First Impressions: Shutting Down A Chapter 11 Case Due To Patent Unconfirmability Of Plan

Before soliciting votes on its bankruptcy plan, a chapter 11 debtor that has filed for bankruptcy typically must obtain court approval of its disclosure statement. As part of the disclosure-statement approval process, interested parties are afforded the opportunity to object. For example, a party may object on the grounds that the disclosure statement lacks sufficient information about the debtor. Sometimes, however, a party objects to the disclosure statement because the chapter 1 1 plan described by the statement cannot be confirmed. Although issues regarding a plan's compliance with the Bankruptcy Code's confirmation requirements are typically deferred until the confirmation hearing, some courts may resolve those issues at the disclosure-statement hearing if the plan is unconfirmable on its face, or "patently unconfirmable."

In In re American Capital Equipment, LLC, 688 F.3d 145 (3d Cir. 2012), the Third Circuit Court of Appeals held as a matter of first impression that a bankruptcy court may, in certain circumstances, resolve confirmation issues at the disclosure-statement hearing. The Third Circuit affirmed a bankruptcy court's ruling at the disclosure-statement stage that: (i) the chapter 11 plan did not satisfy the Bankruptcy Code's requirements that the plan be "feasible" and proposed in "good faith"; and (ii) on the basis of the plan's patent unconfirmability (and the debtors' inability to propose a confirmable plan), the debtors' chapter 11 cases would be converted to chapter 7 liquidations.

THE DISCLOSURE-STATEMENT AND CONFIRMATION HEARINGS

Confirmation and consummation of a bankruptcy plan are the culmination of a chapter 11 debtor's bankruptcy case. Creditors and interest holders whose rights are "impaired" (e.g., detrimentally affected vis-à-vis treatment outside bankruptcy) by a chapter 11 plan and who are to receive a distribution are entitled to vote on the plan. After a bankruptcy case is commenced and with limited exceptions, a debtor (or other plan proponent) can solicit votes on the plan only if holders of claims or interests are provided with a "disclosure statement" which is approved, after notice and a hearing, by the bankruptcy court and which contains "adequate information." Thus, before soliciting votes, a chapter 11 debtor generally must obtain court approval of its disclosure statement, and interested parties must have the opportunity to challenge approval.

Following approval of the disclosure statement, the debtor may solicit votes on its plan and thereafter seek confirmation of the plan. To be confirmed, the plan must satisfy certain statutory requirements found in section 1129 of the Bankruptcy Code, including the following: (i) the plan complies with the Bankruptcy Code; (ii) the plan has been proposed in good faith; (iii) the plan has been accepted by at least one class of impaired creditors (without taking into account plan acceptances of insiders), if any class of creditors is impaired; (iv) each class of creditors and interest holders has accepted the plan (or is deemed to have accepted by reason of nonimpairment), or the plan is "fair and equitable" with respect to each dissenting class; and...