The Bankruptcy Plan - Short

Topics

• The Disclosure Statement
• Creating the best bankruptcy plan
• Liquidation Analysis Report
• Court costs & who pays

Hosted by Neil Goldstein & Stephen B. Ravin

This is an abridged version of the original episode. Feel free to go back and listen to the full version in our show feed.

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Transcript

SPEAKER_01 0:01

You are listening to Corporate Bankruptcy A to Z, a podcast that gives you the ins and outs of corporate bankruptcy. This is an abbreviated release of episode 5, where we will cover the Chapter 11 plan, the role of the disclosure statement, how plans are structured, what makes a plan acceptable, and how creditors evaluate and vote on the outcome. If you are new to the show or want to hear the full conversation about this topic and more, we invite you to check out our full bankruptcy series down below in the show feed. There you will find an unedited version of each episode where we dig deeper and answer more questions. He is joined by co-host and legal expert Steve Raven of CUA, a bankruptcy attorney with over 40 years in the field. If you are dealing with the situation now and need the items, you can reach out to them directly. Call Neil at 940-808-9451 and Steve at 973-286-6713.

SPEAKER_02 1:12

For this episode, we have a special guest. Maris Candiston is an attorney with McDermott, Will, and Emery. Maris, in previous episodes of this podcast, we discussed what a bankruptcy is. Let's begin with the preparation of the plan and the disclosure statement. What is the plan and why is it necessary?

SPEAKER_00 1:35

So the Chapter 11 plan is the roadmap for how prepetition creditors and interest holders will be treated through the bankruptcy. It also shows what the data will look like once it emerges. So, for instance, if the company, substantially all of the assets are sold during the bankruptcy, commonly what will happen is the plan will provide for liquidation of the debtors and distribution of the remaining assets, including sale proceeds.

SPEAKER_02 1:59

What is the disclosure statement?

SPEAKER_00 2:02

The disclosure statement is the companion piece to the plan. It contains additional information that helps demonstrate the plan's feasibility, that the information that shows that the plan is in the best interest of creditors. It's designed to be a piece that creditors can look to to get enough information about the plan and how it's going to work so that they can vote one way or another on the plan.

SPEAKER_03 2:29

That's key, actually. At the end of the road in a chapter 11, the last hurrah is the approval of the plan of reorganization. And the approval is based on several factors, including the vote of the creditors to accept or reject the plan, and the way they get information on which to base their vote is just what Maris just said, which is through this pile of papers called a disclosure statement.

SPEAKER_02 3:01

How many years should the plan encompass?

SPEAKER_00 3:05

It's five. Generally it's five, unless you're paying creditors in full.

SPEAKER_03 3:24

It's based on a lot of things like cash flow, value of assets, money in the bank projections. So it could be a cash on confirmation plan, and that's the end of it. What a plan could be uh a 20% plan payment over three years, five years, two years, it's it's all negotiated, and there's no rule which says how long a plan has to be or can't be.

SPEAKER_00 3:58

It is a negotiation, and with respect to you know what assets are in there that need to be liquidated, it could just be a function of we think we need three years to you know prosecute this litigation that's gonna bring money into the estate, and at that point we'll make distributions.

SPEAKER_02 4:17

What criteria would make a plan acceptable for that?

SPEAKER_00 4:22

Well, the code goes through the various criteria for plan confirmation. Again, it includes that the plan must be proposed in good faith, must be feasible, meaning that the company can make good on the promises for the distributions under the plan, and that it won't result in the company having to file again.

SPEAKER_02 4:43

I hear that all the time. That the creditors have to get more than they would upon a liquidation.

SPEAKER_03 4:50

Well, one of the documents that's included in the disclosure statement, and probably the most important document, is called a uh liquidation analysis, which will show by line item what creditors would get in a chapter seven versus what they are being offered in the chapter eleven. And the creditors have to get more through this chapter eleven process than they would get in a chapter seven.

SPEAKER_02 5:19

How important is the cash flow part of the disclosure statement?

SPEAKER_00 5:25

It's extremely important as it informs effective parties as to the feasibility of the plan, whether it's in the best interests of creditors. Without that information, voting parties can't make an informed decision one way or another. But it also shows, you know, the financial projections of what the debtor anticipates it will look like going forward, which again goes into feasibility.

SPEAKER_02 5:48

Does the company's disclosure statement have to show profitability?

SPEAKER_00 5:53

They do have to show include financial projections of what the debtor anticipates its profitability will be post-emergence once its debt load is shed through the plan. Um but those are just projections. Those projections don't always hold up in the long term.

SPEAKER_02 6:08

What happens to the debt incurred prior to the filing?

SPEAKER_00 6:13

It's addressed through the Chapter 11 plan in accordance with the priority scheme and the bankruptcy code. Priority claims have to be satisfied as well. But there's no requirement that general unsecured creditors receive any money on account of their pre-petition debts.

SPEAKER_02 6:27

Are there court costs? If so, who pays them?

SPEAKER_00 6:32

So the cost of the court, the you know, the judges, it's the judge's staff and what have you, those are all paid through statutory fees that are the debtors required to pay on a quarterly basis to the office of the United States Trustee, which is an arm of the federal government. And fees are calculated based on disbursements during the case.

SPEAKER_02 6:53

My clients generally feel insulted by having to spend more for every dollar that they disperse to the court. It seems insulting to them, but somebody has to pay those costs.

SPEAKER_00 7:07

Yeah, I've definitely be on the receiving end of those calls.

SPEAKER_03 7:12

You know, when we were talking before about that liquidation analysis, one of the line items is always what the debtor will have to pay in a chapter 11 in terms of the US trustees' quarterly fees, which in certain cases can get rather sizable.

SPEAKER_02 7:35

The company has presented a plan to the court, and assume the plan has been approved, who pays the creditors and how?

SPEAKER_00 7:45

So it depends on what's set up in the plan in terms of structure.

SPEAKER_02 7:51

Let's say that the plan is accepted and the company starts to make payments, and after say two or three months, they can't continue to pay its obligations. What happens?

SPEAKER_00 8:04

You know, if it's a pro rata plan, uh say the general unsecured creditors are getting a pot plan and they each get their pro rata share based on their allowed claims. This is why you don't make early distributions because you want to make sure that the money sort of stays in the estate so it could be distributed pro rata to all of the allowed creditors.

SPEAKER_02 8:24

Could you expand on that? So let's take an example uh that the company had liabilities of 10 million, they settle for 10%, so they're going to pay out 1 million. And let's just assume for this example, they're going to pay it over 10 months or 100,000 a month. So they pay the first month 100, the second month 100, and they don't have any more money to pay. And what happens when they have to tell the court that they don't have the third month's payment?

SPEAKER_00 8:59

Well, then the the cases are still in chapter 11. The court will suggest or just sponge a convert it to chapter seven.

SPEAKER_03 9:09

Or another option is that the debtor can file a motion to modify the plan of reorganization in any manner. For example, if it's a 10-month payout at $100,000 a month, they can file a motion to modify it to a 20-month payout at $5,000 a month.

SPEAKER_02 9:31

Is it legal for the company to pay extra to some creditors to make up their losses?

SPEAKER_03 9:37

Only if it's disclosed and approved by the court.

SPEAKER_00 9:42

If you don't make that disclosure by bringing it before the court and seeking approval, then it becomes a real problem. They're not no, they're not supposed to do that. It's often something I find difficult explaining to companies. Like you can't when you get into chapter 11, what you can and can't do, they're a little bit surprised that they can't do whatever they want, whenever they want.

SPEAKER_02 10:04

Well, that's the end of the questions. Uh Maris, any parting comments for our listeners?

SPEAKER_00 10:10

You know, chapter 11 is not as scary as it seems. If you have the right partners, counsel, advisors, and what have you. Um, it's you know a lot easier to navigate than you would think. For instance, having a CRO, I always love having a CRO. Having somebody who's been through this in my case, who is making sure that I get all the information I need as debtor's counsel to make sure that the plan and the case is as successful as possible.

SPEAKER_01 10:40

Do you have a question about bankruptcy? Why not ask the experts? Emails for Neil and Steve can be found in the show notes below. And remember, the first call is always free. Call Neil at 940-808-9451 and Steve at 973-286-6713. You can also find more resources on our website. Go to corporatebankruptcy a to Z dot com or elementarybusiness.com. You can also find links to those in the show notes down below. Corporate Bankruptcy A to Z podcast and YouTube channel are produced by me, Sir Isaac Smith. Be sure you subscribe and share the episode, and we will see you next time.