Winning! How to Confirm a Contested Chapter 11 Plan Connecticut Bankruptcy Conference October 3, 2019 1
Fuel Supply Inc. Chapter 11 Plan Key Players: • Debtor – Fuel Supply Inc. – supplier of oil / propane to residential customers; owned by Charley Smith • Landlord, Inc. – owned by Charley’s sister; leases property to Debtor for operations • Local Bank – owed (i) $3.5M on LOC secured by A/R valued at $4.2M & (ii) $2M on term loan secured by equipment worth $1.5M; personal guaranties by Charley • Creditors’ Committee – consists of 5 largest creditors incl. 3 fuel suppliers owed $1 mill each. Debtor stopped doing business w/supplier Maverick who is not happy 2
Fuel Supply, Inc. Proposed Plan • Debtor to refinance within 6 months to pay the Bank 60% of receivables ($2.5M); Debtor will self‐finance or get $$ from Charley and family until refi • Term Loan (bought by off –shore trust (FOI) created by Charley’s friend right before bankruptcy) will be paid $1M from refinancing • Unsecured Creditors get (i) $100K/year for 5 years from a projected 5% increase in earnings; and (ii) all the proceeds of avoidance actions • Debtor assumes lease with sister’s company at $15K /month (which is market). Sister’s mortgage is $7,000 per month. The lease is “triple net”. • Charley and a family member will infuse $500,000 into the Debtor to fund the Plan. After confirmation Charley will be the president and sole shareholder of the Debtor. Charley to get a release of claims. • Administrative and priority creditors paid according to the Code, but sales taxes to be paid in equal monthly installments over 5 years from the Effective Date. 3
Votes and Objections Votes • Class 1 : Bank Revolver, allowed, impaired. Voted to reject. • Class 2 : FOI Term Loan, allowed, impaired. Voted to accept. • Class 3 : Unsecured, allowed (except as to Maverick), impaired. Voted to reject if you include Maverick. Voted to accept if you don’t. • Class 4 : Equity, contested impaired. Voted to accept. Objections • Bank : (1) the Plan is not feasible because the Revolver is not addressed, and refinance is speculative, (2) the Bank not being paid fair value of its allowed secured claim, and (3) Charley not putting in sufficient new value to retain equity and the absolute priority rule bars confirmation. • Committee/Maverick : Generally supports the Plan (since in liquidation unsecured creditors will get nothing), but limited objection to paying an insider, Charley’s sister, rent in excess of the carrying cost of the building (the lease is triple net). • Maverick : objection on feasibility grounds, that the plan is not “fair and equitable”. Also oppose release for Charley, on grounds that it is insufficient and it has valid claims against Charley for fraud. • Taxing Authority : Has filed an objection that the repayment period violates the Code and it does not consent to a longer payment term, • UST : Objection to release requested by Charley and to the Plan, generally, on feasibility grounds. 4
Was the plan submitted in good faith? • Does that fact that FOI is a friend of the Debtor matter? • Can they be the consenting impaired class? 5
Is the plan feasible? • Can the debtor “kick the can down the road” and hope it finds exit financing after confirmation? • Or, does the Debtor need a term sheet in hand? 6
Charley’s release • Can he get one? • If so under what circumstances? • What about Maverick’s claims? 7
Absolute Priority Rule • Can unsecured creditors be paid when the Bank is objecting? • Can Charley keep the equity if unsecured creditors do not consent to the plan? • Does the new value exception apply? • Is there really even a new value exception? • Does the Bank control the unsecured class? • Can you separately classify the Bank’s deficiency claim? 8
Is Sister an insider? • What happens if the lease is rejected? • Can the bankruptcy court force the sister to accept lower lease payments? 9
Valuation/Liquidation Analysis • How do you value the AR for purposes of reorganization vs. liquidation? • Does it matter? • What evidence do you put on concerning AR valuation? • Do you need an expert? 10
Recommend
More recommend
