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Public Information Series of the Bankruptcy Judges Division
Administrative Office of the United States Courts
June 2000
While the
information presented herein is accurate as of the date of publication, it
should not be cited or relied upon as legal authority. This information
should not be used as a substitute for reference to the
United
States Bankruptcy Code (title 11, United States Code) and the
Federal
Rules of Bankruptcy Procedure, both of which may be reviewed at local
law libraries, or to local rules of practice adopted by each bankruptcy
court. Finally, this fact sheet should not substitute for the advice of competent
legal counsel.
A case filed under chapter 11 of the United States Bankruptcy Code is frequently
referred to as a "reorganization" bankruptcy.
A bankruptcy case commences when a bankruptcy petition is filed with the bankruptcy court.
Fed. R. Bankr. P. 1002.
A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed
by creditors that meet certain requirements. 11 U.S.C. §§ 301, 303. A voluntary petition should adhere to the format
of Form 1 of the Official Forms prescribed by the Judicial Conference of the United States.
(Official Bankruptcy Forms can be purchased at a legal stationery store or
they may be downloaded from the U.S.
Court's website. They are not available at the courthouse.) The voluntary petition will include standard information concerning the debtor's
name(s), social security number or tax identification number, residence, location of principal assets (if a business), the
debtor's plan or intention to file a plan, and a request for relief under the appropriate chapter of the Bankruptcy Code.
In addition, the voluntary petition will indicate whether the debtor qualifies as a small business as defined in 11 U.S.C.
§ 101(51C) and whether the debtor elects to be considered a small business under 11 U.S.C. § 1121(e).
Upon the filing of a voluntary petition for relief under chapter 11 or, in an involuntary case, the entry of an order for such
relief, the debtor automatically assumes an additional identity as the "debtor in possession."
11 U.S.C. § 1101. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter
11, without the appointment of a case trustee. A debtor will remain a debtor in possession until the debtor's plan of
reorganization is confirmed, the debtor's case is dismissed or converted to chapter 7, or a chapter 11 trustee is
appointed. The appointment or election of a trustee occurs only in a small number of cases. Generally, the debtor, as
"debtor in possession," operates the business and performs many of the functions that a trustee performs in cases
under other chapters. 11 U.S.C. § 1107(a).
A written disclosure statement and a plan of reorganization must be filed with the court.
11 U.S.C. § 1121. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs
of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization.
11 U.S.C. § 1125. The information required is governed by judicial discretion and the circumstances of the case. The
contents of the plan must include a classification of claims and must specify how each class of claims will be treated
under the plan. 11 U.S.C. § 1123. Creditors whose claims are "impaired,"
i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan vote on the plan by ballot.
11 U.S.C. § 1126. After the disclosure statement is approved and the ballots are collected and tallied, the bankruptcy court will
conduct a confirmation hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.
While individuals are not precluded from using chapter 11, it is more typically used to reorganize a business, which may
be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the
stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal
assets of the stockholders at risk other than the value of their investment in the company's stock. A sole proprietorship
(owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s); accordingly,
a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the
owners-debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership
bankruptcy case (partnership as debtor), however, the partners' personal assets may, in some cases, be used to pay
creditors in the bankruptcy case or the partners may, themselves, be forced to file for bankruptcy protection.
Section 1107 of the Code places the debtor in possession in the position of a fiduciary, with the rights and powers of
a chapter 11 trustee, and requires the performance of all but the investigative functions and duties of a trustee. These
duties are set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.
11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a). Such powers and duties include accounting for property, examining and objecting to claims, and
filing informational reports as required by the court and the United States trustee, such as monthly operating reports.
The debtor in possession also has many of the other powers and duties of a trustee including the right, with the court's
approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor
during its bankruptcy case. Other responsibilities include filing tax returns and filing such reports as are necessary
or as the court orders after confirmation, such as a final accounting. The United States trustee is responsible for
monitoring the compliance of the debtor in possession with the reporting requirements.
It should be noted that railroad reorganizations have specific requirements under subsection IV of chapter 11 which
will not be addressed here and that stock and commodity brokers are prohibited from filing under chapter 11 and are
restricted to chapter 7. 11 U.S.C. § 109(d).
A small business debtor is defined by the Bankruptcy Code as a person engaged in commercial or business activities
(not including a person that primarily owns or operates real property) that has aggregate noncontingent liquidated
secured and unsecured debts that do not exceed $2,000,000. 11 U.S.C. § 101(51C). If a debtor qualifies and elects to
be considered a small business under 11 U.S.C. § 1121(e), the case is put on a "fast track" and treated differently than
a regular chapter 11 case under the Code. For example, the appointment of a creditors' committee and a separate
hearing to approve the disclosure statement are not mandatory in a small business case.
11 U.S.C. § 1102(a)(3). A small business case proceeds faster than a regular chapter 11 case because the court may conditionally approve a
disclosure statement, subject to final approval after notice and a hearing and solicitation of votes for acceptance or
rejection of the plan. Thereafter, the disclosure statement hearing may be combined with the confirmation hearing.
11 U.S.C. § 1125(f). In addition, the debtor has a shortened period of time (100 days from the date of the order for relief)
within which only the debtor may file a plan. After the 100-day period expires, any party in interest may file a plan;
however, all plans must be filed within 160 days from the date of the order for relief.
11 U.S.C. § 1121(e).
Another type of debtor that has special provisions under the Bankruptcy Code is a single asset real estate debtor. The
term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer
than four residential units, which generates substantially all of the gross income of a debtor and on which no substantial
business is being conducted by a debtor" other than operating the real property and which has aggregate
noncontingent liquidated secured debts of no more than $4,000,000. 11 U.S.C. § 101(51B). The Bankruptcy Code
provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic
stay which are not available to creditors in ordinary bankruptcy cases. 11 U.S.C. § 362(d). On request of a creditor with
a claim secured by the single asset real estate and after notice and a hearing, the court will grant relief from the
automatic stay to the creditor unless the debtor files a feasible plan of reorganization or begins making interest
payments to the creditor within 90 days from the date of the order for relief. The interest payments must be equal to
the current fair market interest rate on the value of the creditor's interest in the real estate.
11 U.S.C. § 362(d)(3).
The automatic stay provides for a period of time in which all judgments, collection activities, foreclosures, and
repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose
before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of
creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed.
11 U.S.C. § 362(a). The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C.
§ 362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve
the difficulties in the debtor's financial situation.
Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the
automatic stay. For example, when the debtor has no equity in the property and that property is not necessary for an
effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to
foreclose on the property, sell it, and apply the proceeds to the debt. 11 U.S.C. § 362(d).
It should be noted that, although creditors are stayed from action against the debtor unless relief is granted by the
court, section 331 of the Bankruptcy Code permits applications for fees to be made by certain professionals during the
case. Thus, a trustee, a debtor's attorney, or any professional person appointed by the court may apply to the court
at intervals of 120 days for interim compensation and reimbursement payments. In very large cases with extensive legal
work the court may permit more frequent applications. Although professional fees may be paid pursuant to
authorization by the court, the debtor cannot make payments to professional creditors on prepetition obligations,
i.e.,
obligations which arose before the filing of the bankruptcy petition. The ordinary expenses of the ongoing business,
however, continue to be paid.
Creditors' committees can play a major role in chapter 11 cases. The United States trustee, a federal employee to be
distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of
unsecured creditors who hold the seven largest unsecured claims against the debtor.
11 U.S.C. § 1102. The committee may consult with the debtor in possession on the administration of the case, investigate the conduct of the debtor and
the operation of the business, and participate in the formulation of a plan. 11 U.S.C. § 1103. A creditors' committee may,
with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties.
A creditors' committee can be an important safeguard to the proper management of the business by the debtor in
possession.
There is no specific statutory time limit set for the filing of a plan; however, the debtor (unless a "small business" debtor,
as set out above) has a 120-day period during which it has an exclusive right to file a plan.
11 U.S.C. § 1121(b). The debtor's exclusive period in which to file a plan may be extended or reduced by the court. After the exclusive period
has expired, a creditor or the case trustee may file a competing plan. The United States trustee may not file a plan.
11 U.S.C. § 307.
A chapter 11 case may continue for many years unless the court, the United States trustee, the committee, or another
party in interest acts to ensure the case's timely resolution. The creditors' right to file a competing plan provides
incentive for the debtor to file a plan within the exclusive period and acts as a check on excessive delay in the case.
The debtor in possession or the trustee, as the case may be, has what are called "avoiding" powers. Such powers may
be used to undo a transfer of money or property made during a certain period of time prior to the filing of the
bankruptcy petition. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction
and force the return or "disgorgement" of the payments or property, which then are available to pay all creditors.
Generally, the power to avoid transfers is effective against transfers made within 90 days prior to the filing of the
petition. However, transfers to insiders (i.e., relatives, general partners, and directors or officers of the debtor) made
up to a year prior to filing can be avoided. 11 U.S.C. §§ 101(31), 101(54), 547, 548. In addition, under 11 U.S.C. § 544,
the trustee is given the authority to avoid transfers under applicable state law, which often provides for longer time
periods. Avoiding powers are used, for example, to prevent unfair prepetition payments to one creditor at the expense
of all other creditors.
Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11
case, other issues may arise which must be addressed by the debtor in possession. The debtor in possession may use,
sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court
orders otherwise. 11 U.S.C. § 363(c). If the intended sale or use is outside the ordinary course of its business, the
debtor must obtain permission from the court. A debtor in possession may not use "cash collateral,"
i.e., collections of accounts subject to security interests or proceeds from the sale of pledged inventory or equipment, without the
consent of the secured party or authorization by the court which must first examine whether the interest of the secured
party is adequately protected. 11 U.S.C. § 363.
When "cash collateral" is used (spent), the secured creditors are entitled to receive additional protection under section
363 of the Bankruptcy Code. Section 363 defines "cash collateral" as cash, negotiable instruments, documents of title,
securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than
the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees,
charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other
lodging properties subject to a creditor's security interest. The debtor in possession must file a motion requesting an
order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court
authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and
account for all cash collateral in its possession. 11 U.S.C. § 363(c)(4). A party with an interest in property being used
by the debtor may request that the court prohibit or condition this use to the extent necessary to provide "adequate
protection" to the creditor.
Adequate protection may be required to protect the value of the creditor's interest in the property being used by the
debtor in possession. This is especially important when there is a decrease in value of the property. The debtor may
make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the creditor's
property interest being adequately protected. 11 U.S.C. § 361.
When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a
court-approved "superpriority" over other unsecured creditors or a lien on property of the estate.
11 U.S.C. § 364.
Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the United States
trustee can request the appointment of a case trustee or examiner at any time prior to confirmation in a chapter 11
case. The court, on motion by a party in interest or the United States trustee and after notice and hearing, shall order
the appointment of a case trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or
if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate.
11 U.S.C. § 1104(a). The trustee is appointed by the United States trustee, after consultation with parties in interest and
subject to the court's approval. Fed. R. Bankr. P. 2007.1. Alternatively, a trustee in a case may be elected if a party in
interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that
instance, the United States trustee convenes a meeting of creditors for the purpose of electing a person to serve as
trustee in the case. 11 U.S.C. § 1104(b).
The case trustee is responsible for management of the property of the estate, operation of the debtor's business, and,
if appropriate, the filing of a plan of reorganization. Section 1106 of the Code requires the trustee to file a plan "as soon
as practicable" or, alternatively, to file a report explaining why a plan will not be filed or to recommend that the case
be converted to another chapter or dismissed. 11 U.S.C. § 1106(a)(5).
The court, after notice and hearing, may, at any time before confirmation, upon the request of a party in interest or the
United States trustee, terminate the trustee's appointment and restore the debtor to possession and management of
the property of the estate and of the operation of the debtor's business. 11 U.S.C. § 1105.
The appointment of an examiner in a chapter 11 case is rare. The role of an examiner is generally more limited than
that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file
a statement of any investigation conducted. If ordered to do so by the court, however, an examiner may carry out any
other duties of a trustee that the court orders the debtor in possession not to perform.
11 U.S.C. § 1106. Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file
a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether
some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections
to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action
should be taken. An examiner may not serve as a trustee. 11 U.S.C. § 321.
In addition to the case trustee or examiner and the creditors' committee, the United States trustee plays a major role
in monitoring the progress of a chapter 11 case and supervising its administration. The United States trustee is
responsible for monitoring the debtor in possession's operation of the business, and the submission of operating
reports and fees. Additionally, the United States trustee monitors applications for compensation and reimbursement
by professionals, plans and disclosure statements filed with the court, and creditors' committees. The United States
trustee conducts a meeting of the creditors, often referred to as the "section 341 meeting," in a chapter 11 case.
11 U.S.C. § 341. The United States trustee and creditors may question the debtor or the debtor's corporate representative
under oath at the section 341 meeting concerning the debtor's acts, conduct, property, and the administration of the
case.
The United States trustee also imposes certain requirements on the debtor in possession concerning matters such as
reporting its monthly income and operating expenses, the establishment of new bank accounts, and the payment of
current employee withholding and other taxes. By law, the debtor in possession must pay a quarterly fee to the United
States trustee for each quarter of a year until the case is converted or dismissed.
28 U.S.C. § 1930(a)(6). The amount of the fee, which may range from $250 to $10,000, depends upon the amount of the debtor's disbursements during each
quarter. Should a debtor in possession fail to comply with the reporting requirements of the United States trustee or
orders of the bankruptcy court or fail to take the appropriate steps to bring the case to confirmation, the United States
trustee may file a motion with the court to have the debtor's chapter 11 case converted to a case under another chapter
of the Code or to have the case dismissed.
It should be noted that in North Carolina and Alabama, bankruptcy administrators perform similar functions that United
States trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by
the Administrative Office of the United States Courts, while the United States trustee program is administered by the
Department of Justice. For purposes of this fact sheet, references to United States trustees are also applicable to
bankruptcy administrators.
Prior to confirmation of a plan, there are several activities that may take place in a chapter 11 case. The continued
operation of the debtor's business may lead to the filing of a number of contested motions. The most common are those
seeking relief from the automatic stay, the use of cash collateral, or to obtain credit. There may also be litigation over
executory (i.e., unfulfilled) contracts and unexpired leases and the assumption or rejection of those executory contracts
and unexpired leases by the debtor in possession. 11 U.S.C. § 365. Delays in formulating, filing, and obtaining
confirmation of a plan often cause creditors to file motions for relief from stay or motions to convert the case to a
chapter 7 or to dismiss the case altogether.
Frequently, the debtor in possession will institute a lawsuit, known as an adversary proceeding, to recover money or
property for the estate. Adversary proceedings may take the form of lien avoidance actions, actions to avoid
preferences, actions to avoid fraudulent transfers, or actions to avoid post petition transfers. Such proceedings are
governed by Part VII of the Federal Rules of Bankruptcy Procedure. At times, a creditors' committee may be authorized
by the bankruptcy court to pursue these actions against insiders of the debtor if the plan provides for the committee
to do so or if the debtor has refused a demand to do so. Creditors may also initiate adversary proceedings by filing
complaints to determine the validity or priority of a lien, to revoke an order confirming a plan, to determine the
dischargeability of a debt, to obtain an injunction, or to subordinate a claim of another creditor.
A claim is a right to payment or a right to an equitable remedy for a failure of performance if the breach gives rise to
a right to payment. 11 U.S.C. § 101(5). In some instances, a creditor must file a proof of claim form along with
documentation evidencing the validity and amount of the claim. When proofs of claim are required to be filed, creditors
must file the proofs of claim with the bankruptcy clerk in the district where the case is pending. The clerk is required
to keep a list of claims filed in a case when it appears that there will be a distribution to unsecured creditors.
Fed. R. Bankr. P. 5003(b). Most creditors whose claims are scheduled (i.e., claims listed by the debtor on the debtor's
schedules), but not listed as disputed, contingent, or unliquidated, need not file claims because the schedule of
liabilities is deemed to constitute evidence of the validity and amount of those claims.
11 U.S.C. § 1111. Any creditor whose claim is not scheduled, or is scheduled as disputed, contingent, or
unliquidated, must file a proof of claim in order to be treated as a creditor for purposes of voting on the plan and distribution under it.
Fed. R. Bankr. P. 3003(c)(2). If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling
of that claim. Fed. R. Bankr. P. 3003(c)(4). It is the responsibility of the creditor to determine whether the claim is
accurately listed. The debtor must provide notification to those creditors whose names are added and whose claims
are listed as a result of an amendment to the schedules. The notification also should advise such creditors of their right
to file proofs of claim and that their failure to do so may prevent them from voting upon the debtor's plan of
reorganization or participating in any distribution under that plan. When a debtor amends the schedule of liabilities to
add a creditor or change the status of any claims to disputed, contingent, or unliquidated claims, the debtor must
provide notice of the amendment to any entity affected. Fed. R. Bankr. P. 1009(a).
An equity security holder is a holder of an equity security of the debtor. Examples of an equity security are a share in
a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a
share, security, or interest of a share in a corporation or an interest in a limited partnership.
11 U.S.C §§ 101(16), (17). An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of
claim. A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled
as disputed, contingent, or unliquidated. 11 U.S.C. § 1111. An equity security holder whose interest is not scheduled
or scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor
for purposes of voting on the plan and distribution under it. Fed. R. Bankr. P. 3003(c)(2). A properly filed proof of
interest supersedes any scheduling of that interest. Fed. R. Bankr. P. 3003(c)(4). Generally, most of the provisions that
apply to proofs of claim, as discussed above, are also applicable to proofs of interest.
A debtor in a case under chapter 11 has a one-time absolute right to convert the chapter 11 case to a case under
chapter 7 unless (1) the debtor is not a debtor in possession, (2) the case originally was commenced as an involuntary
case under chapter 11, or (3) the case was converted to a case under chapter 11 other than at the debtor's request.
11 U.S.C. § 1112(a). A debtor in a chapter 11 case does not have an absolute right to have the case dismissed upon
request.
Generally, upon the request of a party in interest in the case or the United States trustee, after notice and hearing and
"for cause," the court may convert a chapter 11 case to a case under chapter 7 or dismiss the case, whichever is in
the best interest of creditors and the estate. 11 U.S.C. § 1112(b). The court may convert or dismiss a case "for cause"
when there is a continuing loss to the estate, an inability to effectuate a plan, unreasonable delay that is prejudicial to
creditors, denial or revocation of confirmation, or inability to consummate a confirmed plan.
There are important exceptions to the conversion process in a chapter 11 case. One exception is that, unless the debtor
requests the conversion, section 1112(c) of the Code prohibits the court from converting a case involving a farmer or
charitable institution to a liquidation case under chapter 7.
The filing of a written disclosure statement is preliminary to the voting on a plan of reorganization, and the disclosure
statement must provide "adequate information" concerning the affairs of the debtor to enable the holder of a claim or
interest to make an informed judgment about the plan. 11 U.S.C. § 1125. After the disclosure statement is filed, the
court must hold a hearing to determine whether the disclosure statement should be approved. Acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement.
11 U.S.C. § 1125(b). After the disclosure statement has been approved, the debtor or proponent of a plan can begin to solicit acceptances of the
plan, and creditors may also solicit rejections of the plan. Fed. R. Bankr. P. 3017(d) requires that, upon approval of a
disclosure statement, the following must be mailed to the United States trustee and all creditors and equity security
holders: (1) the plan, or a court approved summary of the plan; (2) the disclosure statement approved by the court; (3)
notice of the time within which acceptances and rejections of the plan may be filed; and (4) such other information as
the court may direct, including any opinion of the court approving the disclosure statement or a court-approved
summary of the opinion. Fed. R. Bankr. P. 3017(d). In addition, the debtor must mail to the creditors and equity security
holders entitled to vote on the plan or plans (1) notice of the time fixed for filing objections; (2) notice of the date and
time for the hearing on confirmation of the plan; and (3) a ballot for accepting or rejecting the plan and, if appropriate,
a designation for the creditors to identify their preference among competing plans.
Id. However, in a small business case, the court may conditionally approve a disclosure statement subject to final approval after notice and a combined
disclosure statement/plan confirmation hearing. 11 U.S.C. § 1125(F).
As noted earlier, during the first 120-day period after the filing of the voluntary bankruptcy petition, which filing also
acts as the order of relief, only the debtor in possession may file a plan of reorganization. The debtor in possession has
180 days after the filing of the voluntary petition (or in a case commenced by an involuntary petition, after the order for
relief) to obtain acceptances of the plan. 11 U.S.C. § 1121. For cause, the court may extend or reduce this exclusive
period. 11 U.S.C. § 1121(d). The exclusive right of the debtor in possession to file a plan is lost and any party in interest,
including the debtor, may file a plan if and only if (1) a trustee has been appointed in the case, (2) the debtor has not
filed a plan within the 120-day exclusive period or any extension granted by the court, or (3) the debtor has not filed a
plan which has been accepted by each class of claims or interests that is impaired under the plan within the 180-day
period or any extensions granted by the court. 11 U.S.C. § 1121.
If the exclusive period expires before the debtor has filed and obtained acceptance of a plan, other parties in interest
in a case, such as the creditors' committee or a creditor, may file a plan. Such a plan may compete with a plan filed by
another party in interest or by the debtor. If a trustee is appointed, the trustee is responsible for filing a plan, a report
of why the trustee will not file a plan, or a recommendation for the conversion or dismissal of the case.
11 U.S.C. § 1106(a)(5). A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and
solicitation.
It should be noted that, in a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in
possession to liquidate the business under more economically advantageous circumstances than a chapter 7
liquidation. It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the
distribution of the proceeds than in a chapter 7 case.
Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a chapter 11 plan and section 1123(b) lists
the discretionary provisions. Section 1123(a)(1) provides that a chapter 11 plan shall designate classes of claims and
interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors,
unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.
Under section 1126(c) of the Code, an entire class of claims accepts a plan if the plan is accepted by creditors that hold
at least two-thirds in amount and more than one-half in number of the allowed claims in the class. Under section
1129(a)(10), if there are impaired classes of claims, the court cannot confirm a plan unless the plan has been accepted
by at least one class of non-insiders who hold impaired claims. "Impaired" claims are claims that are not going to be
paid completely or in which some legal, equitable, or contractual right is altered. Moreover, under section 1126(f),
holders of unimpaired claims are deemed to have accepted the plan.
Under section 1127(a) of the Bankruptcy Code, the proponent may modify the plan at any time before confirmation, but
the plan as modified must meet all the requirements of chapter 11. Federal Rule of Bankruptcy Procedure 3019
provides that, when there is a proposed modification after balloting has been conducted and the court finds after a
hearing that the proposed modification does not adversely affect the treatment of any creditor who has not accepted
the modification in writing, the modification shall be deemed to have been accepted by all creditors who previously
accepted the plan. If it is determined that the proposed modification does have an adverse effect on the claims of
nonconsenting creditors, then another balloting must take place.
Because more than one plan may be submitted to the creditors for approval, Federal Rule of Bankruptcy Procedure
3016(a) requires that every proposed plan and modification be dated and identified with the name of the entity or
entities submitting such plan or modification. When competing plans are presented and meet the requirements for
confirmation, the court must consider the preferences of the creditors and equity security holders in determining which
plan to confirm.
Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after
notice, to hold a hearing on the confirmation of a plan. If no objection to confirmation has been timely filed, the Code
allows the court to determine that the plan has been proposed in good faith and according to law.
Fed. R. Bankr. P. 3020(b)(2). Before confirmation can be granted, the court must be satisfied that there has been compliance with all the
other requirements of confirmation set forth in section 1129 of the Code, even in the absence of any objections. In order
to confirm the plan, the court must find that (1) the plan is feasible, (2) it is proposed in good faith, and (3) the plan and
the proponent of the plan are in compliance with the Code. In addition, the court must find that confirmation of the plan
is not likely to be followed by liquidation or the need for further financial reorganization.
While some courts have a practice of issuing a discharge order in a case involving an individual, a separate order of
discharge is usually not entered in a chapter 11 case. Section 1141(d)(1) specifies that the confirmation of a plan
discharges the debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor
is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan
creates new contractual rights, replacing or superseding pre-bankruptcy contracts.
There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge.
Confirmation of a plan of reorganization will discharge any type of debtor- -corporation, partnership, or individual--from most types of prepetition debts. It does not, however, discharge an individual debtor from any debt made
nondischargeable by section 523 of the Bankruptcy Code. Confirmation does not discharge the debtor if the plan is a
liquidation plan, as opposed to one of reorganization, and the debtor is not an individual. When the debtor is an
individual, confirmation of a liquidation plan will effect a discharge unless grounds would exist for denying the debtor
a discharge if the case were proceeding under chapter 7 instead of chapter 11. 11 U.S.C. §§ 1141(d)(2), 727(a).
At any time after confirmation and before "substantial consummation" of a plan, the proponent of a plan may modify
a plan if the modified plan would meet certain Bankruptcy Code requirements. 11 U.S.C. § 1127(b). This should be
distinguished from preconfirmation modification of the plan. A modified postconfirmation plan does not automatically
become the plan. A modified postconfirmation plan in a chapter 11 case becomes the plan only "if circumstances
warrant such modification" and the court, after notice and hearing, confirms the plan as modified pursuant to chapter
11 of the Code.
Federal Rule of Bankruptcy Procedure 3020(d) provides that, "[n]otwithstanding the entry of the order of confirmation,
the court may issue any other order necessary to administer the estate." This authority would include the
postconfirmation determination of objections to claims or adversary proceedings which must be resolved before a plan
can be fully consummated. Sections 1106(a)(7) and 1107(a) of the Bankruptcy Code require a debtor in possession or
a trustee to report on the progress made in implementing a plan after confirmation. A chapter 11 trustee or debtor in
possession has a number of responsibilities to perform after confirmation, including consummating the plan, reporting
on the status of consummation, and applying for a final decree.
A revocation of the confirmation order is an undoing or cancellation of the confirmation of a plan. A request for
revocation of confirmation, if made at all, must be made by a party in interest within 180 days of confirmation. The court,
after notice and hearing, may revoke a confirmation order "if and only if [the confirmation] order was procured by
fraud." 11 U.S.C. § 1144.
A final decree closing the case must be entered after the estate has been "fully administered."
Fed. R. Bankr. P. 3022.
Local bankruptcy court policies may determine when the final decree should be entered and the case closed.
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