Chapter 11 v Chapter 13 - Part 4

I think we left off somewhere around where the disclosure statement was to be filed.  The purpose of a disclosure statement is to provide "adequate information" for a claim holder to either accept or reject the plan. 

In a nutshell, the disclosure statement should really explain how and why your plan will work, and to some extent "sell" your plan to the entities which will end up voting on it.  As to what information is necessary to accomplish this, it is really common sense.  It is important to substantiate your DS -  use bank statements, property leases, pay stubs, tax returns, appraisals, listing agreements if real property is to be sold etc....

The DS should also describe how the various classes have been designated and how they will be treated.  It should address any assumed leases or planned adversaries.  In the context of our hypothetical, much of the information used to draft the disclosure statement is the same information remitted to the Chapter 13 trustee. 

The plan is really who gets paid what and when, and other legal consequences of plan acceptance.  I personally find it way more fun to draft Chapter 11 plans, as you have a lot of latitude on how to structure your plan.  There is no time limit.  It can last for years or have a lump sum payout and pretty much anything inbetween.  However, when drafting it keep in mind while you could conceivably force a class to acceptance its payments in pennies, they probably would be disinclined to accept your plan, nor would you pass a good faith test, so try to keep it within bounds.

The DS and Plan are filed simultaneously and there is a hearing on the adequacy of statement.  There are really two types of objections to DS -  (1)  Legitimate objections because you have glossed over some point, and there is missing information.  By glossed over, I mean made some assertions regarding the plan lacking substantiation.  (2)  Veiled plan objections.  There are a few cases out there standing for the proposition that if your plan is so bad, it can be denied at the DS stage because going beyond that is pointless.  This usually is the case if your plan has completely improper classifications or attempts to do something that isn't allowed.  However, some creditors borrow a page from the Chapter 13 trustee and use this oppurtunity to launch myriads of objections to the plan that are premature in an attempt to derail the case. 

The good news is the more numerous and detailed the veiled plan objections are is excellent evidence your DS provides adequate information.  If a creditor has all kinds of objections about how shitty your plan is for them, you can tell the court, that you provided adequate information because said creditor has enough to information to conclude the plan sucks.  In fact you can trap creditors on this, if you make some statement as to is there any information that the plan proponent could provide which would cause said creditor to accept the plan.  Usually the answer is no and the DS is approved.

Anyway back to our example, this whole process can take a while.  I'd estimate around 15 hours or so of legal work, but let's say it is 25 hours total and at $300 per, our Debtor is now in the hole to his counsel for $7500, but the DS is approved and the plan is set for confirmation.  Keep track of these numbers as there is going to be an item by item breakdown at the end.

Joe our debtor has been at this point paying his quarterly fees and any necessary adequate protection payments, but he is not making "plan payments" so to speak.  If things are going well, you will notice your client's DIP accounts steadily increasing every month.  If they are not increasing, your client is either completing bullshit operating reports (not unheard of) or the plan isn't going to work.

It is important to note we have not heard the term 22C and definitely no discussion about expenses for cell phone data plans or prom dresses for kids or about the job prospects for a 21 year old child kicking it at home while masquerading as a community college student.

So this concludes part 4.  We might go up to parts 7 or 8 before I'm done.  However, I am going to take a brief interlude to explain some Chapter 13 adventures from this week.