Shhhhh….The Secret Bankruptcy Plan

The grand finale of any reorganization in bankruptcy is supposed to be The Plan! In a Chapter 11 proceeding, this is typically a Plan of Reorganization (unless it is a liquidating Chapter 11).
Some bankruptcy plans are consensually approved, while others may be crammed down among certain creditors, whether they like it or not. The process of making a plan is seeking its approval which typically provides certain protections for creditors. Any creditor that is “impaired” (have their rights impacted) under the plan have an opportunity to vote on it. And before this moment occurs, the proponent of the plan must first issue a Disclosure Statement that enables the creditors to understand the pros and cons of the proposed plan.
Some protections typically built into the requirements for a reorganization plan include disclosure of the identity and compensation of any insider who would be retained by the reorganized debtor and an analysis of the feasibility of the plan to succeed, without requiring a subsequent liquidation or re-reorganization in the future.
For each group of impaired creditors, except in a cramdown, plan approval requires a majority of the creditors who vote and two thirds, in terms of dollar amount owed, of the impaired creditors within that class who vote. Any nonvoting creditors in a particular class that approves the plan will have the plan foisted upon them regardless, provided that the plan is not worse for the group that dissenting or nonvoting creditors than a pure liquidation. (Yes, bankruptcy attorneys need to have math skills.)
What is that strange word “cramdown” we mentioned? A cramdown occurs when there is an insufficient amount of creditors within a particular class to approve the plan. In such a situation, a plan could still be approved if it will provide those creditors a value, as of the effective date of the plan, equal to the allowed amount of their claim or the amount they would receive in a liquidation.
In order to make plans even more fair, after 120 days, entities other than the debtor can propose a competing plan of reorganization. This market mechanism promotes development of plans that maximize return for creditors.
With all those requirements, if you have filed the claim in the bankruptcy, there is at least some reason to believe that the reorganization process will look out for your interests. That is, if the real economic decision-making in the case, is actually tied up in a plan… Beware of the non-plan plan. Before a plan of reorganization is confirmed, debtors are able to follow a
court approved process to sell certain assets. This is known as a section 363 sale. Some debtors try to sell or refinance so many of their assets prior to proposing a confirming of reorganization that there is effectively little to nothing left for the actual plan to reorganize. When this happens, you have what is called a sub rosa plan.
The problem with a sub rosa plan is that it might not include all those protections various creditors that we described above. For this reason, courts will sometimes reject a debtor’s proposed preplanned asset sale or financing because it does not include the same protections to all the creditors that an official plan of reorganization would provide.
A recent example of a sub rosa plan, which the bankruptcy court rejected, occurred in the case of LATAM Airlines Group S.A. In a 138 page opinion, the bankruptcy court in the Southern District of New York found that a proposed $2.45 billion financing for the largest airline in Latin America could not be approved because it constituted a sub rosa plan that effectively prohibited the proposal of alternative plans of reorganization and had the possibility of rewarding equity holders prior to unsecured creditors being repaid. For bedtime reading, we have attached the court’s opinion here.

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