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Chapter 11 Bankruptcy: Equal Treatment of Creditors

chapter-11.jpgChapter 11 bankruptcy is also known as a reorganization bankruptcy. This is because companies enter Chapter 11 with the goal of shedding overly restrictive obligations, restructuring their debt and emerging as a stronger and healthier business. The Chapter 11 process requires that companies come up with a realistic reorganization plan. A restructuring plan must be approved before a company can move forward with reorganization. Chapter 11 plans will only be approved if they meet all relevant legal requirements. One of the most often contested requirements is the provision that demands the equal treatment of creditors. An experienced Chapter 11 lawyer can help your company craft an effective reorganization plan that meets this legal requirement along with all others.

The Equal Treatment Requirement

The Bankruptcy Code set outs requirements for what must be included in a Chapter 11 reorganization plan. Under the code, the contents of the plan must specify:

  • All classes of claims and interests that will be impaired by the plan;
  • All classes of claims and interests that will be left unaffected by the plan;
  • The exact nature of how each impaired class will have their claim or interest altered; and
  • That all similarly situated creditors are treated equally under the plan.

While equal treatment may sound like a simple concept, many Chapter 11 reorganization plans are extremely complex, and as a result, disputes often arise over what exactly qualifies as equal treatment. It is critical to address this issue carefully when crafting a restructuring plan. A Chapter 11 plan can be delayed or outright rejected if it does not provide for proper treatment of similarly situation creditors.

Chapter 11: Classification of Claims and Interests

The key to ensuring that your Chapter 11 plan equally treats creditors is to ensure that creditor claims and interests are appropriately classified. The ability to group creditors into classes is one of the most powerful tools available to a business entering Chapter 11. When it is done correctly, it can help facilitate your plan's approval through the voting process.

Claims do not need to be completely identical to be placed in the same class. However, claims should not be placed in different classes unless there is a reasonable distinction that justifies the legal separation of those claims. If a dispute arises over the classification of a claim, a California court will review the issue under the 'clearly erroneous' standard. Some deference is given to the company that crafted the plan, but the court will still need to consider the reasoning that led to the classifications.

Contact Our Office Today

If your California business is financially distressed and in need of restructuring, Chapter 11 bankruptcy may be the best path forward. At Diemer, Whitman & Cardosi, LLP, our experienced San Jose bankruptcy lawyers have extensive experience helping companies through the business bankruptcy process. If you have any questions about Chapter 11 plans, please contact our firm today to set up a free initial consultation. We represent clients throughout Silicon Valley and the Bay Area.

Sources:

https://www.law.cornell.edu/uscode/text/11/chapter-11

http://cdn.ca9.uscourts.gov/datastore/uploads/guides/stand_of_review/I_Definitions.html#_Toc199130795

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