The goal in most Chapter 11 cases is to reorganize or sell under a plan proposing repayment of creditors that is confirmed by the Bankruptcy Court. To confirm a plan, certain classes of creditors must vote in favor of the plan, or the court may confirm the plan if it is otherwise fair. Except in cases filed by small businesses under Subchapter V of Chapter 11, a debtor-tenant cannot solicit votes from creditors on a plan unless a Bankruptcy Court–approved disclosure statement is provided to those creditors. The disclosure statement must contain “adequate information” to enable holders of claims in the case to make an informed judgment about the plan.
Plan Confirmation and Lease Decision Timing in Retail Bankruptcies
A retail debtor can assume, assume and assign, or reject real estate leases under a plan. The deadline for a retail debtor to assume or reject a lease is the earlier of (i) 120 days after the bankruptcy filing (plus a possible additional 90 days if granted for “cause”) and (ii) the entry of an order confirming the plan. Given this timing, retail debtors often file plans and disclosure statements quickly and seek to have plan confirmation hearings scheduled well within 210 days of the bankruptcy filing. Moreover, the debtors’ lenders frequently require the debtors to meet certain deadlines (referred to as “milestones”), such as filing and confirming plans within 210 days of the petition date, which if not met, constitute defaults.
Classification and Voting in Retail Bankruptcies
A Chapter 11 plan will typically classify creditors by the type of claims they hold. A class proposed to be paid in full (e.g., senior secured lenders) would likely be unimpaired and deemed to accept the plan, while a class that is to receive (or retain) nothing of value (e.g., most commonly equity interest holders) would be deemed to reject the plan. A class votes in favor and accepts the plan if creditors that hold at least two-thirds in amount and more than one-half in number of those voting vote in favor of the plan. The debtor may only need one class of “impaired,” non–insider creditors to vote in favor of the plan to achieve a “cramdown” plan confirmation. Additionally, a confirmable plan must be feasible, proposed in good faith, and comply with all other requirements of the Bankruptcy Code.
Plan Confirmation Process in Retail Bankruptcies
While the plan and disclosure statement are occasionally approved jointly, it is typically a two-step process in which a disclosure statement for the plan is approved first, followed by the debtor sending out solicitation packages to permit voting on the plan under a court-approved timeline. Creditors can then decide whether to vote for or against the plan or abstain from voting. This decision is often made in connection with creditors opting out of releases of nondebtor third parties under the plan.
Plan Confirmation Issues to Consider in Retail Bankruptcies
It’s important for retail landlords to carefully review their tenants’ plans and disclosure statements. Disclosure statements filed by reorganizing debtors should include financial information with projections, which are useful in evaluating the tenant’s ability to provide adequate assurance of future performance under leases to be assumed. Other significant issues for landlords to assess include:
- Process for lease decisions to be made and inclusion of proposed cure amounts with sufficient opportunity to object
- Lease decisions to be made no later than the deadline to assume or reject absent prior written consent of the landlord
- Reasonable cure dispute procedures, including that cure disputes should be considered at the confirmation hearing, and authority to consensually resolve amounts
- Finality of lease decisions upon plan confirmation conditioned on plan becoming effective, irrespective of any court decision on a disputed cure amount
- Reaffirmation of lease guarantees and obligations of co-obligors, including debtors and nondebtors, under leases
- Ability to opt out of proposed releases of nondebtor third parties under plan
- Limitation of liens against leases granted to exit financing lenders consistent with related lease provisions
- Preservation of landlords’ rights of setoff and recoupment, including ability to setoff or recoup security deposits under rejected leases.
In the next issue of Bankruptcy Basics, we will share quick-hitting recaps of various common retail bankruptcy filings and what landlords should look out for.