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Reading newspapers, it seems as if a Ch 11 bankruptcy is like being reborn: you shed off all debts to emerge a pristine new company. But why would debtors agree to this? Aren't they better off with a lower interest % on their loan, or an agreement that they will only have to get paid if the company is turning a profit?

Is it in a Ch 11 necessary for the creditors to agree with the plan of the debtor, or is it enough that the court decides that it's 'fair and equitable' and more than the debtors would get from a Ch 7 bankrupty?

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  • 1
    Chapter 11 and Chapter 13 are two different things. Which do you want to know about?
    – Kevin
    Jun 17 '20 at 21:40
  • Oops, meant to say 11
    – Plumpie
    Jun 20 '20 at 13:09
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If the creditors and debtor could agree to a plan without the court's involvement, there would be no need for Chapter 11 in the first place. The parties would simply sit down and iron out a deal. This is entirely legal and does not require the court's involvement, provided the deal is subsequently followed. The only reason to go to bankruptcy court is because negotiations have broken down or are impractical (e.g. because a creditor is refusing to negotiate altogether, because there are too many creditors, because the debtor's obligations are too complex, etc.). Bearing that in mind:

Is it in a Ch 11 necessary for the creditors to agree with the plan of the debtor, or is it enough that the court decides that it's 'fair and equitable' and more than the debtors would get from a Ch 7 bankrupty?

Pursuant to 11 USC 1129:

(a) The court shall confirm a plan only if all of the following requirements are met:

[...]

(7) With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date; or
(B) [snip extra rules for debt secured by a property lien]

(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.

[...]

(b)
(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
(2) [snip further provisions explaining what counts as "fair and equitable" in considerable detail]

(There are a lot of other provisions in 11 USC 1129. Bankruptcy plans are very complex instruments, and this answer does not purport to give a full exposition of them. There are also a lot of other statutes under title 11 which further complicate the picture, such as 11 USC 502, which determines whether a claim is allowed in the first place. By the time you get to plan confirmation, you've already been through a fair amount of legal process.)

The definition of a class of claims "accepting a plan" is in 11 USC 1126:

(c) A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.
(d) A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.
(e) On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.

In short: You have to get the agreement of creditors holding at least two-thirds of the dollar value in each class, and at least half of the individual claims or interests within that class. But if you convince the judge that a particular creditor rejected the plan in bad faith (e.g. because they are spitefully trying to force the company into Chapter 7 liquidation, rather than because they genuinely expect to get more money by holding out), that creditor is not counted at all. Pursuant to 11 USC 1122 and 1123, the plan can only group claims together into classes to the extent that they are substantially similar, so you can't just lump a bunch of happy creditors together with the one creditor who doesn't like the plan.

Or, you can meet all of the other requirements, make sure your plan is fair and equitable, and then ask the court to apply (b)(1) and confirm the plan anyway.

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  • 'fair and equitable' seems extremely vague, and 11 USC 1126 is about making a deal without the judge, which as you say doesn't really happen because then you wouldn't need Ch 11 bankruptcy. Thanks for your response but I'm still quite confused.
    – Plumpie
    Jun 26 '20 at 22:31
  • @Plumpie: It's vague because Congress wanted the judge to make a prudent and sensible decision, taking into account all of the available information (and also because I snipped the definition). Being too specific could interfere with the court's discretion. 11 USC 1126 is mostly needed so that (for example) if you have 100 secured creditors with similar or identical claims, you offer them $100 each, and 98 of them accept that, then the two holdouts can't slow down the process very much. The whole class is considered to have "accepted" the $100 each.
    – Kevin
    Jun 28 '20 at 3:00

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