STRATEGIES FOR UNSECURED CREDITORS IN CHAPTER 11

I. DOING BUSINESS WITH A CHAPTER 11 DEBTOR

II. SERVING ON THE UNSECURED CREDITORS' COMMITTEE

(A) The appointment of the committee

(B) The powers and duties of the committee

(C) Fiduciary duty of the committee and its qualified immunity

III. MISCELLANEOUS CREDITOR STRATEGIES IN CHAPTER 11

(A) Analyze the debtor

(B) Seek the conversion or dismissal of the case

(C) Seek the appointment of a Chapter 11 trustee or an examiner

(D) Negotiate a plan with the debtor

(E) Propose a creditor plan

(F) Actively oppose the debtor's plan

(G) Litigating the exception to the absolute priority rule

(i) Policy rationale for the new value "exception"

(ii) Elements of the exception

(iii) Burden of proof

(iv) Strategies

IV. EVALUATING A CHAPTER 11 PLAN OF REORGANIZATION

(A) The relationship between the Plan and the Disclosure Statement

(B) Evaluating the Plan and Disclosure Statement

(1) Does the plan satisfy the "best interest of creditors' test"

(2) Does the plan provide unsecured creditors with their fair share of the reorganization value of the debtor

(3) Is the plan is feasible

(4) To the extent that the creditors are to accept payments over time, does the plan contain sufficient covenants to protect their interests

(5) Are there are any viable alternatives to the plan

(6) Is the plan supported by creditors' committee

(7) Does the plan expose the creditor to any postconfirmation litigation

(8) Are there any other reasons for accepting plan

V. POSTCONFIRMATION REMEDIES

The debtor's business will typically continue to operate in Chapter 11, either under the debtor's continued management (as a debtor-in-possession ("DIP")), or under the control of a Chapter 11 trustee. Unlike Chapter 7 which requires a trustee to obtain court authorization in order to continue to operate the business (see 11 U.S.C. §721), in Chapter 11 the DIP or trustee is authorized to operate the business unless the court orders otherwise (see 11 U.S.C. §1108).

The regular day to day operations of the business (the "ordinary course of business transactions") proceed pretty much as before without court or creditor oversight. Transactions which are not in the ordinary course of the business must be submitted to the creditors (typically the unsecured creditors' committee if one exists) for "comment", and to the court for approval, before the transaction may proceed. Accordingly, the distinction between what is ordinary and what is not is important in Chapter 11.

Courts have utilized a two-step conjunctive test for determining whether a transaction is in the ordinary course of business. The test is comprised of a "horizontal dimension" and a "vertical dimension." See, e.g., In re Roth American, Inc., 975 F.2d 949, 952-54 (3d Cir. 1992). The vertical dimension part of the test is also called the "creditors' expectation" test. The horizontal dimension tests whether, from an industry-wide perspective, the transaction is of the sort commonly undertaken by companies in that industry. For example, the trading of derivatives would likely not be in the ordinary course of business for a small domestic manufacturer. The vertical dimension tests whether, from the normal operations of the debtor, itself, the transaction is of the type that the debtor was likely to enter into in the course of its business. The primary focus of the vertical dimension aspect is therefore on the debtor's pre-petition business practices and conduct, although a court must also consider changing circumstances.

Under the Bankruptcy Code, debts incurred by a debtor in the ordinary course of its business, including trade credit, is automatically granted an "administrative expense" priority, 11 U.S.C. §364(a), and can be paid in the ordinary course without prior court approval. On the other hand, debts incurred outside of the ordinary course of a debtor's business must be preapproved by the bankruptcy court in order to be entitled to an administrative expense priority. See 11 U.S.C. §364(b). It would seem that in most cases, trade creditors doing business with a debtor prepetition, who continue to do business postpetition, will be entitled to an administrative expense claim under 11 U.S.C. §364(a).

There may be situations where an administrative expense priority is not alone sufficient to protect the postpetition creditor such as where the debtor's assets (both pre and post petition) are totally encumbered, or where the debtor is accruing unpaid postpetition claims. Where the debtor's assets are fully encumbered (so a liquidation would yield nothing for unsecured creditors), or where it appears that the debtor has become (or is becoming) administratively insolvent (i.e., the accrued administrative expense claims exceed the debtor's ability to pay), the creditor cannot rely on a simple administrative expense claim in order to get paid. The creditor's alternatives are to demand postpetition liens (under 11 U.S.C. §§ 364(c) and (d)) or some sort of superpriority treatment (under 11 U.S.C. §364(c)). Court approval must be sought, and granted, before the creditor can obtain this added protection. Before approving such added protection, the court will need to have been persuaded that the debtor cannot obtain credit under any less onerous terms.

There may be occasions where a creditor learns, after the extension of postpetition credit, that the debtor cannot or will not pay the debt in the ordinary course. In such a case the creditor's options include the refusal to do any further business until its outstanding postpetition claim has been paid, seeking an order from the court compelling the debtor to immediately pay the debt, or seeking the conversion of the case on the theory that the debtor's failure to pay evidences an inability to effect a reorganization. Although the creditor may be able to sue the debtor in state court, a judgment is a hollow victory since the automatic stay precludes execution on the judgment as long as the debtor remains in Chapter 11.

Another matter of concern for creditors doing business with a Chapter 11 debtor is their right to enforce the terms of their credit documents, e.g., their right to enforce provisions pertaining to late fees, interest, and collection costs. This is still an open question. The conventional wisdom for many years was that claims for late fees, etc., accruing on postpetition extensions of credit, would not be given an administrative expense priority unless such terms had been preapproved by the court under 11 U.S.C. §§364(b), (c), or (d). Thus, the §364(a) creditor would not be entitled to late fees, interest, costs of collection, etc., on a defaulted postpetition debt. In a relatively recent case out of the Eleventh Circuit, however, it was held that ordinary course of business trade creditors are entitled to interest on their postpetition extensions of credit as an administrative expense claim. Varsity Carpet Services, Inc. v. Richardson (In re Colortex Industries, Inc.), 19 F.3d 1371 (11th Cir. 1994). There are, however, some important limitations to this decision. First, while it is the law in the 11th Circuit, it is not binding elsewhere. Of course, it does constitute persuasive authority in other jurisdictions. Second, the interest accrual continues only as long as the debtor remains in Chapter 11. If the case is converted, the accrual stops. Third, the decision only addresses interest. Late fees, punitive rates of interest, and legal fees, may be treated differently. Finally, notwithstanding the potential accrual of interest, it is still necessary to collect the debt. The postpetition creditor has no greater right to execute against the assets of the estate then any other creditor and may still have to obtain a court order in order to compel payment.

In summary, the important point to remember is that extension of credit postpetition, although more likely to get repaid than prepetition unsecured debt, is not guaranteed. Accordingly, creditors continuing to do business with a debtor postpetition must exercise care.

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II. SERVING ON THE UNSECURED CREDITORS' COMMITTEE

(A) The appointment of the committee

The appointment of an unsecured creditors' committee is statutorily mandated by the Bankruptcy Code. 11 U.S.C §1102 provides that as soon as practicable after the order for relief in a Chapter 11, the United States Trustee shall appoint an unsecured creditors' committee and may appoint such additional committees as the United States Trustee deems appropriate, or as ordered by the court. [The exception is where the debtor has elected to be treated as a "small business" Chapter 11. See 11 U.S.C. §1102(a)(3). To be eligible as a small business the debtor's total liabilities must be less than $2 million. In such a case, the debtor can ask the court to not appoint an official committee. The tradeoff, however, is that the debtor's period of exclusivity and time to file a plan is shortened.]

Section 1102 provides that a committee of creditors appointed under the section shall ordinarily consist of the persons, willing to serve, that hold the seven (7) largest claims against the debtor of the kinds represented by such committee. United States Trustees will, however, appoint committees of as few as three members. They will generally not appoint committees of less than thre members and, therefore, notwithstanding the statutory mandate, a committee will only appointed if there is sufficient creditor interest. The United States Trustee will occasionally appoint committees larger than seven members where it is believed necessary to assure adequate representation of the class and/or where this is a great deal of interest in the case.

The committee appointed in accordance with §1102 is an "official committee" with the powers, rights, and duties specified in the Bankruptcy Code at §1103. The official committee is the representative of the class of creditors from which its members were drawn. There is, however, nothing to prevent creditors with similar interests to band together as unofficial committees. While such unofficial committees lack the specified rights and powers of an official committee, they still have standing in the case by virtue of their rights as parties in interest. Under 11 U.S.C. §1109, every creditor in the case (and thereby the "representative" of that creditor) has the right to "raise and may appear and be heard on any issue in a case...".

(B) The powers and duties of the committee

The powers and duties of the official committee are spelled out in 11 U.S.C. §1103. That section provides that the committee appointed under §1102 has the right, at a scheduled meeting at which a majority of members are present, and with court approval, to elect one or more attorneys, accountants, or other agents, to represent it or perform services for it, at the expense of the debtor. Section 1103 further provides that a committee may:

(1) consult with the trustee or DIP concerning the administration of the case;

(2) investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such a business, and any other matter relevant to the case or to the formulation of a plan;

(3) participate in the formulation of a plan, advise those represented by the committee of its determination as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;

(4) request the appointment of a trustee or examiner under 11 U.S.C. §1104; and

(5) perform such other services as are in the interest of those represented.

In practice, the activities of the committee generally falls into three categories: (a) reviewing, and advising the court of the committee's position on motions and other legal matters which arise during the case; (b) evaluating the debtor's prepetition conduct for possible causes of action against insiders or other parties that would benefit the estate; and (c) evaluating the likelihood of the debtor successfully effecting a reorganization, investigating alternatives to any debtor plan, and formulating and implementing a strategy for maximizing the recovery of the committee's constituency.

(C) Fiduciary duty of the committee and its qualified immunity

Given its official standing, access to professionals paid for by the estate, and the fact that it represents an entire class of creditors, the committee normally has better access to information about the case then do most other creditors. The committee's views are often given great weight by its constituents, particularly recommendations as to how to vote on a plan. Furthermore, while a court will not always follow the recommendation of the committee, it will generally give committee views great deference. The committee is therefore an extremely important, and potentially powerful, party in the case. In apparent consideration for this "power", there is a fiduciary duty imposed on the members of the committee. See, e.g., Cynthia A. Futter, Protecting Committee Members from Potential Liability Arising from Committee Participation, Bankruptcy Litigation Newsletter, Vol. 1, No. 3, p. 8 (ABA Section of Litigation July, 1994), citing Shaw & Levine v. Gulf & Western Ind., Inc. (In re Bohack Corp.), 607 F.2d 258 (2d Cir. 1979).

The fiduciary duty requires committee members to be "honest, loyal, trustworthy, and without conflicting interests and with undying loyalty and allegiance to their constituents' and to not use their position to further their own personal interests at the expense of the debtor or other creditors." Id., citing Johns-Manville Sales Corp. v. Doan (In re Johns-Manville Corp.), 26 B.R. 919, 925 (Bankr. S.D.N.Y. 1983). Counsel to the committee owes a fiduciary duty not only to the committee and its constituency, but also to the court. Id., citing United Steelworkers of America v. Lampl (In re Mesta Machine Co.), 67 B.R. 151,157 (Bankr. W.D. Pa. 1986). However, the fiduciary obligation of the committee, its members, and its counsel, do not extend to the debtor or the estate generally. Id., citing In re Microboard Processing, Inc. 95 B.R. 283, 285 (Bankr. D. Conn. 1989).

Several courts have considered the extent of the immunity of committee members for liability for their actions while serving on the committee. In one early decision the court held that committee members did not have absolute immunity, but did enjoy a qualified immunity. In re Tucker Freight Lines, Inc., 62 B.R. 213 (Bankr. W.D. Mich. 1986). The conclusion that committee members enjoy a qualified immunity has been generally followed. See, e.g., Luedke v. Delta Air Lines, 159 B.R. 385 (S.D.N.Y. 1993); In re Drexel Burnham Lambert Group, Inc., 138 B.R. 717 (Bankr. S.D.N.Y. 1992).

The qualified immunity extends to conduct within the scope of the committee's statutory or court-ordered authority. Bruce Nathan, Liability of Creditors' Committee Members, ABI Journal, p. 36, October 1995; Pan Am Corp. v. Delta Air Lines Inc., 175 B.R. 438, 515 (S.D.N.Y. 1994). Actions by the committee involving willful misconduct, or activities beyond those authorized by the statute or by court order, take the committee out of its qualified immunity. Id. The Pan Am court defined willful misconduct as either the intentional performance of an act with knowledge that the performance of that act will probably result in injury, or the intentional performance of an act in such a manner as to imply reckless disregard of the probable consequences. For example, a creditors' committee urging the rejection of a plan for reasons that they knew, or would have known but for their recklessness, to be false would violate their fiduciary duty and deprive them of any limited immunity they might otherwise hold. Tucker Freight, 62 B.R. at 216.

Participation on a creditors' committee can be a rewarding experience. Not only does the participation increase the member's knowledge and range of experiences, but it can also be satisfying to work with others in an effort to maximize the recovery for the committee's constituency. However, participation does impose certain duties and responsibilities on the members, including, but not limited to, the obligation to act in good faith on behalf of the committee's constituency. In order to make sure that it stays within its qualified immunity, the committee should engage counsel to advise it on its duties and responsibilities, it should not take advantage of its position to benefit its members to the detriment of the bankruptcy estate or its constituency, and it should refrain from any conduct which constitutes willful misconduct or exceeds its statutory duties.

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III. MISCELLANEOUS CREDITOR STRATEGIES IN CHAPTER 11

Although Chapter 11 is a judicial proceeding, the success or failure of the reorganization effort is related to the quality of the turnaround strategy of the debtor's management and the viability of the business. While what goes on in court will affect the legal rights of the various parties to the case, it is unlikely to determine whether the debtor will successfully reorganize (where the company is need of an operational turnaround). Accordingly, while legal strategies are important, what ultimately determines the creditors' recovery is the value of the debtor's business.

Chapter 11 provides numerous tools to facilitate an operational turnaround as well as a financial restructuring by a debtor. These tools include, but are not limited to: the automatic stay; the ability to abandon burdensome property; the ability to avoid preferential and fraudulent transfers; the ability to reject burdensome executory contracts and leases; the ability to alter (subject to certain important limitations) secured and unsecured claims; and the ability to bind dissenting creditors to the reorganization plan. These tools are, however, equally available to the creditors should they wish to take charge of the reorganization effort. Creditors are therefore not entirely at the mercy of a debtor or its management in Chapter 11.

The strategies ultimately pursued by creditors in a Chapter 11 depends on the facts and circumstances of the case. The strategies are not mutually exclusive. Several can be pursued at the same time. While it is usually the creditors' committee which spearheads the effort for creditors in Chapter 11, strategy formulation and implementation is not limited to that group. Any party in interest, including individual creditors, can pursue any of these strategies. See 11 U.S.C. §1109(b). Some of the strategic moves available to creditors are the following:

(A) Analyze the debtor

The analysis of the debtor is less a separate strategy than a first step in any strategy formulation. Such an analysis would include:

(1) determining the liquidation value of the debtor and how the creditors would come out in a liquidation;

(2) determining the cause of the debtor's failure;

(3) determining the feasibility and advisability of a change in management;

(4) conducting an analysis of the business including such things as the efficiency of operations, the existence of surplus assets which can be liquidated without adversely affecting the debtor's competitive position, an analysis of the debtor's competitive position in its industry; etc.;

(5) analysis of the status and type of (priority) tax obligations;

(6) analysis of secured claims, whether those claims were properly perfected, the value (7) analysis of the debtor's prepetition dealings with insiders;

(8) analysis of the avoidability of prepetition transfers and the existence of other causes of action including substantive consolidation, equitable subordination, etc.;

(9) analysis of the status of the debtor's executory contracts, the advisability of any assumption or rejection decision;

(10) determining the adequacy of insurance coverage;

(11) identifying the existence of significant legal issues that would affect the feasibility of any plan; and

(12) closely monitoring postpetition operations to determine if an operational turnaround (if necessary) has been accomplished and to make sure that the creditors' position in a liquidation is not being made worse by continuing losses.

See generally Lynn M. LoPucki, Strategies for Creditors in Bankruptcy Proceedings, Chapters 10 and 11 (2d ed. 1991).

(B) Seek the conversion or dismissal of the case

11 U.S.C. §1112(b) authorizes the court to convert a case to Chapter 7 or dismiss, whichever is in the best interests of the creditors and the estate, for cause. Cause includes:

(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;

(2) inability to effectuate a plan;

(3) unreasonable delay by the debtor that is prejudicial to creditors;

(4) failure to propose a plan within any time fixed by the court; and

(5) denial of confirmation of every proposed plan.

Creditors need to consider conversion as an option if a Chapter 7 liquidation is likely to generate some recovery for unsecured creditors, and to actually purse that alternative if at any point during the case it appears that the debtor's continued operation puts that recovery in jeopardy because the debtor is continuing to lose money.

The circumstances justifying a request for dismissal are less clear. Dismissal is unlikely to benefit the entire creditor body unless the debtor is solvent. On the other hand, where the debtor is so far "under water" that even a liquidation will not generate funds for creditors and there is no prospect of a successful reorganization, dismissal may at least have the satisfying affect of bringing the matter to a close.

(C) Seek the appointment of a Chapter 11 trustee or an examiner

If appointed, a Chapter 11 trustee takes over total control of the debtor. 11 U.S.C. §1104(a) authorizes a court to appoint a Chapter 11 trustee:

(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case; or

(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate.

Establishing "cause" by showing fraud, dishonesty, incompetence, or gross mismanagement is fairly straightforward. The second prong, "appointment is in the interests of creditors," is less straightforward. Generally, courts are looking for an indication that the economic benefit of the appointment exceeds the extra costs the appointment imposes upon the estate. Thus, this prong does not require evidence of wrongdoing or gross mismanagement as does the first, but can be something more subtle, e.g., evidence that the trustee will accomplish something which the debtor cannot (or will not). Economic benefit is not, however, an easy thing to establish.

Under the 1994 amendments, the creditors can elect the Chapter 11 trustee, if appointed, rather than being forced to accept the person selected by the United States Trustee. This ability to elect the trustee increases the strategic significance of this option.

In contrast to a trustee who takes over total control of the debtor, an examiner is appointed in order to accomplish some specific task. An examiner can be directed to conduct such investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management. See 11 U.S.C. §1104(b). While the appointment of the examiner is usually made for the purpose of effecting a particular investigation, courts have used examiners for all kinds of purposes including such things as mediating plan negotiations. See, e.g., In re Public Service Company of New Hampshire, 99 B.R. 177 (Bankr. D.N.H. 1989).

(D) Negotiate a plan with the debtor

Regardless of which, if any, other strategies are pursued, this one is likely to be (and probably should be) pursued at the same time. In negotiating the treatment of the creditors' class, the creditors should keep in mind all the factors relevant to an evaluation of the plan, as discussed below, and seek to obtain the best package they can under the circumstances. Compromises may be necessary between the creditors' desire to obtain immediate payment in full and the need for the plan to be feasible.

(E) Propose a creditor plan

Often, the best defense is a good offense. The best strategy for creditors in a Chapter 11 is to come up with their own reorganization plan. Even if confirmation of the plan is never actually sought, its existence obviously improves the creditors' bargaining position. Of course, for the plan to represent a credible threat, it must be feasible and confirmable.

Creditor plans typically fall in one of five categories: a liquidation plan; a plan providing for the sale of the business (as an ongoing entity) to some third party; a stock plan (in which the prepetition stock is canceled and new stock is issued to the creditors making them the owners of the reorganized debtor); a litigation plan (in which various causes of action belonging to the estate are pursued for the benefit of the creditors); or some combination of the prior four categories. Which of the categories should be pursued depends on the facts and circumstances of the case.

One aspect of Chapter 11 that hinders creditors' ability to file a plan is the debtor's right to exclusivity. See 11 U.S.C. §1121. The period of exclusivity is 120 days. If the debtor's plan is filed within the 120 day period, exclusivity is automatically extended an additional 60 days for the solicitation of votes. The court has the power to extend the 120 day (and 60 day extension), for cause provided that the extension is sought before the period is terminated. The court can also reduce the period of exclusivity for cause.

Exclusivity is significant only if some party other than the debtor is prepared to file a plan. Often, parties expend a great deal of effort in litigating a requested extension of the exclusive period without having a credible alternative to a debtor plan. One suspects that even in situations were exclusivity is extended, it can be subsequently reduced if the court is advised that the party seeking the reduction is prepared to immediately file a plan. That, notwithstanding, the existence of the period of exclusivity seems to present a psychological, if not actual, barrier to the presentation of competing plans and remains an important consideration in pursing a creditor plan.

(F) Actively oppose the debtor's plan

11 U.S.C. §1129(a) lists the requirements for confirmation of a plan. Among those requirements is that every impaired class has voted for the plan. Impairment is defined in 11 U.S.C. §1124 as the modification of the legal and/or contractual rights of the class members. This would obviously include any proposal to pay creditors less than in full. The Bankruptcy Reform Act of 1994 amended 11 U.S.C. §1124 (by deleting §1124(3)) so as to make clear that creditors are entitled to postpetition interest in order to be considered unimpaired. See also Equitable Life Insurance Company of Iowa v. Atlanta-Stewart Partners (In re Atlanta-Stewart Partners), 193 B.R. 79 (Bankr. N.D.Ga. 1996) (observing that a distribution of 100% on effective date of plan to unsecured creditor class did not prevent that class from being impaired under amendment to §1124).

If all requirements for plan confirmation set out in §1129(a) have been satisfied other than the plan's acceptance by every impaired class, the plan proponent may move for confirmation under §1129(b). Confirmation of the plan under §1129(b) over the rejection of the plan by an impaired class is called "cramdown." Under §1129(b), a plan may be crammed down against a class of impaired unsecured creditors only if they are being paid in full or if the absolute priority rule is satisfied.

Payment in full, so as to satisfy §1129(b), requires that the unsecured creditors be paid postconfirmation interest if payments are to be made over time. See, e.g., Everett v. Perez (In re Perez), 30 F.3d 1209 (9th Cir. 1994). A critical issue which remains unresolved, however, is how to determine the correct rate of interest. The rate can range from being very low (to reflect the fact that creditors may be getting paid interest on a claim which in liquidation would have been worth nothing), to very high (to reflect the rate that would be charged for an unsecured loan of that amount in the market place). See George W. Kuney, Interest on Nothing, Commercial Law Bulletin, p.30-32 (Nov./Dec. 1994). Kuney's conclusion is that the interest should be based on some blended rate, weighted between "market" for that percentage of the creditors' claims which would have been paid in a liquidation, and zero interest for the rest. While perhaps a logical resolution, this gives all of the upside potential to equity interest holders without requiring them to make any new investment in the debtor. It order to balance the respective interests of equity and the creditors, it seems that the interest rate on that portion of the creditors' claims that is "under water" should also receive some interest, albeit perhaps at a lower rate than that which would otherwise constitute market. Payment of interest based on the time value of money (i.e., the risk free rate for a similar duration), might be the fairest compromise for that portion of the claim "under water," with market rate for the balance.

The satisfaction of the absolute priority rule (the other way of effecting cram down) requires unsecured creditors to be paid in full before any junior class, including subordinated claims or equity interests, receive anything on account of their claims or interest. Note, however, that there is a so called exception to the absolute priority rule, that being the "new value exception." Under the exception, subordinated claims and/or equity interests may participate in the distribution (normally of new equity) by bringing new value to the estate.

In order to realize the benefits of §1129(b) (i.e., the requirement that a rejecting class of impaired creditors either get paid in full or that the absolute priority rule be satisfied), it is necessary for the creditors' class to reject the debtor's plan. A class of creditors accepts a plan if creditors holding at least two-thirds in amount, and more than one half in number, of those members of the class voting on the plan have voted for the plan. Of critical importance is the fact that the determination is made based on creditors who return a ballot regardless of the size of the class. A minority of the members of a class can control the class if the majority does not bother to vote. Thus, it is important for creditors seeking to prevent confirmation to actively solicit negative votes. Creditors should, however, carefully consider the method by which they solicit rejections. As had been discussed above, a creditors' committee loses its qualified immunity if it commits willful misconduct in the solicitation of rejections of a plan. Furthermore, different jurisdictions have different views on a party's ability to solicit votes through the use of materials and/or information outside of the court approved disclosure statement. Compare In re Texaco, Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988) (plan and disclosure statement are only documents allowed in the solicitation of votes), with Century Glove, Inc., v. First American Bank of N.Y., 860 F.2d 94 (3d Cir. 1988) (solicitation through use of information other that disclosure statement and plan permitted as long as there has already been an approved disclosure statement).

In addition to the solicitation of negative votes, the creditor(s) opposing the plan should file an objection to the plan (alleging the plan's failure to satisfy specific requirements of §1129), and prepare to support the objection at the confirmation hearing.

(G) Litigating the exception to the absolute priority rule

As discussed above, there is an exception to the absolute priority rule, that being the "new value exception." The exception existed in pre-Bankruptcy Code bankruptcy law. There is controversy as to whether the new value exception survived the enactment of the Bankruptcy Code. It probably goes without saying that until there has been a definitive resolution to the question of whether the "new value exception" survived the enactment of the Bankruptcy Code, an objection to a new value plan on that basis remains the first line of attack. A number of courts have held that the passage of the Code eliminated the exception. See, e.g., Piedmont Associates v. Cigna Property & Casualty Insurance Co., 132 B.R. 75 (N.D. Ga. 1991); In re Outlook/Century, Ltd., 127 B.R. 650 (Bankr. N.D. Cal. 1991); In re Lumber Exchange Limited Partnership, 125 B.R. 1000 (Bankr. D. Minn. 1991); and Pennbank v. Winters (In re Winters), 99 B.R. 658 (Bankr. W.D. Pa. 1989). On the other hand, a majority of the courts that have considered the question have held that the new value exception is alive and well. Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). For purposes of the balance of this section it will be assumed that the attack was made, but that the court ruled that there is no per se prohibition against the former owners acquiring an interest in the reorganized debtor.

(1) Policy rationale for the new value "exception"

It is helpful to the formulation of a litigation strategy to understand the likely rationale for the conclusion that the exception survived the enactment of the Code. In defending the exception, the proponent of the new value plan would probably argue that the "new value exception" is not an exception to the to the "absolute priority rule" in 11 U.S.C. §1129(b)(2)(B)(ii), but rather is a corollary. See Bonner Mall, supra.; In re SM 104, Ltd., 160 B.R. 202, 223 (Bankr. S.D. Fla. 1993); In re Woodscape Ltd., Partnership, 134 B.R. 165, 168 (Bankr. D. Md. 1991). See also In re Trevarrow Lanes, Inc., 183 B.R. 475, 488-89 (Bankr. E.D. Mich. 1995)( absolute priority rule does not prevent former owners from acquiring an interest in reorganized debtor so long as the acquisition is not wholly or partially "on account of" the pre-existing interest.) Holding that the exception is a corollary, rather than an exception, appears to represent the current trend in the cases. SM 104, supra. Under the corollary approach, the proponent:

... starts with the premise that, in a cramdown situation, §1129(b) clearly bars prepetition owners from receiving an interest under the plan "on account of" their prior ownership interests. 11 U.S.C. §1129(b)(2)(B)(ii). However, when prepetition owners infuse into the reorganized debtor necessary new value in the form of money or money's worth, the basis of their equity interest in the reorganized debtor is not their prepetition ownership interest in the debtor, but rather their payment of new value for an interest in the reorganized debtor.

Professor Elizabeth Warren, in A Theory of Absolute Priority, 1991 Annual Survey of American Law 9 (1991), reproduced in an appendix to In re BMW Group I, Ltd., 168 B.R. 731, 735 (Bankr. W. D. Okl. 1994), discussed the theory of the "exception." Professor Warren starts with the idea that a plan confirmation is "the sale of all assets of the recently-created bankruptcy estate to the newly-created, post-confirmation business." BMW Group, 168 B.R. at 736. She noted the risk, if the prior owners are allowed to purchase the assets, that they may engage in some form of self dealing in order to obtain a bargain price. She observed that this risk is exacerbated by the thinness of the market for most bankrupt companies. Id. at 738. On the other hand, she also saw a problem with a per se rule that the prior owners cannot purchase the assets. Given the thinness of the market the prior owners may well be the only parties interested in bidding. In fact, the desire of the prior owners to retain their interest may be such that they may offer more than what the assets would actually bring on the market. Id. at 740-41.

Professor Warren also noted that the justification for allowing debtors to cram down plans is to counter the absolute veto power that creditors would have if only consensual plans could be confirmed. Id. at 745. The ability to effect a cramdown thereby prevents a creditor class from dissipating the reorganization value of the debtor when the holdout is the result of a misapprehension of value or imperfect negotiations. Id. at 746.

In effect, the exception may simply level the "playing field" for the purpose of facilitating a reorganization. As Professor Warren points out:

Because the "exception" is often discussed as if it were created for the benefit of equity holders, the emphasis is often in the wrong place. The better analysis is to see the "exception" as a judge-made tool to monitor the relationship between old equity and the DIP. It is not the case that the exception permits old equity to qualify for a bonus: instead, the exception is designed to shape an inquiry into whether the interests of the estate - and thereby all of the creditors - are being fully protected.

Id. at 752.

Whether one agrees with Professor Warren's analysis, its message is important for creditors formulating strategy. The message is that while creditors, in accordance with the absolute priority rule, have first claim on the "reorganization value" of the debtor, the exception can be used to prevent them from exercising their claim in a way which unreasonably dissipates that value. This message, in turn, suggests the themes of the creditors' case in opposition to a new value plan. The themes of the creditors' case should be that the new value plan fails to adequately compensate the estate for the reorganization value of the debtor; that the DIP failed to do enough to seek to realize that value for the creditors; that the proposed transfer of that value to the prior owners is not being done because it is necessary to prevent the dissipation of that value but, rather, is the result of self dealing; and that the creditors' opposition to the new value plan is reasonable.

(2) Elements of the exception

Professor Warren observed that the elements of the exception set the level of scrutiny which a new value plan must undergo in order to ensure that the absolute priority rule is not being violated. BMW Group, 168 B. R. at 752. See also Trevarrow Lanes, 183 B.R. at 491 (elements simply direct the court's attention to ways in which the statute's "on account provision" might be violated.) Creditors should argue that the court cannot simply apply them in a mechanical fashion (unless, of course, applying them in a mechanical fashion is better for their case.) Instead, the elements should be viewed as tools to help the court make sure that the debtor's prior owners do not eviscerate the absolute priority rule by means of a contrived infusion. See, In re Tallahassee Associates, L.P., 132 B.R. 712, 718 (Bankr. W.D. Pa. 1991).

There are 5 elements to the exception, those being that the new value must be: (i) new;

(ii) substantial; (iii) money or money's worth; (iv) necessary for a successful reorganization; and (v) reasonable equivalent to the value or interest received. In re One Times Square Associates

Limited Partnership, 159 B.R. 695, 707-08 (Bankr. S.D.N.Y. 1993), aff'd, 165 B.R. 773 (S.D.N.Y. 1994), citing Bonner Mall, 2 F.3d at 908. While the elements are listed as separate items, their distinction is sometimes blurred. For example, the substantiality requirement is sometimes consolidated with the money or money's worth or necessity elements. See SM 104, 160 B.R. at 226, n. 43; In re Sovereign Group 1985-27, Ltd., 142 B. R. 702, 708, n.10 (E.D. Pa. 1992). Likewise, the necessity element may be subsumed by the substantiality or reasonable equivalence elements. See Trevarrow Lanes, 183 B.R. at 493-95. Creditors will, nevertheless, want to emphasize them as being 5 distinct areas of inquiry.

(3) Burden of proof

The plan proponent bears the burden of proving that the new value exception has been satisfied. Tallahassee Associates, 132 B.R. at 718. The recent trend is to simply require that a plan proponent meet that burden by a preponderance of the evidence, see, e.g., Trevarrow Lanes, 183 B.R. at 479.

(4) Strategies

(i) Determine value of the business. Determine the value of the estate, as an ongoing entity and in a piecemeal liquidation. This information is obviously important to a determination of the reasonable equivalency element of the exception and the "best interests of creditors' test" in §1129(a)(7). The existence of a valuation would also tend to show that the impasse between the creditors and the plan proponent is not the result of a clearly erroneous valuation of the business.

It is important to avoid the trap that the value is simply a function of the net worth of the estate. Instead, the focus should be on the upside potential, assuming a feasible and successful plan. In determining value, one must look beyond the assets and liabilities on the day of confirmation, and, instead, look at the cash flow and its use over the life of the business.

(ii) Analyze plan in light of the elements of the exception. Test the plan against the 5 elements of the exception, but do not lose sight of the fact that the purpose is to determine whether the absolute priority rule is being complied with, not whether the elements are mechanically satisfied. Determine whether the contribution is truly new value; is in current cash or other tangible property; is substantial in light of the value of the estate and amount of debt; is necessary to make the plan feasible; and is of a value reasonably equivalent to the reorganization value of the business. For an extended discussion of the 5 elements see Owen W. Katz, Litigation Strategies in Connection with New Value Plans - The Creditor's Perspective, Bankruptcy Litigation, Vol. 3, No. 4, Fall 1995 (Litigation Section, ABA).

(iii) Formulate a theory of the case. Evaluate the proposed new value plan in light of Professor Warren's analysis and formulate a general argument for why the plan does not come within the rationale for the exception. It may be that the plan is the result self dealing. For example, the debtor may have failed to solicit any other bids in a situation where other bids may have been possible. See BMW Group, 168 B.R. at 735. It may be that the plan simply does not require a contribution from the prior owners that is reasonably equivalent to the reorganization value of the business.

The creditors will want to avoid anything which might lead the court to conclude that their opposition is the result of an erroneous valuation of the business, imperfect negotiations, or an attempt to exploit a perceived hold out power.

(iv) Formulate an alternative to the new value plan. Though perhaps self-evident, the single best strategy in opposition to a new value plan is to formulate a feasible alternative. Alternatives can include: a distribution of the new equity to the creditors in lieu of, or in addition to, some cash distribution; giving creditors first right to buy the business at the purchase price proposed in the new value plan; and engaging investment bankers and/or brokers to market the business. A feasible alternative, probably more than any other evidence that the creditors might be able to present, would establish that they are not simply being unreasonable holdouts and/or that the prior owners are acting in their own self interest to the detriment of the estate.

A creditor stock plan (either distribution or purchase) has it own problems including the fact that creditors seldom want stock, particularly where the stock will have no secondary market. In addition, the creditors who end up owning the business may have to replace management and forge new relationships with lenders, customers and suppliers. On the other hand, if a creditor stock plan is feasible without any capital infusion, it is quite possible that the new value to be contributed is not really necessary.

(v) Seek the appointment of a trustee or examiner. In order to combat concerns about self-dealing, to assure access to information necessary to pursue alternatives, and to make sure that the potential beneficiaries of the new value plan do not somehow try to sabotage the business to make the pursuit of alternatives more difficult, the creditors can seek the appointment of a trustee or examiner. See Lynn M. LoPucki, Strategies for Creditors in Bankruptcy Proceedings, §11.11.2 (2d ed. 1991).

(vi) Challenge any provision giving the former owners the exclusive right to acquire the new equity. The provision in a new value plan most likely to lead a court to find that it violates the absolute priority rule may be that which gives the former owners the exclusive right to acquire the new equity. Some courts have found that provision, alone, was sufficient to violate the absolute priority rule. See, e.g., BMW Group, 168 B.R. at 735. At the very minimum, the creditors should examine the reasons, if any, for the exclusion of any other participants. Any and all such reasons should be attacked as illusory. If the plan proponent lacks a good reason for limiting the participation to prior owners, the inference should be that the exclusivity is on account of the former interest and, therefore, violates the absolute priority rule.

(vii) Demand an auction. An auction or other manner of marketing the business can be sought. There is authority for the requirement that the ownership stake be subject to auction. See, e.g., In re ROPT Limited Partnership, 152 B.R. 406, 412-13 (Bankr. D.Mass. 1993). The utilization of an auction allows the court to avoid the need to become embroiled in the vagaries of reorganization value or any other standard of valuation.

An auction is a great alternative in the right circumstances. It will not, however, always lead to the best outcome for creditors In a business involving management skills and/or relationships enjoyed by management with suppliers and customers, shareholders active in management will have an advantage in the bidding since the business would be worth less without them. From the creditors perspective, that advantage can only be justified if it truly results from something personal to the prior owners and is not something which would constitute an intangible asset of the estate. Such an advantage, together with the fact that the market for distressed businesses is thin, may result in the prior owners acquiring the business in an auction for less than what might have been required by a court applying the 5 element new value exception test. Accordingly, creditors may not only want to avoid seeking an auction, but may also want to oppose a shareholder proposed auction, if it is obvious that the shareholders have a bidding advantage that can be mitigated by some other alternative.

(viii) Determine if the plan is objectionable on any other basis. The plan should be evaluated in light of the other requirements of §1129(a), including the requirement of good faith, best interests of creditors, and feasibility, and if appropriate, attacked on that basis.

(ix) Time the attack. While the question of the cram down of a new value plan is typically one for the confirmation hearing, creditors should not wait until that point to challenge the plan. There is authority for challenging a new value plan at the hearing on the disclosure statement. The older the case becomes, the greater the pressure on the court (and all of the parties to the case) to bring it to a conclusion. A court confronted with a questionable new value plan may elect to error on the side of confirmation if the issue is being raised at the time of plan confirmation in a relatively old case, particularly if the creditors lack any alternative which can be quickly implemented.

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IV. EVALUATING A CHAPTER 11 PLAN OF REORGANIZATION

(A) The relationship between the Plan and the Disclosure Statement

The Chapter 11 plan process typically involves the preparation of a plan and disclosure statement, a hearing on the adequacy of the disclosure statement and court approval of the disclosure statement if appropriate, distribution of the plan and the disclosure statement to the creditors for their vote, and the plan confirmation hearing. While the plan and the disclosure statement are usually separate documents, they need not be. Both documents are critical to the evaluation of a plan.

The plan can be thought of as the proposed "contract" between the reorganized debtor and the preconfirmation creditors. It must set forth the classes of claims, address how those claims are to be treated, and provide a means for implementation. The disclosure statement, while perhaps including a summary of the plan, provides additional information to aid creditors in the evaluation of the plan. This additional information may include, but is not limited to: a discussion of the debtor's pre and post petition operations; the events which led to the bankruptcy; significant legal matters which have been dealt with since the case was filed; the strategy for turning around the debtor's operations; projected cash flow and other financial information; information regarding the debtor's postconfirmation management; and a liquidation analysis.

(B) Evaluating the Plan and Disclosure Statement

The decision of whether to support or oppose a plan can, perhaps, be analogized to an investment type decision, with one significant difference: the typical investor has an almost unlimited number of number of investment alternatives, while a creditor in a bankruptcy is already locked into the "investment" and must now figure out the best "exit" strategy. Where the analogy works best is when there would be some distribution for the creditors in a liquidation, but the plan proposes to use that value in continued operations rather than immediately distributing it to the creditors. Such a plan would presumably promise the creditors a higher future return than that which they would have realized in a liquidation.

In evaluating the plan and disclosure statement, the creditors must first understand the plan (i.e., the proposed contract), by reviewing the plan and any discussion of the plan in the disclosure statement. Second, the creditors should utilize the disclosure statement for additional information relevant to their decision of whether to vote for a plan which proposes to "invest" what would have been their distribution in a liquidation in the debtor's continued operations. Things to consider in evaluating the plan and disclosure statement include the following:

(1) Does the plan satisfy the "best interest of creditors' test"

11 U.S.C. §1129(a)(7) imposes as a requirement of plan confirmation that any creditor rejecting the plan receive at least as much, in present value dollars, as it would have received if the debtor were liquidated under Chapter 7. In evaluating the plan, a creditor should confirm that this requirement has been satisfied. In deciding whether this test has been satisfied it is necessary to consider: (i) the likely liquidation value of the debtor (assuming the liquidation proceeded in a commercially reasonable manner); (ii) the higher priority claims (including secured claims, the cost of the liquidation, the administrative costs of the Chapter 11, and the prepetition priority claims) which get paid before unsecured creditors; and (iii) the size of the unsecured creditors' class since whatever is left after paying the higher priority claims will be distributed pro rata. The creditors should also factor into the analysis the likely recovery on all avoidance actions and other causes of action that belong to the estate.

(2) Does the plan provide unsecured creditors with their fair share of the reorganization value of the debtor

Assuming that the reorganization value of the debtor exceeds its liquidation value (a fact that cannot be taken for granted in a turnaround situation), the creditors must determine whether the plan is allocating to them a fair portion of the reorganization value. In evaluating the allocation of the reorganization value of the debtor, creditors must keep in mind the statutory priorities and the absolute priority rule. While only the larger cases will justify the cost of professional advice as to the reorganization value, creditors can get some sense of the fairness of the plan by looking at the likely cash flow that will be generated by the reorganized entity in execess of that necessary to service secured and priority debt, and how that excess is to be utilized. For example, the reinvestment of excess cash flow in the business of the debtor rather than paying more to the unsecured creditors might be unfair where unsecured creditors have no equity interest in the reorganized debtor and/or do not otherwise benefit from a finacially stronger reorganized debtor.

(3) Is the plan is feasible

If creditors are going to be dependent on future operations in order to realize the value allocated to them in the plan (i.e., payments to the creditors are to be made in installments), the feasibility of the plan becomes critical. One way of testing feasibility is to compare the payments to be made under the plan to the projected cash flow. In order to be feasible it is necessary that the projections indicate that there will be sufficient cash flow to fund the plan and maintain operations according to the plan. In evaluating the reasonableness of the projected cash flow, creditors should consider, among other things: (i) the debtor's prior performance and whether the projection has historical support; (ii) the adequacy of the capital structure of the reorganized debtor in light of foreseeable business cycles and setbacks; (iii) the reasonableness of the assumptions on which the cash flow projection is based; (iv) the general economic and industry conditions; and (v) the ability of the management. In evaluating feasibility the focus should be on the most likely scenario rather than the best case scenario.

(4) To the extent that the creditors are to receive payments over time, does the plan contain sufficient covenants to protect their interests

The creditor's best remedy in the event of a plan default may be a simple collection action for breach of "contract." The more clearly the plan lays out the creditors' rights and remedies, the more effective the collection action is likely to be. Furthermore, covenants limiting the debtor's freedom to take certain actions until the creditors have received all their plan payments may help to insure that the plan will be fully consummated. Covenants which creditors should look for in evaluating the plan include:

(a) specific language regarding the effective date of the plan, specific language setting forth the date by which payments to the class must be made, and detailed language setting forth the amount of the payments;

(b) grants of security interests or other "transfers" or guarantees that increase the likelihood of collection in the event of a default;

(c) provisions for the continued existence of the committee until the creditors have been fully paid;

(d) prohibitions against certain types of dealings between the debtor and insiders including, loans to insiders, dividends, stock redemptions, limits on the salaries of the insiders during the life of the plan, etc.;

(e) prohibitions against the encumbrance of the assets of the debtor;

(f) provisions for creditor access to ongoing financial reports;

(g) a specific list of the incidents of default, any requirements regarding notice to the debtor of a default, rights to cure, etc.;

(h) remedies in the event of a default including the acceleration of all obligations due under the plan, entitlement to interest and attorney fees, etc.; and

(i) depending on the circumstances, the other types of covenants typically found in commercial loan documents such as the requirement that the debtor maintain certain financial ratios, maintain insurance coverage, timely pay all taxes, repairs and maintains collateral, etc.

(5) Determine whether there are any viable alternatives to the plan

Although perhaps something which is not disclosed in the plan or disclosure statement, an important consideration in the evaluation of the plan is the existence, or lack thereof, of alternatives and whether those alternatives lead to a better (or worse) result for the creditors.

(6) Is the plan supported by creditors' committee

Given the committee's fiduciary duty to its constituency, and its broad powers and duties, the committee's recommendation is an extremely important consideration in the evaluation of a plan by noncommittee members of the class. Also important is whether the committee will continue to exist after confirmation (and up through full payment to the class) to monitor and enforce the debtor's compliance with the plan.

(7) Does the plan expose the creditors to any postconfirmation litigation

Creditors need to carefully consider the source of plan payments, as well as any discussion regarding the pursuit of preference or other avoidance actions, and/or objections to claims. Some plans are fully funded by preference actions pursued against unsecured creditors. In some cases, the creditor may find itself the subject of a preference action, the proceeds of which will go to a party other than unsecured creditors. The creditor may agree to a plan which proposes to pay pennies on the dollar only to find itself, postconfirmation, the subject of an objection to claim or preference action. Depending on the creditor's particular circumstances, it may wish to evaluate the plan in the context of the risk of being subjected to postconfirmation litigation.

Note that if the plan is silent as to postconfirmation avoidance actions and objections to claims, the creditors may have defenses arising out of res judicata, judicial estoppel, and/or equitable estoppel, if the actions are subsequently initiated. See Owen W. Katz, Res Judicata and Other Defenses to Post Confirmation Litigation, Bankruptcy Litigation, Vol. 2, No. 4, October 1994 (Litigation Section, ABA).

(8) Are there other reasons for accepting plan

Creditors may be benefited by the continuation of the debtor for reasons that go beyond collection on their bankruptcy claims. Whether there are any tangible or intangible reasons for keeping the debtor in business beyond the creditors' recovery on their bankruptcy claims can be factored into the analysis.

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V. POSTCONFIRMATION REMEDIES

Postconfirmation remedies become an issue if there is a default under the plan. There are two types of remedies, those that arise out of the terms of the plan and those that are provided by the Bankruptcy Code.

As had been mentioned above, the plan is, in essence, a contract between the debtor and its creditors. Like any contract, rights and remedies in the event of a default may be spelled out in detail within the document. Therefore, the plan is the first place to go to determine rights and remedies in the event of a default. At the very minimum, even in the absence of specified rights and remedies, a state law cause of action for breach of "contract" exists in the event of a default under the plan.

Note that whether or not the plan provides for postconfirmation interest, a creditor denied payment in accordance with the plan, whether as the result of an objection to its claim, or otherwise, is arguably entitled to interest from the plan payment's due date. See, e.g., Sunbeam-Oster Company, Inc. v. Lincoln Liberty Avenue, Inc. (In re Allegheny International, Inc.), 145 B.R. 823 (W.D. Pa. 1992).

A state law breach of contract "action" may be of limited help if the amount involved is to small to justify the expense of the action, the debtor would be unable to pay any judgement, and/or the creditor can only sue on one of a number of installment payments (i.e., the debt has not been accelerated by default). While there may be little creditors can do in the negotiation of the plan to avoid a situation where the debtor could not pay a judgement, the other limitations on a state law breach of contract actions can be anticipated and provided for in the terms of the plan.

The postconfirmation remedies provided by the Bankruptcy Code are generally of little value to an individual creditor seeking payment following a plan default. They may provide some relief in certain circumstances to the creditor's class. Those remedies include the following:

(1) Revocation of plan. Pursuant to 11 U.S.C. §1144, on request of any party in interest made within 180 days after the date of the confirmation order, the court may revoke the plan if the confirmation order was procured by fraud. The obvious limitations of this remedy is the short period of time within which it may be sought and the need to establish fraud.

(2) Seek modification of plan. Pursuant to 11 U.S.C. §1127(b), the proponent of a plan or the reorganized debtor may seek to modify a confirmed plan prior to substantial consummation of the plan, provided, however, that creditors are permitted to change their original vote in light of the proposed modification and that the plan as modified must still comply with the Code requirements for confirmation. The obvious limitations to this remedy is the fact that it is limited to the plan proponent (or debtor if different), and must be sought prior to substantial consummation. Substantial consummation occurs when the debtor has taken a substantial step towards implementing the plan, which, by statutory definition, would include the transfer of substantially all of the property to be transferred under the plan, the assumption by the debtor or the successor of the debtor of all property to be retained under the plan, and the commencement of the distribution under the plan.

(3) Convert the case to Chapter 7. Pursuant to 11 U.S.C. §1112, the case may be converted to Chapter 7 if there is an inability to effectuate substantial consummation of a confirmed plan, if there is a material default by the debtor with respect to a confirmed plan, or if there is a termination of a plan by reason of the occurrence of a condition specified in the plan. A problem with this remedy is that there is some question among the courts as to the extent of a court's jurisdiction over assets revesting in a debtor under a confirmed plan, if the case is subsequently converted to chapter 7. There is a school of thought that the court would have no jurisdiction over the assets revesting in the debtor as a result of the confirmation. See, e.g., In re T.S.P. Industries, Inc., 120 B.R. 107 (Bankr. N.D. Ill. 1990). The affect of such a conclusion is to make the postconfirmation conversion of the case meaningless.

(4) File an involuntary bankruptcy against the reorganized debtor. This is an alternative strategy to a conversion. Although an involuntary requires compliance with the Code requirements, see 11 U.S.C. §303, including number and amount of claims participating in the involuntary, it avoids any questions about the extent of the court's jurisdiction over the reorganized debtor's assets. It also creates a new date for determining the avoidability of preferential or fraudulent transfers, that date being the date of the involuntary, in the event avoidable transfers occur between the date of plan confirmation and the filing of the involuntary.