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Planning a Smooth Chapter 11 Distribution Process
Companies seeking relief under Chapter 11 often have complex and intriguing issues to address. Sometimes, there is a failure to give proper attention and planning to the end goal: distribution. Term definitions and crafting efficient provisions are critical to all aspects of every plan. From a disbursing agent's perspective, some of these are important for establishing a structure to easily administer distribution, and these are the focus of this article.
The basis for distributions to creditors is, of course, confirmation of a plan of reorganization, or as permitted (and recently quite prevalent), a plan of liquidation. One particular difference of note when dealing with a reorganizing debtor or a liquidating debtor is the provision concerning unclaimed funds. For example, with respect to liquidating Chapter 11 plans, there is no point in using common boilerplate language that effectively contemplates unclaimed property will go to a defunct entity or the asset buyer.
We already know that the Bankruptcy Code and Rules are brief on the topic of distribution. Bankruptcy Code Sections 347(b), 1143 and Federal Bankruptcy Rule 3021 are our only guides. According to Rule 3021, after a plan is confirmed, distributions are to be made: 1) on claims that have been allowed; and 2) to the holder of record at the time of commencement of distribution, unless a different time is fixed by the plan or the order confirming the plan. Section 347(b) together with Section 1143 in relevant reading provides that unclaimed property remaining at the expiration of five years after entry of the confirmation order becomes the property of the debtor or of the entity acquiring the assets of the debtor under the plan.
Undeniably, five years is a long time for property to remain in limbo. Thus, we not only want to have clear guidance on how to effect distributions, but we also want to be sure the disposition of unclaimed property is properly planned in order to avoid limbo as well as other unwanted issues along the way.
Following are some basic plan provision headings, key terms, questions and comments to consider when drafting your plan's definitions and distribution provisions:
Allowed Claim
Creditors are often confused about the concept of “allowed claim,” especially once the plan has been confirmed and distributions begin. Some have argued that if their claim has not been objected to as of the effective date of the plan then it must be an allowed claim. You can eliminate the headache of dealing with such assertions, however, by efficiently defining the term(s). Be sure to include a plan provision that contemplates post-effective date resolution of claims and limit post-confirmation amendments to proofs of claim as being subject to court order.
Compliance with Tax Requirements
Consider incorporating a request for taxpayer identification number into the form of ballot. Early in the case, if you have a claims agent, be sure that he or she is recording any taxpayer identification numbers provided in proofs of claim. This may reduce some cost and effort in determining who needs a W-9 solicitation before distributions can begin. Certainly, do not lose sight of the significance of the time, effort and potential cost necessary to complete this requirement.
Distribution Dates
Allow for discretionary timing of distributions subsequent to the initial distribution date. Plans that contemplate distributions on a date certain, e.g., the last day of a calendar quarter or year, may create logistical challenges for a reorganized debtor whose accounting resources are likely already fully occupied. Make use of the magic words “or as soon as reasonably practicable thereafter.” In order to facilitate smooth preparation, include an interim distribution value threshold that must be met by a specified number of days in advance of any distribution date. Avoid any expectation that distributions need immediately be made as disputed claims are allowed, so that time and effort is not unduly wasted on conducting small issuances. Establish the expectation of next business day distributions when date of distribution falls on a non-business day.
Distribution Record Date
This is incredibly important to a disbursing agent. Absent setting a distribution record date, the distribution is to be made to the “holder of a claim on the commencement of distribution.” This can be quite problematic. Logistically, being able to establish the holder of a claim as of a date certain, and to set distribution files as reviewed and final prior to execution, is critical. Thus, setting a distribution record date facilitates easier planning and reduces the likelihood of distribution errors. Be sure to specify that on the distribution record date, the claims register and other various transfer registers shall be closed, and there shall be no further changes in the record holders of any claim or interest. Clarify that in order to be recognized, any claim transfers must be complete by the distribution record date ( i.e., the objection period of such transfer has passed without objection). There should be no obligation to recognize any transfer of any claim or interest occurring after the distribution record date.
Note that for purposes of executing distributions, when a plan contemplates distributions to beneficial holders of publicly traded bonds or equity, and such holders are offered an election that affects how they are treated, it is essential to segregate the bonds or equity shares with the Depository Trust Company (DTC) by requesting Contra CUSIPs (Committee on Uniform Securities Identification Procedures) or escrow CUSIP accounts. If the securities at DTC are segregated, there will never be a question as to which bond or share made which election. This avoids the nightmare of trying to deliver distributions but still needing to prove beyond the holder's word to what distribution the holder is actually entitled. Escrow CUSIPs are usually desirable when there is to be no further trading or account transfers, and the distribution is contemplated to occur soon after their creation. Contra CUSIPs work better if distributions will not be completed until a later date, or when future trading in the underlying securities is anticipated or desired.
Sometimes, a plan will provide that the securities are to be surrendered and cancelled upon the effective date while also defining a different distribution record date. The plan is requesting surrender (aka “presentment” in securities lingo) and establishing that the registered holders will receive distribution after the surrender has occurred. In such instances, avoid confusion by specifying that the distribution record date ' for such securities holders only ' shall be the date of surrender, since such holders would technically no longer be the holder of a claim after surrender. A surrender provision is generally preferable when the distribution to the publicly traded securities is final. If additional future distributions are contemplated, then a simple distribution record date with no surrender provision may be preferable.
For all other claims, a distribution record date will almost always be of value. Simply put, lack of a distribution record date opens the door to potential future costs, while the simple inclusion of a distribution record date provision will ensure that the distribution can be executed cleanly, whether immediately upon the effective date or even years later. A distribution record date equal to the voting record date is often the simplest way to go, especially in any situation where any of the parties are entitled to make elections that impact their distribution ' the party that voted will always be the party receiving the elected distribution in such instances. If it is desired that the distribution record date is later, or even equal to the Effective Date, it is essential, as mentioned above, that publicly traded securities are segregated into Contra or Escrow CUSIPs when such elections exist, and that proper steps are similarly taken with any private registration agents, etc., to ensure that an accurate segregated accounting can take place using distribution record date holdings.
Delivery of Distributions
Establish any anticipated mode of delivery and the guidelines for an address where distributions may be made. A very simple provision that works well is as follows.
Any distributions or notices which a Claim Holder, Interest Holder or other Person or Entity is or becomes entitled to receive pursuant to the Plan may be delivered by first class mail, postage prepaid, in an envelope addressed to that Claim Holder, Interest Holder or other Person or Entity, as the case may be, or an authorized agent of any of the foregoing at the address indicated on the latest notice of appearance or the latest Proof of Claim or other paper filed by any of the foregoing in the Bankruptcy Court. The burden of providing the Debtor with any change of address shall be on such Claim Holder, Interest Holder or other Person or Entity. Absent any such filing, the address set forth in the relevant Schedules may be used. Distributions made in accordance with this provision shall be deemed delivered to such Claim Holder, Interest Holder or other Person or Entity regardless of whether such is actually received by that Claim Holder, Interest Holder or other Person or Entity. In the event that any distribution to any Holder is returned as undeliverable, the Unclaimed Distributions provisions stated herein shall apply.
Interest on Claims
Include a plan provision that interest shall not accrue on disputed claims during the post-confirmation claims resolution process.
Manner of Cash Payments
Establish that cash distributions will be made in U.S. funds and allow flexibility for wire or check. Consider a “Time Bar to Cash Payments” checks need a stale date after which a check will be voided. Requests for re-issuance of any check should be made by the holder to whom such check was originally issued. Establish a deadline after which the funds represented by such voided checks are treated as unclaimed distributions and any claim in respect of such voided check is discharged and forever barred (notwithstanding any federal or state escheat laws to the contrary).
Finally, don't forget the “No” provisions:
No De Minimis Distributions
Consider including a provision that excuses payment of and discharges claims so small that the cost of making the distribution exceeds the dollar amount of such distribution. Twenty-five dollars is a commonly accepted estimate used among banks and corporations as the “cost” of cutting a check. Whatever the de minimis threshold, we have seen anywhere from $10 to $100 provided for the treatment of such funds, e.g. , to other available cash, unclaimed distributions, or charity.
No Distributions Pending Allowance
Ensure clarity that no payments or distributions need be made with respect to all or any portion of a claim that is not an allowed claim unless and until all objections to such claims have been settled or withdrawn or have been determined by a final order to be an allowed claim.
No Payment of Fractional Dollars or Shares
The simplest way to deal with fractional amounts is to apply rounding down to the nearest whole number. If shares are being distributed, be sure to establish that no compensation will be provided for fractional shares rounded down. Note that someone should model and run all the numbers contemplated for distribution before a plan is filed. That sounds obvious, but there certainly have been circumstances where the methodologies or language of a plan are inconsistent with practical application for distribution execution.
No Distributions on Late-Filed Claims
This is great not only in the context of limiting any complexity or necessity of recalculating distribution amounts, it can serve as an operational disallowance of claims and obviates the need for action on such claims.
Setoff and Recoupment
Have a provision that authorizes but does not require setoff and recoupment before distribution, reserve rights.
Unclaimed Distributions
Section 347(a) mandates remaining property of an estate shall be paid into the court, however, the section applies only to cases under Chapters 7, 12 and 13. Section 347(b) applies to cases under Chapters 9, 11 and 12, and provides that unclaimed property becomes property of the debtor or of the entity acquiring the assets of the debtor. In liquidating Chapter 11 cases, we sometimes see unclaimed funds deposited into the registry of the court despite the inapplicability of ' 347(a) to Chapter 11 cases. This has been the case in situations where the debtor entity no longer exists and assets were not sold to a single entity. Even so, it is not likely that in a liquidating scenario there was any actual intent to provide unclaimed distributions to revert to the debtor or become the property of an asset buyer.
Many courts have adopted local rules allowing a Chapter 11 liquidating plan to provide that any unclaimed funds may be redistributed to a tax-exempt, not-for-profit, non-religious organization. However, such rules are not necessary so long as the plan contains such a provision, is voted upon, accepted and confirmed by the bankruptcy court. Such plan provisions may be general in nature, not specifically identify which not-for-profit is to receive the unclaimed distributions and often, the plan administrator will choose more than one. Note that the American Bankruptcy Institute's Endowment Fund has been designated as a qualified recipient of such unclaimed funds in several Chapter 11 cases, both large and small. It uses the funds received largely for research or educational purposes.
Conclusion
Advanced planning and proper attention to basic plan provisions and key terms, and also consistent, periodic claim and creditor data review can make a real difference in effecting an efficient, accurate and cost-saving distribution.
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'
Companies seeking relief under Chapter 11 often have complex and intriguing issues to address. Sometimes, there is a failure to give proper attention and planning to the end goal: distribution. Term definitions and crafting efficient provisions are critical to all aspects of every plan. From a disbursing agent's perspective, some of these are important for establishing a structure to easily administer distribution, and these are the focus of this article.
The basis for distributions to creditors is, of course, confirmation of a plan of reorganization, or as permitted (and recently quite prevalent), a plan of liquidation. One particular difference of note when dealing with a reorganizing debtor or a liquidating debtor is the provision concerning unclaimed funds. For example, with respect to liquidating Chapter 11 plans, there is no point in using common boilerplate language that effectively contemplates unclaimed property will go to a defunct entity or the asset buyer.
We already know that the Bankruptcy Code and Rules are brief on the topic of distribution. Bankruptcy Code Sections 347(b), 1143 and Federal Bankruptcy Rule 3021 are our only guides. According to Rule 3021, after a plan is confirmed, distributions are to be made: 1) on claims that have been allowed; and 2) to the holder of record at the time of commencement of distribution, unless a different time is fixed by the plan or the order confirming the plan. Section 347(b) together with Section 1143 in relevant reading provides that unclaimed property remaining at the expiration of five years after entry of the confirmation order becomes the property of the debtor or of the entity acquiring the assets of the debtor under the plan.
Undeniably, five years is a long time for property to remain in limbo. Thus, we not only want to have clear guidance on how to effect distributions, but we also want to be sure the disposition of unclaimed property is properly planned in order to avoid limbo as well as other unwanted issues along the way.
Following are some basic plan provision headings, key terms, questions and comments to consider when drafting your plan's definitions and distribution provisions:
Allowed Claim
Creditors are often confused about the concept of “allowed claim,” especially once the plan has been confirmed and distributions begin. Some have argued that if their claim has not been objected to as of the effective date of the plan then it must be an allowed claim. You can eliminate the headache of dealing with such assertions, however, by efficiently defining the term(s). Be sure to include a plan provision that contemplates post-effective date resolution of claims and limit post-confirmation amendments to proofs of claim as being subject to court order.
Compliance with Tax Requirements
Consider incorporating a request for taxpayer identification number into the form of ballot. Early in the case, if you have a claims agent, be sure that he or she is recording any taxpayer identification numbers provided in proofs of claim. This may reduce some cost and effort in determining who needs a W-9 solicitation before distributions can begin. Certainly, do not lose sight of the significance of the time, effort and potential cost necessary to complete this requirement.
Distribution Dates
Allow for discretionary timing of distributions subsequent to the initial distribution date. Plans that contemplate distributions on a date certain, e.g., the last day of a calendar quarter or year, may create logistical challenges for a reorganized debtor whose accounting resources are likely already fully occupied. Make use of the magic words “or as soon as reasonably practicable thereafter.” In order to facilitate smooth preparation, include an interim distribution value threshold that must be met by a specified number of days in advance of any distribution date. Avoid any expectation that distributions need immediately be made as disputed claims are allowed, so that time and effort is not unduly wasted on conducting small issuances. Establish the expectation of next business day distributions when date of distribution falls on a non-business day.
Distribution Record Date
This is incredibly important to a disbursing agent. Absent setting a distribution record date, the distribution is to be made to the “holder of a claim on the commencement of distribution.” This can be quite problematic. Logistically, being able to establish the holder of a claim as of a date certain, and to set distribution files as reviewed and final prior to execution, is critical. Thus, setting a distribution record date facilitates easier planning and reduces the likelihood of distribution errors. Be sure to specify that on the distribution record date, the claims register and other various transfer registers shall be closed, and there shall be no further changes in the record holders of any claim or interest. Clarify that in order to be recognized, any claim transfers must be complete by the distribution record date ( i.e., the objection period of such transfer has passed without objection). There should be no obligation to recognize any transfer of any claim or interest occurring after the distribution record date.
Note that for purposes of executing distributions, when a plan contemplates distributions to beneficial holders of publicly traded bonds or equity, and such holders are offered an election that affects how they are treated, it is essential to segregate the bonds or equity shares with the Depository Trust Company (DTC) by requesting Contra CUSIPs (Committee on Uniform Securities Identification Procedures) or escrow CUSIP accounts. If the securities at DTC are segregated, there will never be a question as to which bond or share made which election. This avoids the nightmare of trying to deliver distributions but still needing to prove beyond the holder's word to what distribution the holder is actually entitled. Escrow CUSIPs are usually desirable when there is to be no further trading or account transfers, and the distribution is contemplated to occur soon after their creation. Contra CUSIPs work better if distributions will not be completed until a later date, or when future trading in the underlying securities is anticipated or desired.
Sometimes, a plan will provide that the securities are to be surrendered and cancelled upon the effective date while also defining a different distribution record date. The plan is requesting surrender (aka “presentment” in securities lingo) and establishing that the registered holders will receive distribution after the surrender has occurred. In such instances, avoid confusion by specifying that the distribution record date ' for such securities holders only ' shall be the date of surrender, since such holders would technically no longer be the holder of a claim after surrender. A surrender provision is generally preferable when the distribution to the publicly traded securities is final. If additional future distributions are contemplated, then a simple distribution record date with no surrender provision may be preferable.
For all other claims, a distribution record date will almost always be of value. Simply put, lack of a distribution record date opens the door to potential future costs, while the simple inclusion of a distribution record date provision will ensure that the distribution can be executed cleanly, whether immediately upon the effective date or even years later. A distribution record date equal to the voting record date is often the simplest way to go, especially in any situation where any of the parties are entitled to make elections that impact their distribution ' the party that voted will always be the party receiving the elected distribution in such instances. If it is desired that the distribution record date is later, or even equal to the Effective Date, it is essential, as mentioned above, that publicly traded securities are segregated into Contra or Escrow CUSIPs when such elections exist, and that proper steps are similarly taken with any private registration agents, etc., to ensure that an accurate segregated accounting can take place using distribution record date holdings.
Delivery of Distributions
Establish any anticipated mode of delivery and the guidelines for an address where distributions may be made. A very simple provision that works well is as follows.
Any distributions or notices which a Claim Holder, Interest Holder or other Person or Entity is or becomes entitled to receive pursuant to the Plan may be delivered by first class mail, postage prepaid, in an envelope addressed to that Claim Holder, Interest Holder or other Person or Entity, as the case may be, or an authorized agent of any of the foregoing at the address indicated on the latest notice of appearance or the latest Proof of Claim or other paper filed by any of the foregoing in the Bankruptcy Court. The burden of providing the Debtor with any change of address shall be on such Claim Holder, Interest Holder or other Person or Entity. Absent any such filing, the address set forth in the relevant Schedules may be used. Distributions made in accordance with this provision shall be deemed delivered to such Claim Holder, Interest Holder or other Person or Entity regardless of whether such is actually received by that Claim Holder, Interest Holder or other Person or Entity. In the event that any distribution to any Holder is returned as undeliverable, the Unclaimed Distributions provisions stated herein shall apply.
Interest on Claims
Include a plan provision that interest shall not accrue on disputed claims during the post-confirmation claims resolution process.
Manner of Cash Payments
Establish that cash distributions will be made in U.S. funds and allow flexibility for wire or check. Consider a “Time Bar to Cash Payments” checks need a stale date after which a check will be voided. Requests for re-issuance of any check should be made by the holder to whom such check was originally issued. Establish a deadline after which the funds represented by such voided checks are treated as unclaimed distributions and any claim in respect of such voided check is discharged and forever barred (notwithstanding any federal or state escheat laws to the contrary).
Finally, don't forget the “No” provisions:
No De Minimis Distributions
Consider including a provision that excuses payment of and discharges claims so small that the cost of making the distribution exceeds the dollar amount of such distribution. Twenty-five dollars is a commonly accepted estimate used among banks and corporations as the “cost” of cutting a check. Whatever the de minimis threshold, we have seen anywhere from $10 to $100 provided for the treatment of such funds, e.g. , to other available cash, unclaimed distributions, or charity.
No Distributions Pending Allowance
Ensure clarity that no payments or distributions need be made with respect to all or any portion of a claim that is not an allowed claim unless and until all objections to such claims have been settled or withdrawn or have been determined by a final order to be an allowed claim.
No Payment of Fractional Dollars or Shares
The simplest way to deal with fractional amounts is to apply rounding down to the nearest whole number. If shares are being distributed, be sure to establish that no compensation will be provided for fractional shares rounded down. Note that someone should model and run all the numbers contemplated for distribution before a plan is filed. That sounds obvious, but there certainly have been circumstances where the methodologies or language of a plan are inconsistent with practical application for distribution execution.
No Distributions on Late-Filed Claims
This is great not only in the context of limiting any complexity or necessity of recalculating distribution amounts, it can serve as an operational disallowance of claims and obviates the need for action on such claims.
Setoff and Recoupment
Have a provision that authorizes but does not require setoff and recoupment before distribution, reserve rights.
Unclaimed Distributions
Section 347(a) mandates remaining property of an estate shall be paid into the court, however, the section applies only to cases under Chapters 7, 12 and 13. Section 347(b) applies to cases under Chapters 9, 11 and 12, and provides that unclaimed property becomes property of the debtor or of the entity acquiring the assets of the debtor. In liquidating Chapter 11 cases, we sometimes see unclaimed funds deposited into the registry of the court despite the inapplicability of ' 347(a) to Chapter 11 cases. This has been the case in situations where the debtor entity no longer exists and assets were not sold to a single entity. Even so, it is not likely that in a liquidating scenario there was any actual intent to provide unclaimed distributions to revert to the debtor or become the property of an asset buyer.
Many courts have adopted local rules allowing a Chapter 11 liquidating plan to provide that any unclaimed funds may be redistributed to a tax-exempt, not-for-profit, non-religious organization. However, such rules are not necessary so long as the plan contains such a provision, is voted upon, accepted and confirmed by the bankruptcy court. Such plan provisions may be general in nature, not specifically identify which not-for-profit is to receive the unclaimed distributions and often, the plan administrator will choose more than one. Note that the American Bankruptcy Institute's Endowment Fund has been designated as a qualified recipient of such unclaimed funds in several Chapter 11 cases, both large and small. It uses the funds received largely for research or educational purposes.
Conclusion
Advanced planning and proper attention to basic plan provisions and key terms, and also consistent, periodic claim and creditor data review can make a real difference in effecting an efficient, accurate and cost-saving distribution.
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