Focus On Feasibility

One of the most significant changes to chapter 1 1 of the Bankruptcy Code in the 2005 amendments was the absolute limit placed on extensions of the exclusivity periods. Courts no longer have the discretion to extend a debtor's exclusive periods to file and solicit a plan beyond 18 months and 20 months, respectively, after the petition date. Although the legislative history contains no explanation for why this change was made, Congress presumably intended to accelerate the reorganization process or facilitate the prospects for competing plans in large, complex cases. Given that the first cases filed after the amendments took effect in October 2005 are now just reaching the 18-month milestone, it remains to be seen what effect this change will have.

For a number of reasons, however, one result of the new exclusivity limits is likely to be increased litigation over, and an increased focus on, the plan "feasibility" requirement. As an initial matter, parties have greater incentives to challenge the feasibility of a plan. A creditor group may challenge feasibility in an attempt to delay the case until the creditor group can file its own plan, or where competing plans have been filed, in an attempt to defeat the competing plan. Moreover, in a competing-plan context, the relative feasibility of the plans may become a focus in soliciting creditor support. Plans may also be more vulnerable to feasibility attacks. Debtors will have had less time in chapter 11 to demonstrate that operational and strategic changes are likely to lead to the projected improvements in financial performance under the proposed plan. In addition, in light of the substantial debate in recent years over repeat chapter 11- filing rates and the contention by some commentators that higher repeat-filing rates are partly attributable to a purported lack of enforcement of the feasibility requirement, it is possible that courts will require a plan proponent to demonstrate a higher likelihood of success to meet the feasibility requirement. Add to these factors the increasing prevalence of hedge funds and other distressed investment funds that often take an active, aggressive role in the restructuring and have the financial wherewithal to propose competing plans and litigate their positions, and the potential for increased litigation over feasibility appears all the more likely.

The Feasibility Requirement

Pursuant to section 1129(a)(11) of the Bankruptcy Code, a plan of reorganization may be confirmed only if "[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan . . . ." This "feasibility" requirement had its origins in various provisions of the Bankruptcy Act of 1898, which required that the court find the plan "feasible." As the United States Supreme Court stated in 1936 in Tennessee Pub. Co. v. American Nat. Bank: "However honest in its efforts the debtor may be, and however sincere its motives, the district court is not bound to clog its docket with visionary or impracticable schemes for resuscitation." The oft-cited modern-day incantation of this maxim was articulated by the Ninth Circuit Court of Appeals in Matter of Pizza of Hawaii, which remarked that the purpose of subsection 1129(a)(11) is "to...