Chapter 11 Plan Exclusivity under the Revised Code

The rub lies in the amendment to section 1121(d) and the anticipated lasso effect it will have on how plan exclusivity currently works in practice. Under the soon-to-be-old section 1121(d), “on request of a party in interest … the court may for cause reduce or increase the 120-day period or the 180-day period.” 11 U.S.C. ' 1121(d). In bankruptcy courts all across the country, it is quite customary for debtors to use this provision to seek to extend exclusivity, and such extensions are almost routinely granted. Moreover, it is not atypical to see a debtor request and be granted multiple extensions of the exclusive period, thereby retaining a perceived competitive advantage that may extend months, and in numerous cases, years beyond the initial 120- and 180-day periods, respectively.

The amendment to section 1121(d) sets a maximum on the debtor's exclusive period. While a bankruptcy judge still has discretion to extend for cause a debtor's ability to file a plan beyond the initial 120-day period, the court may not extend that period beyond 18 months from the order of relief date whether for cause or for any other reason. Similarly, the amendment to Section 1121 effectively ends the exclusive period if a debtor's plan is not confirmed within 20 months from the petition date.

Effect of the New Amendments to Section 1121

The revised section 1121 only affects cases filed on or after Oct. 17, 2005. Thus, its effect on Chapter 11 cases remains a matter of speculation at this time. However, Congress has made it very clear that, “ready or not,” the debtor will have a relatively short period of time to file a plan, and solicit and garner acceptances thereof before other parties-in-interest are able to come to the table with a plan of their own.

Whether the court's inability to extend the exclusive periods will have an impact on a given Chapter 11 case, and what impact it will have, will turn on the circumstances of each case, including: 1) whether there is an active creditors' committee; 2) whether the committee can file a plan that meets the absolute priority rule; 3) whether there is significant secured debt and, if so, how many tranches; 4) whether there are disputed intercreditor issues that predominate; 5) whether equity is in the money, or thinks it is; and 6) whether there is any party in a position to file a plan of reorganization that is confirmable absent consensus. Each of these issues, and others, could determine whether the amendment affects a particular case. Indeed, there are cases in which exclusivity has lapsed in which no party has filed a plan. The only certainty is that all parties-in-interest will know from day one of the case the exact date that exclusivity will terminate.

Chaos

Debtors have long argued that exclusivity should be maintained because chaos will ensue if multiple plans can be filed, and that debtors are in the best position to negotiate a consensual plan of reorganization. We will soon find out if this is true. Or will we? While the amendment appears to be an absolute, lawyers are nothing if not creative, so it remains to be seen how they will deal with the amendment. For example, there is no provision in the Bankruptcy Code (as currently constituted or as amended) that addresses how quickly a party may obtain a hearing with respect to a disclosure statement or plan, or whether a court must indeed send out all competing plans that are filed. While Bankruptcy Rule 3017(b) provides that after a disclosure statement is filed the court “shall” hold a hearing on at least 25 days' notice, there is no outside time set for a hearing. This lack of a deadline may give courts discretion to invoke their ability to control their docket to attempt to bring some order to any perceived chaos. There may also be entirely new litigation over what plan(s) should be solicited.

Costly

Debtors also argue that competing plans are far too costly to the estate, do not maximize returns for the debtor's creditors and, consequently, are not be in the best interest of the debtor, its estates and its creditors. While likely true in a certain number of cases as pure statistics would suggest, it is not a notion that can be accepted wholesale and has, in some cases, proven to be untrue. Nonetheless, in those cases where a competing plan scenario would severely handicap the debtor's ability to reorganize or worse, force a conversion to Chapter 7 because the debtor is made administratively insolvent by or anticipates being made administratively solvent by a confirmation fight, debtors may be compelled to file a plan before exclusivity expires and get that plan promptly confirmed. Alternatively, where multiple plans are filed, if cost of solicitation (or multiple solicitations) is a factor, will the amendment spawn litigation regarding what plan(s) should be solicited?

Confusion

Debtors also suggest that competing plans are too confusing for the general creditor body and only frustrate the plan confirmation process. To the extent that there is real merit to this argument, the reality of the amendment to section 1121 will require that debtors make Chapter 11 plans more reader friendly in order to overcome this obstacle or the debtors themselves will be forced to take significant remedial steps by having to galvanize their various constituencies and file plans much earlier in the life cycle of a case.

Here We Come — Maybe

A truncated period of exclusivity will provide parties-in-interest such as creditors committees, secured lenders, landlords, employees and/or those interested in acquiring the debtor's business, just to name a few, a concrete date by which they can file a plan if they so choose. The common assumption is that this will shift the bargaining leverage in a case as the non-debtor constituencies have a new bullet in their arsenal. While the amendment will no doubt be welcome in many cases by non-debtor constituencies, it is not at all clear that major players will find the amendment helpful in all cases. For example, under the current law, some courts have approved the concept of “co-exclusivity,” that is, plan exclusivity is maintained as to all parties except the one, usually the committee or a secured lender, who has bargained with the debtor for the ability to file its own plan. While some courts refuse to permit co-exclusivity, finding no basis in the Bankruptcy Code for such a concept, this tool used by major players appears to no longer be available. Non-debtor constituencies may find that they, too, are forced to the bargaining table sooner than they would like to be.

More Pre-packs

One possible effect of debtors racing to beat the clock may be an increase in the number of “pre-packaged” bankruptcy filings. Although not the subject of the within article, it seems that congress has taken pains to facilitate the filing of pre-packs by making some changes to Bankruptcy Code section 1125(g) (debtor may re-solicit parties in the post-petition period that were solicited during the pre-petition period as long as the pre-petition solicitation was compliant with applicable non-bankruptcy law) and section 341(e) (which obviates the need for a meeting of creditors or equity security holders if the debtor filed a plan and solicited acceptances of the plan pre-petition). Because the clock does not start to run until the case is filed, where possible, parties may look to pre-packs as a preferred choice.

Conclusion

Congress may have had in mind that shortening exclusivity will bring all the parties to the bargaining table more quickly and result in companies spending less time under the auspices of the bankruptcy court. One could argue that by shortening the potential period of exclusivity, one will limit a debtor's ability to negotiate and work out complicated and unique problems in an organized way. Not every bankruptcy case is the same and more often than not, cases present unique and complex problems, the solutions to which are only occasioned by the narrowing of issues and the clarity that comes with the passage of time. Congress' “one-size-fits-all” approach may lead to greater inefficiency and higher costs to the debtor's estate. What will remain to be seen is whether this more abbreviated period of time actually will prompt more filing of plans or not.

The filing of a case under Chapter 11 of the Bankruptcy Code bestows certain “inalienable” rights upon a debtor. In addition to the hallmarks of a bankruptcy case, such as the automatic stay's “breathing space” and the “fresh start” of a discharge, debtors have traditionally enjoyed rather protracted periods of “plan exclusivity.” Plan exclusivity, as it is commonly referred, is that period in a Chapter 11 case in which the debtor has the “exclusive” right to file a plan of reorganization. With the passage of the amendment to Bankruptcy Code section 1121, Congress has encroached upon this particular “inalienable” right.

Changes to Section 1121(d)

Under both the current and revised section 1121, “only a debtor may file a plan until after 120 days after the date of the order for relief under this Chapter.” 11 U.S.C. ' 1121(b). Further, both the current and the newly enacted section 1121 allow the debtor 180 days for confirmation of a plan. 11 U.S.C. ' 1121(c)(3). So, if all that remains the same, where's the rub?

The rub lies in the amendment to section 1121(d) and the anticipated lasso effect it will have on how plan exclusivity currently works in practice. Under the soon-to-be-old section 1121(d), “on request of a party in interest … the court may for cause reduce or increase the 120-day period or the 180-day period.” 11 U.S.C. ' 1121(d). In bankruptcy courts all across the country, it is quite customary for debtors to use this provision to seek to extend exclusivity, and such extensions are almost routinely granted. Moreover, it is not atypical to see a debtor request and be granted multiple extensions of the exclusive period, thereby retaining a perceived competitive advantage that may extend months, and in numerous cases, years beyond the initial 120- and 180-day periods, respectively.

The amendment to section 1121(d) sets a maximum on the debtor's exclusive period. While a bankruptcy judge still has discretion to extend for cause a debtor's ability to file a plan beyond the initial 120-day period, the court may not extend that period beyond 18 months from the order of relief date whether for cause or for any other reason. Similarly, the amendment to Section 1121 effectively ends the exclusive period if a debtor's plan is not confirmed within 20 months from the petition date.

Effect of the New Amendments to Section 1121

The revised section 1121 only affects cases filed on or after Oct. 17, 2005. Thus, its effect on Chapter 11 cases remains a matter of speculation at this time. However, Congress has made it very clear that, “ready or not,” the debtor will have a relatively short period of time to file a plan, and solicit and garner acceptances thereof before other parties-in-interest are able to come to the table with a plan of their own.

Whether the court's inability to extend the exclusive periods will have an impact on a given Chapter 11 case, and what impact it will have, will turn on the circumstances of each case, including: 1) whether there is an active creditors' committee; 2) whether the committee can file a plan that meets the absolute priority rule; 3) whether there is significant secured debt and, if so, how many tranches; 4) whether there are disputed intercreditor issues that predominate; 5) whether equity is in the money, or thinks it is; and 6) whether there is any party in a position to file a plan of reorganization that is confirmable absent consensus. Each of these issues, and others, could determine whether the amendment affects a particular case. Indeed, there are cases in which exclusivity has lapsed in which no party has filed a plan. The only certainty is that all parties-in-interest will know from day one of the case the exact date that exclusivity will terminate.

Chaos

Debtors have long argued that exclusivity should be maintained because chaos will ensue if multiple plans can be filed, and that debtors are in the best position to negotiate a consensual plan of reorganization. We will soon find out if this is true. Or will we? While the amendment appears to be an absolute, lawyers are nothing if not creative, so it remains to be seen how they will deal with the amendment. For example, there is no provision in the Bankruptcy Code (as currently constituted or as amended) that addresses how quickly a party may obtain a hearing with respect to a disclosure statement or plan, or whether a court must indeed send out all competing plans that are filed. While Bankruptcy Rule 3017(b) provides that after a disclosure statement is filed the court “shall” hold a hearing on at least 25 days' notice, there is no outside time set for a hearing. This lack of a deadline may give courts discretion to invoke their ability to control their docket to attempt to bring some order to any perceived chaos. There may also be entirely new litigation over what plan(s) should be solicited.

Costly

Debtors also argue that competing plans are far too costly to the estate, do not maximize returns for the debtor's creditors and, consequently, are not be in the best interest of the debtor, its estates and its creditors. While likely true in a certain number of cases as pure statistics would suggest, it is not a notion that can be accepted wholesale and has, in some cases, proven to be untrue. Nonetheless, in those cases where a competing plan scenario would severely handicap the debtor's ability to reorganize or worse, force a conversion to Chapter 7 because the debtor is made administratively insolvent by or anticipates being made administratively solvent by a confirmation fight, debtors may be compelled to file a plan before exclusivity expires and get that plan promptly confirmed. Alternatively, where multiple plans are filed, if cost of solicitation (or multiple solicitations) is a factor, will the amendment spawn litigation regarding what plan(s) should be solicited?

Confusion

Debtors also suggest that competing plans are too confusing for the general creditor body and only frustrate the plan confirmation process. To the extent that there is real merit to this argument, the reality of the amendment to section 1121 will require that debtors make Chapter 11 plans more reader friendly in order to overcome this obstacle or the debtors themselves will be forced to take significant remedial steps by having to galvanize their various constituencies and file plans much earlier in the life cycle of a case.

Here We Come — Maybe

A truncated period of exclusivity will provide parties-in-interest such as creditors committees, secured lenders, landlords, employees and/or those interested in acquiring the debtor's business, just to name a few, a concrete date by which they can file a plan if they so choose. The common assumption is that this will shift the bargaining leverage in a case as the non-debtor constituencies have a new bullet in their arsenal. While the amendment will no doubt be welcome in many cases by non-debtor constituencies, it is not at all clear that major players will find the amendment helpful in all cases. For example, under the current law, some courts have approved the concept of “co-exclusivity,” that is, plan exclusivity is maintained as to all parties except the one, usually the committee or a secured lender, who has bargained with the debtor for the ability to file its own plan. While some courts refuse to permit co-exclusivity, finding no basis in the Bankruptcy Code for such a concept, this tool used by major players appears to no longer be available. Non-debtor constituencies may find that they, too, are forced to the bargaining table sooner than they would like to be.

More Pre-packs

One possible effect of debtors racing to beat the clock may be an increase in the number of “pre-packaged” bankruptcy filings. Although not the subject of the within article, it seems that congress has taken pains to facilitate the filing of pre-packs by making some changes to Bankruptcy Code section 1125(g) (debtor may re-solicit parties in the post-petition period that were solicited during the pre-petition period as long as the pre-petition solicitation was compliant with applicable non-bankruptcy law) and section 341(e) (which obviates the need for a meeting of creditors or equity security holders if the debtor filed a plan and solicited acceptances of the plan pre-petition). Because the clock does not start to run until the case is filed, where possible, parties may look to pre-packs as a preferred choice.

Conclusion

Congress may have had in mind that shortening exclusivity will bring all the parties to the bargaining table more quickly and result in companies spending less time under the auspices of the bankruptcy court. One could argue that by shortening the potential period of exclusivity, one will limit a debtor's ability to negotiate and work out complicated and unique problems in an organized way. Not every bankruptcy case is the same and more often than not, cases present unique and complex problems, the solutions to which are only occasioned by the narrowing of issues and the clarity that comes with the passage of time. Congress' “one-size-fits-all” approach may lead to greater inefficiency and higher costs to the debtor's estate. What will remain to be seen is whether this more abbreviated period of time actually will prompt more filing of plans or not.