Now it is time for Joe to confirm his plan of re-organization. In order for a plan to be confirmed, there 15 elements that need to be met - See 11 USC 1129(a). The most important one is getting one impaired class to accept the plan. Once you get that, you are in the game.
I don't think I discussed what "impairment" means. It is any claim whose legal rights are altered by the plan. The easiest way to get an impaired class on board is via modifying a vehicle loan. There is no "hanging paragraph", so that 2013 Porsche you bought 2 days before you filed is fair game.
In this scenario, remember Joe had 36 more months on his ride @ 300 per month. Let's say his vehicle is worth $10k and the present value of the loan is $12,500. Very simple, split the claim, go 5 years secured @ 4.5% for the $10k and slide the $2.5k into your unsecured class. Usually this will get you some sort of response from the secured claim holder. We want this.
At this point, the end game of the car loan is irrelevant as long as Joe and the lender agree to whatever terms. This is where it gets slick. Joe's objective is to get the lender to agree to some sort of terms that require it to accept the plan as to the secured class AND accept as to the unsecured class (bifurcated portion). Now, without any voting, we have an acceptance of class 1 and an acceptance of class 2.
Since, I have a consenting class in my back pocket the rest is really academic. Joe's "I-J" is still $600 or so, but who cares? I'd slide our class two about $250 per month for 24 months. Most of the time, the rest of the unsecured creditors won't bother to return ballots. If they don't, you have both impaired classes accepting and you are confirmed.
Let's say some guy in Amex's BK department tries to play hero and rejects as to class 2. If he is the only other voter, Class 2 hasn't accepted. Not a problem at all. A little background here.
When a Debtor faces this situation, where he has met all the confirmation elements aside from all impaired classes accepting the plan, he must attempt to "cram down the plan". This is colloquially known as the "Absolute Priority Rule". While it sounds like a Richard Marx album and rather intimidating, at its essence it is pretty simple - if the non-consenting impaired class is secured, the creditor must be paid the full value of its secured claim w/ interest. That is usually easy to work out. If the non-consenting class is unsecured, then you must pay this class the full amount of its claim (THIS IS A PARAPHRASE, IT IS ACTUALLY MORE COMPLICATED THAN THIS OFTEN).
Joe has no desire to pay his unsecured creditors in full. In fact his precise words are "fuck that", I'd rather be sending tax refunds to the trustee for 5 years than doing this. The good news is according to some courts, BACPA has said "fuck that" to the Absolute Priority Rule in individual 11s. In the 9th Circuit, the BAP in In re Fridman has held the APR does not imply in individual 11s.
First, next time you are in Judge Clarkson's courtroom be sure to thank him for this ruling. Second, the absence of the APR makes confirming individual 11s so easy, it isn't funny. Some judges though, are too cool for the BAP (ironically, Judge Clarkson has a great opinion, In re Rinard where he makes a compelling argument the BAP is not binding on lower bankruptcy courts, or in effect a judge can be too cool for the BAP).
Let's say you find yourself in Santa Ana, Courtroom 5B. The APR is alive and well here. See In re Khamel. The situation is still not insurmountable. Joe must provide "new value". New value makes a lot of sense in non-individual cases, but in individual cases it can be a bit counter-intuitive. Again this is my paraphrase of new value - essentially the interests who are junior to the unsecured class (i.e. equity) must contribute money upon confirmation of the plan that represents the going concern value of the re-organized entity. I will provide a list of useful cases on this at the end of the series.
In an individual case, basically the Debtor must provide money that represents the going concern value of himself. Further this money has to come from some place beyond the estate. As stated by Judge Albert, this new value needs to come from "uncle joe" as a sort of gift. It is wise to plan ahead for this, so it is important to have "Uncle Joe" in place well before plan confirmation, so if needed he can pump 5 or 10,000 bucks into the plan which is probably sufficient to be new value. The best part, is this new value will in almost all likliehood go to administrative costs i.e. your fees.
Congrats. Joe has a confirmed Chapter 11 plan. He is a re-organized debtor. His name will be engraved on the Wall of Fame in the Office of the United States Trustee and he can tell all of his friends about the great job his attorney did and provide him a bunch of referrals for more Chapter 11 work.
Now it is time for comparison. Which is better for Joe? Stay tuned....
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