Competing Plans in Bankruptcy

Over the last few years, we've seen a number of cases run parallel plans in bankruptcy - sometimes contentiously between creditors trying to argue they are the fulcrum and sometimes for legitimate business reasons. Distressed Debt Investing contributor George Mesires of Ungaretti & Harris LLP has written a piece talking about competing plans in bankruptcy. Enjoy!

Competing Plans in Bankruptcy
One of a debtor’s most powerful levers during a bankruptcy case is its exclusive right to file a plan of reorganization during the first 120 days of a bankruptcy case.  This period, commonly known as the exclusivity period, coupled with the automatic stay, provides a debtor breathing room to focus its efforts on, among other things, formulating a plan of reorganization to exit bankruptcy.  Exclusivity provides a debtor an opportunity to develop its plan of reorganization without the threat of its strategy immediately being derailed by competing constituents.  Certainly the careful debtor may work with other constituents to build consensus around its plan of reorganization, but exclusivity gives a debtor the initial leverage over its creditors and other constituents during the important early few months of a bankruptcy case.

Often times, however, particularly in complex bankruptcy cases, 120 days is simply not enough time for a debtor to formulate its plan of reorganization, and in such circumstances, debtors often request, and courts routinely grant, extensions of the exclusivity period.  Indeed, in many cases, debtors were granted seemingly indefinite extensions, a practice that led some critics to contend that exclusivity extensions unduly prolonged the time and increased the expense of chapter 11 reorganizations to the detriment of other constituencies.  Even though the Bankruptcy Code permitted a party in interest to petition the bankruptcy court for authority to file a competing plan, such requests were rarely granted.  Generally, if a bankruptcy case appeared to be on-track, courts deferred to the debtor so that the debtor could maintain control of the plan process.

To address the concern that debtors were hiding behind the cloak of exclusivity to the detriment of other constituents, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amended the Bankruptcy Code provision relating to exclusivity by imposing an 18 month limit on a debtor’s exclusivity period.  The amendment was intended to motivate a debtor and other constituents to develop a consensual plan, thereby reducing the time and expense of a protracted chapter 11 proceeding.  Notwithstanding its laudable intent, the BAPCPA amendment relating to exclusivity may have, in fact, complicated the chapter 11 process by stripping bankruptcy courts of their discretion to extend exclusivity and automatically permitting other constituents to file competing plans after 18 months.

The Exclusivity Period
Pursuant to § 1121(b) of the Bankruptcy Code, a debtor has the exclusive right to file a plan of reorganization during the first 120 days after the commencement of a chapter 11 case.  If a debtor files a plan during this exclusive filing period, section 1121(c)(3) of the Bankruptcy Code grants an additional 60 days during which the debtor may solicit acceptances of that plan, and no other party in interest may file a competing plan.

Section 1121(d) of the Bankruptcy Code provides that the Court may, in its discretion, “for cause,” extend these periods: “[o]n request of a party in interest . . . and after notice and a hearing, the court may for cause reduce or increase the 120-day period or the 180-day period referred to in this section.”  11 U.S.C. § 1121(d)(1).

Although the Bankruptcy Code does not define “cause,” a number of courts have looked to the Bankruptcy Code’s underlying legislative history for assistance in construing this term in this context.  See, e.g., In re Ravenna Indus., Inc., 20 B.R. 886, 889 (Bankr. N.D. Ohio 1982); accord In re Amko Plastics, Inc., 197 B.R. 74, 77 (Bankr. S.D. Ohio 1996); Gaines v. Perkins (In re Perkins), 71 B.R. 294, 297-98 (W.D. Tenn. 1987); Teachers Ins. and Annuity Ass’n of Am. v. Lake in the Woods (In re Lake in the Woods), 10 B.R. 338, 342-45 (E.D. Mich. 1981).

Courts hold that the decision to extend the exclusivity period is left to the sound discretion of a bankruptcy court and should be based on the totality of circumstances in each case.  See, e.g., 203 North LaSalle Street P’ship v. Bank of Am. Nat’l Ass’n (In re 203 North LaSalle Street P’ship), Nos. 99 C 7110 and 99 C 7108, 1999 1206619 at *4 (N.D. Ill. Dec. 13, 1999) (“[T]he Code commits the decision on extending the exclusivity period to the discretion of the bankruptcy court.”); First Am. Bank of N.Y. v. Southwest Gloves & Safety Equip., Inc., 64 B.R. 963, 965 (D. Del. 1986); In re Dow Corning Corp., 208 B.R. 661, 664 (Bankr. E.D. Mich. 1997); In re McLean Indus., Inc., 87 B.R. 830, 834 (Bankr. S.D.N.Y. 1987).

In determining whether cause exists for an extension of a debtor’s exclusivity period, courts have relied on a variety of factors, each of which alone may constitute sufficient grounds for extending the exclusivity period.  Factors that courts have routinely considered to determine whether “cause” exists include: (a) the existence of good faith progress towards reorganization; (b) the size and complexity of the debtor’s case; (c) a finding that the debtor is not seeking to extend exclusivity to pressure creditors to accede to the debtor’s reorganization demands; (d) existence of an unresolved contingency; and (e) the fact that the debtor is paying its bills as they come due.  However, in no event shall the exclusivity period be “be extended beyond a date that is 18 months after the [petition] date,” and the 180-day period “may not be extended beyond a date that is 20 months after the [petition] date.” 11 U.S.C. § 1121(d)(2).

BAPCPA Amendment Concerning Exclusivity
Following the BAPCPA amendment to § 1121, regardless of how well the bankruptcy case is progressing, bankruptcy courts no longer have any discretion to consider requests for an extension of exclusivity beyond 18 months after the petition date.  Accordingly, after 18 months, any party in interest has the ability to file a competing plan of reorganization.  The sudden ability of other parties in interest to file a plan of reorganization can have a dramatic effect on the negotiating posture of the competing constituents and significantly alter their negotiating leverage.  Moreover, competing plans will likely add further complexity (both procedural and substantive) to the proceedings.

The Tribune bankruptcy case is probably the most prominent example of a post-BAPCPA case that became significantly more complex and protracted following the expiration of the debtors’ exclusivity period.  Following the automatic expiration of exclusivity in August 2010, and efforts by a mediator to garner support for a single plan, four plans of reorganization were filed by various creditor groups.  And nearly two years after the expiration of exclusivity, Tribune is still in bankruptcy.  (Yet to be fair, confirmation hearings are set for next month).  See also, Lehman Brothers (three competing plans); Tronox (two competing plans); Meruelo Maddux Properties (three competing plans).  All of these cases posed significant procedural challenges after the competing plans were filed, mainly because the Bankruptcy Code is silent as to how competing plans should be presented to the creditor body.  Should competing plans be presented to voters simultaneously or sequentially?  What processes should govern dissemination of the vast amounts of information associated with competing plans?

Regardless of the outcome of these cases, one question that will remain unanswered is whether such cases would have been more efficiently administered had the bankruptcy court retained the discretion to extend the debtor’s exclusivity period, or whether amended § 1121 compounded the cost and length of the bankruptcy proceedings.

George is a monthly contributor to the Distressed Debt Investing blog and practices restructuring and bankruptcy law at Ungaretti & Harris LLP.  George can be reached at grmesires@uhlaw.com.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.