means that it
has a reasonable probability of being successful and that it is
unlikely that, following confirmation, there will be a need for a
liquidation or any further reorganization not proposed in the plan.
n. Bankruptcy fees paid: All bankruptcy fees required under 28 U.S.C.
section 1930 must be paid or will be paid on or before the effective
date of the plan.
o. Retiree insurance benefits protected: The plan must provide for
the continued payment of all retiree benefits at the level
established before bankruptcy unless (i) a modification is agreed to
by the trustee (or debtor in possession) and the authorized
representative of the recipients, or (ii) the court orders the
payments to be modified in accordance with Bankruptcy Code
3. Cram Down: A plan can be confirmed where all of the above
requirements have been satisfied except section 1129(a)(8), which
requires that every class of claims or interests either has accepted
the plan or is unimpaired under the plan. Thus, upon request by the
proponent of a plan, the court will confirm the plan, despite the
by one or more impaired classes, if the plan is not unfairly
discriminatory and is fair and equitable with respect to any
dissenting impaired classes. Bankruptcy Code §1129(b)(l)
a. Unfair discrimination: To determine whether discriminatory
treatment of a dissenting class is fair, the court considers the
(i) Whether there is a reasonable basis for the discriminatory
(ii) Whether the plan could be implemented without the
(Hi) The presence or absence of good faith; and
(iv) The manner in which the class is treated under the plan.
(1) Example: Debtor Corporation files a Chapter 11 plan, designating
seven classes of claims. Class 111 consists of a disputed and
unliquidated tort claim for $35,000,000. Class IV consists of
undisputed, general unsecured claims held by trade creditors and
attorneys totaling $171,000. The plan proposes to pay the Class IV
creditors fifty cents on the dollar, without interest, over
thirty-six months, and to pay the Class III claimant $50,000 in
cash, from guaranteed funds of bankruptcy Debtor Corporation's president,
within 180 days after confirmation. Under the above standard, the
plan does not discriminate unfairly against the Class III creditor,
whose disputed and unliquidated claim will be paid regardless of the
future success or failure of Debtor Corporation.
b. Fair and equitable: The Bankruptcy Code provides specific guidelines for
determining whether a plan is fair and equitable with respect to a
particular class. These tests differ according to whether the class
is comprised of secured claims, unsecured claims, or equity
(1) Secured claims: For secured claims, the plan must propose one of
the following three methods of treatment if it is to be considered
fair and equitable:
(a) Secured party retains lien and receives deferred cash payments:
Here, the creditor retains her lien on the collateral for the
allowed amount of the claim and also receives payment in deferred
installments that total at least the allowed amount of the secured
claim and that have a present value, as of the effective date of the
plan, of at least the value of the collateral.
1) Interest rate: In determining present value, many courts require
the debtor to pay the interest rate "charged by institutional
lenders for similar commercial transactions" as the prevailing
2) If a partially secured creditor elects,
under Bankruptcy Code section 1111(b), to have her entire claim
treated as secured, then the deferred cash payments in a cram down
must equal the full dollar amount of her allowed claim (without
interest) and must have a present value of at least the value of the
(b) Secured party receives indubitable equivalent: The second
method provides that the creditor realize the indubitable equivalent
of her secured claim.
1) Example: Creditor's receipt of twenty-one individual buyers'
notes secured by twenty-one separate pieces of real property was
held to constitute the indubitable equivalent of Creditor's first
mortgage on 200 acres of land, where the present value of the notes
was $153,777, the total debt was $153,521, and the value of the
twenty-one lots was $287,500.
2) Example: Under-secured creditor's receipt of the actual property
securing its claim constituted indubitable equivalence of its
(c) Collateral sold and lien attaching to proceeds treated as above:
The third method provides for the collateral to be sold free and clear of
the creditor's lien, with the lien to attach to the proceeds of the
sale and to be treated in a manner described in (a) or (b) above
Note that the sale is subject to the creditor's right, under
bankruptcy code section
363(k), to bid at the sale, purchase the property, and offset her
claim against the purchase price
(2) Unsecured claims: For a class of unsecured claims, the plan must
propose one of the two following methods of treatment if it is to be
considered fair and equitable:
(a) Each creditor receives property equal to allowed claim:
Each creditor of the class receives property (although not
necessarily cash—e.g., notes, stock, or other property of the
debtor) having a present value, as of the effective date of the
plan, equal to the allowed amount of her claim.
(b) Senior classes fully paid before junior classes: No
creditor or holder of an interest that is junior to the class
receives or retains any property at all. This principle is known as
the absolute priority rule, and
it requires full payment to senior classes before any distribution
can be made to junior classes.
1) Example: Where a bankruptcy debtor corporation is insolvent, the absolute
priority rule prevents shareholders from retaining their interest in
the business, absent the consent of all classes of unsecured
creditors whose claims are not fully paid.
2) "New value exception": The courts are split concerning the
continuing validity of a pre-Code, judicially created exception
allowing equity security holders to retain an interest where they vest new capital constituting a substantial contribution that is
at least equal to the value of the interest retained.
(3) Equity interests: For a class of interests, the plan must
propose one of the two following methods of treatment if it is to be
considered fair and equitable:
(a) Holder receives or retains property equal to fixed liquidation
preference, fixed redemption price, or equity interest holder
receives or retains property having a present value, as of effective
date of the plan, equal to any applicable fixed liquidation
preference, any applicable fixed redemption price, or the value of
her equity interest, whichever is the greatest.
(b) Senior classes fully paid before junior classes: No interest
holder that is junior to the class receives or retains any property
(4) Valuation: To determine whether a bankruptcy plan is fair and
equitable with respect to a dissenting class of unsecured claims or
equity interests, it may be necessary for the court to value the
reorganized debtor as a going concern. This process usually involves
capitalization of the future expected average yearly earnings of
the reorganized corporation, based upon an
capitalization rate over the estimated future life of the entity.
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