USA Law and Practice Contributed by: Davis Lee Wright, Natalie D. Ramsey, Katherine M. Fix and Rachel Jaffe Mauceri, Robinson & Cole LLP
tor from any diminution in the collateral value that occurs due to the passage of time or the creation of super-priority liens on the collateral. • Relief from the automatic stay – The bankruptcy court may lift or modify the automatic stay in favour of a secured creditor: (a) “for cause, including the lack of adequate pro - tection” in the secured creditor’s collateral; or (b) “the debtor does not have an equity in such property” and “such property is not necessary to an effective reorganization” (11 USC Section 362 (d)(1), (2)). • Enhanced cram-down treatment rights – If cram- down of a Chapter 11 plan is sought over a dis - senting secured creditor, the debtor must prove that the secured creditor receives: (a) full payment on the allowed amount of the secured claim over time (with a market inter - est rate) which equals the present value of the secured claim; (b) a new lien attaching to the proceeds, follow - ing any sale of collateral free and clear of the secured creditor’s liens, and that the secured creditor was provided with the opportunity to credit bid its secured claim at the sale; or (c) the “indubitable equivalent” of the allowed amount of its secured claim, such as a receiv - ing a lien on replacement collateral with the same or greater value and the same or lesser risk profile, receiving cash payments equal to the allowed claim value, or abandonment of the collateral to the secured creditor. Unsecured Creditors The general rule in bankruptcy is that all pre-petition general unsecured claims are treated the same as all other pre-petition general unsecured claims. Certain classes of trade creditors, however, may be entitled to priority treatment. • 11 USC Section 503 (b)(9) creditors – Trade credi - tors delivering goods to the debtor within 20 days of the bankruptcy filing are entitled to administra - tive expense priority for the value of the goods delivered during those 20 days. • Critical vendors – A debtor may seek to establish a “critical vendor” protocol to protect certain ven - dors that provide essential goods and services that
may provide for payment of pre-petition claims. This protocol, including any pre-petition payments, must be authorised by the bankruptcy court. • Convenience class creditors – These claims are generally paid as part of a confirmed Chapter 11 plan. Creditors holding de minimis or smaller unse - cured claims may be paid in full. Pursuant to 11 USC Section 1112, unsecured credi - tors (and other parties-in-interest) may request that the bankruptcy court convert a Chapter 11 reorgani - sation to a Chapter 7 liquidation, dismiss the Chapter 11 case “for cause”, appoint a Chapter 11 trustee or appoint an examiner, subject to the best-interests of the creditors; 11 USC Section 1112 (b)(4) provides a non-exclusive list of activities that may constitute “cause” for dismissal. Unsecured creditors may also petition to change the location of the Chapter 11 case or to dismiss the case as a “bad faith” filing based on the debtor’s pre-petition actions or actions resulting in the filing of the bankruptcy. Unsecured creditors can file a proof of claim asserting the value of their claims against the debtor. The claim amount asserted in the proof of claim is deemed valid unless a party-in-interest objects. Unsecured creditors have the right to be represented by an official commit - tee of unsecured creditors and to receive information from the official committee, including a recommen - dation on whether the individual unsecured creditor should vote to accept or reject the Chapter 11 plan. Unsecured creditors have the right to vote on accept - ing or rejecting the Chapter 11 plan, except in two scenarios: • if the plan provides unsecured creditors will be paid in full; or • if the plan provides that unsecured creditors will not receive any distribution. To cram-down a Chapter 11 plan on dissenting unse - cured creditors, the debtor must demonstrate: • that at least one impaired creditor class has voted to accept the plan and the value provided to unsecured creditors under the plan is at least as
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