Chapter 11 Equity Interests

Interests: The debtors lawyer must classify Equity interests in a sole proprietorship, a partnership, or a corporation separately from creditors' claims. Furthermore, common stock and preferred stock interests ought to be placed in different classes.

Contents of Plan: The bankruptcy code specifies several provisions that the debtors lawyer must include in a Chapter 11 plan, and, in addition, indicates other terms that may be part of a plan.

Mandatory provisions: A lawyer for a Chapter 11 debtor must do the following:

(1) Classify all claims and interests, other than priority claims for administrative expenses, involuntary case gap claims, or seventh priority taxes.
(2) Specify any class that is not impaired
(3) Describe the treatment to be accorded any impaired class
(4) Treat every claim or interest within a particular class identically, unless a holder consents to less favorable treatment under the bankruptcy Debtor's Chapter 11 plan, which proposes to pay undisputed claims in a class a specified percentage on the effective date of confirmation and to pay disputed claims in that class pro rata from Debtor's remaining assets at a future time after all contested issues have been resolved, is defective since it does not provide the same treatment for each claim in the class;
(5) Establish adequate ways to implement the plan, such as by
(a) The bankruptcy debtor's retention of estate property;
(b) The transfer through debtors lawyers of estate property to another entity;
(c) Merger or consolidation,
(d) The sale through debtors lawyers of estate property free and clear of liens, or the distribution of estate property to the holders of any interests in the property;
(e) The satisfaction or modification of a lien,
(f) The cancellation or modification of an indenture,
(g) Curing or waiving a default;
(h) Extending the maturity date, or altering the interest rate or other terms of outstanding securities;
(i) Amending the bankruptcy debtor's charter; or
(j) Issuing securities of the bankruptcy debtor or a successor to the bankruptcy debtor, or of an entity with whom the debtor has merged or has been consolidated;
(6) The lawyers must include in the charter of a corporate bankruptcy debtor, a provision prohibiting the issuance of nonvoting stock, and complying with certain other requirements concerning voting powers ; and
(7) The lawyers must provide for the selection of officers and directors in a manner consistent with the interests of creditors and equity security holders, and that does not violate public policy.

Permissive provisions: In addition to the mandatory items described above, the lawyers may create a plan any provide for:
(1) Any class of claims or interests to be impaired or unimpaired under the bankruptcy.
(2) The lawyers to assume, reject, or assign  executory contracts or un-expired leases.
(3) The settlement by lawyers for the debtor of any claim or interest by the bankruptcy estate, or the retention and enforcement of such action by the bankruptcy debtor, trustee, the lawyers, or an appointed representative of the estate.
(4) The liquidation of all or substantially all of the bankruptcy property, and
distribution of the proceeds ; and
(5) Any other appropriate measure that is consistent with the provisions of the Bankruptcy Code . For example, the Supreme Court has upheld a plan's provision requiring the IRS to allocate a bankruptcy debtor's tax payments first to trust fund taxes, before being applied to non-trust fund tax liabilities, where necessary for the success of the bankruptcy reorganization
 

Exempt property: If the debtor is an individual, any plan proposed by another entity may not include a provision to use, sell, or lease exempt properly without the consent of the bankruptcy debtor or his lawyer.
Impairment of classes; Whether a class of claims or interests is impaired under a plan is of great significance in the bankruptcy, because if a particular class is not impaired, there is a conclusive presumption that the plan has been accepted by the class or their lawyers, and by the holder of each claim or interest in the class or their attorneys. Consequently, it is unnecessary for the proponent of the plan to solicit their acceptances.  A class is deemed Impaired unless the plan provides for all claims or interests of that class to be treated in accordance with one of the three methods set forth below
a. Rights unmodified: A class is considered unimpaired if the plan does not alter the legal, equitable, or contractual rights of the holders of the claims or interests. Any change in a holder's rights, even a favorable change, will cause the class to be impaired.
Example: Debtor Corporation files a voluntary Chapter 11 bankruptcy, and is current on its payments to the unsecured bondholders, at a contractual rate of six percent. Under advice of the debtors lawyers, the bankruptcy Debtor's plan will pay the bondholders a higher interest rate of seven percent. The class is impaired because its rights have been altered.
b. cure and deceleration A class is deemed unimpaired if, regardless of any contractual or other legal right to accelerate payment upon default, the plan proposes: (i) to cure any default (other than one under Bankruptcy Code section 365(b)(2) ( San Diego Bankruptcy Reporter ); (ii) to reinstate the original maturity date; (iii) to pay for any damages caused by the claimant's or the interest holder's reasonable reliance on the right to accelerate; and (iv) not to otherwise alter the legal, equitable, or contractual rights of the holder of the claim or interest
(1) Example: Debtor owes Bank $100,000, secured by a first mortgage on residential property. The bankruptcy Debtor defaults, and Bank, relying on an acceleration clause in the contract, accelerates the debt and obtains a state court foreclosure judgment against residential property. Subsequently, on advice of lawyers, Debtor files a Chapter 11 petition, and Bank unsuccessfully seeks relief from the automatic stay as the court permits Debtor, pursuant to its plan, to cure the default and reinstate the original maturity of the obligation on the same terms. For Bank (which has been placed, alone, in a separate class) to be unimpaired, the bankruptcy Debtor must not only cure the default and de-accelerate the debt, but also compensate Bank for the damages, including attorney's fees, incurred in accelerating the debt and instituting the foreclosure proceedings. However, the damages will not include the attorney's fees incurred in seeking relief from the automatic stay, since those costs did not arise as a result of Bank's reliance on its right to accelerate the debt.
(2) Cure period: Usually, the bankruptcy debtor is permitted to cure the default and reinstate the obligation at any time prior to a foreclosure sale, However, in states where the mortgage merges into the foreclosure judgment, some courts have held that there is nothing to cure and reinstate. Other cases suggest that merger is irrelevant because section 1124(2) evidences Congress's intent to permit de-acceleration. (5) However, the arrearage must be cured on or before the effective date of the Chapter 11 plan,
c. Cash out: The third method of treatment that will leave a class of claims or interests unimpaired is known as a cash out. Bankruptcy Code §1124(3); San Diego Bankruptcy Reporter.
(1) Class of claims: To render a class of claims unimpaired by a cash out, the plan must propose to pay each creditor in full the allowed amount of her claim, in cash, on the effective date of the plan.
(a) Section 1111(b) election: Recall that a creditor can prevent a cash out at the value of her collateral by making the election under section 1111(b)(2) to have her entire allowed claim treated as secured.
(2) Class of interests: To render a class of interests unimpaired by a cash out, the plan must propose to pay, in cash on the effective dale of the plan, the greater of any fixed liquidation preference or fixed redemption price to which the holders of the interests are entitled. San Diego bankruptcy reporter.