Plan of Reorganization

The Plan of Reorganization is the central document in a Chapter 11 bankruptcy case, proposing how the debtor will reorganize debts, restructure operations, and emerge from bankruptcy. The plan classifies claims and equity interests, specifies treatment of each class, and provides for ongoing operations post-confirmation. Plans are subject to creditor voting (for impaired classes) and court confirmation under § 1129. Confirmation generally discharges debts that arose before confirmation, except as the plan, the confirmation order, or § 1141(d) provides, allowing the reorganized debtor to emerge with restructured obligations.

Required plan contents, § 1123

Section 1123 requires plans to: (1) designate classes of claims and interests; (2) specify any classes that are unimpaired; (3) specify treatment of each impaired class; (4) provide same treatment within class (unless holder agrees otherwise); (5) provide adequate means for plan implementation; (6) for a corporate debtor, include a charter provision prohibiting nonvoting equity securities; (7) contain only provisions consistent with the interests of creditors and equity holders and with public policy in selecting officers and directors. Permitted provisions are listed in § 1123(b).

Classification

Plans classify claims and interests by similar legal character. Standard classes: (1) secured claims, typically separate class per secured creditor; (2) priority non-tax claims, such as certain wage claims (administrative expense, involuntary-gap and priority tax claims are not classified, § 1123(a)(1)); (3) general unsecured, typically one class; large general unsecured may be subdivided; (4) convenience class, small claims paid in full; (5) subordinated claims; (6) equity interests, typically separate classes for preferred and common. Classification affects voting and confirmation; gerrymandering classification to manipulate voting is closely scrutinized.

Disclosure statement, § 1125

Section 1125 requires disclosure statement providing "adequate information" for creditors to make informed plan vote. Standard contents: (1) business description; (2) events leading to bankruptcy; (3) plan terms, class treatments, timing, distributions; (4) liquidation analysis, comparing plan to Chapter 7 liquidation; (5) financial projections; (6) risk factors; (7) tax consequences; (8) voting procedures. A court-approved disclosure statement is required before postpetition solicitation (§ 1125(b)), with exceptions for solicitation that began before the case (§§ 1125(g), 1126(b)), for small business cases (§ 1125(f)), and for Subchapter V cases, where § 1125 does not apply unless the court orders otherwise (§ 1181(b)). Disclosure statement hearing is significant pre-confirmation event.

Voting, § 1126

Plan voting mechanics: (1) impaired classes vote; unimpaired classes presumed to accept; (2) creditor class acceptance, class accepts if approved by 2/3 in amount AND more than 1/2 in number of voting creditors; (3) equity class acceptance, 2/3 in amount of voting interests; (4) insider votes count toward class acceptance under § 1126(c) but are disregarded in deciding whether at least one impaired class accepted (§ 1129(a)(10)); the court may also designate votes not cast or solicited in good faith (§ 1126(e)). Voting tabulation typically conducted by claims agent or trustee. Voting outcomes determine whether confirmation requires cramdown or proceeds with consent.

Confirmation requirements, § 1129

Section 1129(a) confirmation requires (16 specific findings): (1) plan complies with Code; (2) proponent complies with Code; (3) good faith proposal; (4) payments approved by court reasonable; (5) governance disclosure; (6) regulatory approvals; (7) best interests test (each holder in an impaired class that has not accepted receives at least what it would receive in Chapter 7); (8) acceptance by all impaired classes OR cramdown under § 1129(b); (9) priority claims paid in full or treated per § 1129(a)(9); (10) if any class is impaired, at least one impaired class accepts, without counting insider acceptances; (11) feasibility, plan likely to succeed; (12) US Trustee fees paid; (13)-(16) various technical requirements. Cramdown under § 1129(b) permits confirmation over dissenting class with "fair and equitable" treatment.

Effect of confirmation

Plan confirmation has substantial effects: (1) discharge, of debts arising before confirmation, except as the plan, the confirmation order, or § 1141(d) provides (for example, no discharge for a non-individual debtor whose plan liquidates substantially all its property and who does not continue in business); (2) binding, all parties bound by plan terms whether or not they voted; (3) vesting of property, property vests in reorganized debtor free of liens (except as provided); (4) injunction, against acts inconsistent with plan; (5) res judicata, preclusive effect on issues addressed in plan; (6) discharge injunction, the § 524(a)(2) injunction against collecting discharged debts as personal liabilities of the debtor.

Pre-packaged and pre-arranged plans

Two common Chapter 11 approaches: (1) pre-packaged plan, plan negotiated and accepted by major creditors before petition filing; voting completed pre-petition; often a short time to confirmation after filing (prepetition votes count if solicited in compliance with § 1126(b)); (2) pre-arranged plan, substantial creditor support negotiated pre-petition without completed voting; rapid plan filing post-petition. Both can reduce Chapter 11 cost and uncertainty. Used heavily in larger restructurings to manage timeline and cost.