Creditor Opposition to a Prepackaged Chapter 11 Plan

Creditor Opposition to a Prepackaged Chapter 11 Plan

by George E.B. Maguire and Jasmine Ball

This Emerging Issues Analysis addresses creditor opposition to a prepackaged chapter 11 plan. Presented with a "coercive" prepackaged bankruptcy, there are two broad lines of defense open to an opposing creditor. First, the creditor may challenge directly the treatment it receives under the plan and the company's ability to bind it. Second, the creditor may in a variety of ways challenge the proposed recoveries of other constituencies.

Excerpt:

A creditor may have a number of substantive reasons, other than realizing "holdout value," for opposing a restructuring plan, including inadequate treatment of its claim under the plan in light of the financial condition of the restructuring company and the treatment of other parts of the company's capital structure; disagreement with the company and other creditors over relative legal entitlements; loss of confidence in existing management; and concerns over feasibility of the plan. However, as discussed above, a restructuring effected through a prepackaged plan will, if accepted and confirmed, bind an opposing creditor.

Presented with a "coercive" prepackaged bankruptcy, there are two broad lines of defense open to an opposing creditor. First, the creditor may challenge directly the treatment it receives under the plan and the company's ability to bind it. Second, the creditor may in a variety of ways challenge the proposed recoveries of other constituencies. In either case, the prospective ability to inject delay and uncertainty into the contemplated chapter 11 case may be a dissenting creditor's principal source of leverage in prepetition plan negotiations. However, both opposing creditors and constituencies supporting the plan need to evaluate the effects of possible challenges asserted in the chapter 11 case upon the process, the company and ultimate recoveries.

Challenging Treatment Under the Plan

Improper Classification. A dissenting holder can be bound by a plan that is accepted by the requisite percentage of other holders in the dissenter's class. However, each class must consist only of substantially similar claims, and in general courts do not permit classes to be gerrymandered to dilute opposing votes or to create an accepting impaired class. A dissenting holder that is classified with accepting holders of a different debt issue should investigate the possibility of a challenge to classification. While there are no specific rules, claims of different contractual priorities or with material differences in other contractual rights should not be classified together. [footnotes omitted]

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George E.B. Maguire is a partner with Debevoise & Plimpton LLP in New York City and is a member of the firm's Bankruptcy & Restructuring Group. Mr. Maguire represents debtors and creditors and other parties in workouts and restructurings as well as chapter 11 proceedings. Mr. Maguire is a frequent contributing author to various publications, including the Collier Business Workout Guide. He is a former member of the Association of the Bar of the City of New York's Committee on Bankruptcy and Corporate Reorganization. His representations include Ronald Lauder in the sale of his stake in Central European Media Enterprises to Apax Partners and of Verizon Communications in its acquisition of MCI. Mr. Maguire is a graduate of Princeton University (A.B., 1980), Oxford University (B.A., 1983) and the University of Virginia (J.D., 1986), where he was a member of the Virginia Law Review.

Jasmine Ball is a partner with Debevoise & Plimpton LLP in New York City and is a member of the firm's Bankruptcy & Restructuring Group. Ms. Ball regularly represents debtors, investors, creditors and other parties in distressed mergers and acquisitions, debt and equity financings and refinancings, complex restructurings and chapter 11 proceedings. Her representations include large suppliers to distressed companies in various sectors and Delta Air Lines, Inc. as special aircraft counsel in its chapter 11 proceeding. Ms. Ball is a frequent contributor to various publications and is contributing author to the Collier Business Workout Guide. Ms. Ball is a member of the American Bar Association, the New York State Bar Association and the Association of the Bar of the City of New York and a member of its Committee on Bankruptcy and Corporate Reorganization. Ms. Ball is a graduate of Princeton University (B.S., 1996) and the University of Michigan (J.D., 1999), where she was an Executive Editor of the Michigan Journal of International Law.