USA Law and Practice Contributed by: Davis Lee Wright, Natalie D. Ramsey, Katherine M. Fix and Rachel Jaffe Mauceri, Robinson & Cole LLP
a creditor retains the ultimate right to have the value determined for distribution purposes. Secured claims are determined pursuant to 11 USC Section 506. Obtaining Credit A DIP or trustee is authorised to operate the debtor’s business, obtain unsecured credit and incur unse - cured debt in the ordinary course. The court may authorise a trustee to incur unsecured debt outside the ordinary course following a hearing. This debt will be treated as a post-petition administrative expense (11 USC Section 364 (a), (b)). If a trustee or DIP is unable to obtain unsecured credit, then, after notice and a hearing, the court may author - ise the incurrence of debt that: • has priority over any or all other allowed adminis - trative expenses; • is secured by a lien on property that is not subject to a lien; • is secured by a junior lien on property that is sub - ject to a lien; or • is secured by a lien senior to or equal to an existing lien on estate property, but only if adequate protec - tion is provided to the current lienholder (11 USC Section 364 (c), (d)). A DIP may use “cash collateral” (such as cash, cash equivalents and cash proceeds from accounts receiv - able) with lien holder consent. Bankruptcy courts may authorise cash collateral usage without consent so long as lien holders are provided “adequate protec - tion” (11 USC Section 363 (c), (e)). Chapter 11 Plan The plan is a contract between the debtor and its vari - ous creditors that resolves the debtor’s pre-petition liabilities. Once confirmed by the bankruptcy court, the terms of the plan bind all creditors, equity hold - ers and parties-in-interest. Plan terms may modify the rights of secured creditors, unsecured creditors and equity holders. A plan must, among other things:
• specify the treatment of each impaired class; • provide the same treatment for each claim or interest in a particular class, unless the holder of a claim or interest agrees to less favourable treat - ment; and • provide adequate means for implementation of the plan (11 USC Section 1123 (a)). These plan terms may: • impair or leave unimpaired any class of claims or interests; • provide for the assumption, rejection or assignment of executory contracts and unexpired leases; • provide for the sale of property and the distribution of sale proceeds; and • modify the rights of holders of secured and unse - cured claims (11 USC Section 1123 (b)). Chapter 11 plans prohibit “non-consensual third-party releases”. Consensual third-party releases of claims held by a creditor against a non-debtor are permit - ted. “Consent” continues to be a subject of litigation, with certain bankruptcy courts requiring creditors to affirmatively “opt in” to providing a release, and others allowing a less stringent “opt out”. Plan Timing A DIP has the exclusive right to propose and solicit a Chapter 11 plan for the 120 days and 180 days, respectively, after filing bankruptcy. The bankrupt - cy court may extend this exclusive period up to 18 months after the case is filed. Following the expiration of this exclusive period, any party-in-interest (includ - ing the DIP) may file and solicit a reorganisation plan. The plan confirmation process typically takes at least 60 days, and sometimes far longer, after the proposed Chapter 11 plan is filed. Plan Solicitation To solicit a Chapter 11 plan for acceptance, the plan proponent must prepare and receive approval of a disclosure statement that will be sent with a copy of the proposed plan and a ballot. Disclosure statements provide creditors voting on the plan with “adequate information” about the plan and each creditor’s pro - posed treatment under the plan (11 USC Section 1125).
• designate classes of claims and interests; • specify which classes are unimpaired;
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