Mr Cooper Group Inc (COOP)

[thepennyguy]

Plan Formulation—Creditors' Committees

A reorganization plan must be formulated that will allow the DIP to run the business profitably. The DIP has an initial exclusive right for 120 days to file the plan, but the creditors get to vote on whether to accept or reject the plan. Hence, much of the initial stages of the bankruptcy require formulating a plan, negotiating with creditors to secure their votes, then getting the plan confirmed by the court. Sometimes, in what is called a prepackaged bankruptcy, the debtor will negotiate with its creditors before filing so that the debtor will already have an acceptable plan, allowing it to emerge from bankruptcy sooner. Once the plan is confirmed, then all parties in interest, including those who voted against the plan, are bound by it.

To facilitate the negotiation with creditors, a creditors' committee is formed by the United States Trustee that is composed of representatives of the business debtor's 7 largest creditors. The debtor must negotiate with the creditors' committee to arrive at a reorganization plan that will allow the debtor to survive at the least possible cost to the creditors. The plan will detail what assets to sell, which executory contracts will be rejected, and how creditors are classified and how much each class will be paid as a percentage of their claim.

The debtor is given 120 days to file a plan and 180 days to confirm it. If the debtor fails to either provide a plan or get a plan confirmed, then the creditors may submit a plan. The time limit motivates the DIP to formulate a desirable plan that will be acceptable to its creditors, because if it doesn't, the creditors will be allowed to submit a plan that may be less desirable for the DIP.

Creditors' committees are not usually formed for most small businesses and individual debtors filing under Chapter 11, since there is usually a lack of interest from creditors in participating in a committee. In these cases, the U.S. Trustee takes a more active role in shaping the plan.

Disclosure
The DIP must negotiate with the creditors' committee for an acceptable plan. Since the creditors vote on whether to accept the plan or not, the DIP must send the creditors a disclosure statement that is approved by the court, after notice and a hearing, which contains adequate information so that creditors can evaluate it and make an informed decision. For a big business, the disclosure statement is much like a prospectus for an investment, since the same types of information must be disclosed. Generally, the disclosure statement will provide a history of the business and its transactions, the details of its plan to emerge from bankruptcy, possible alternatives to the plan, and the financial information that creditors need to evaluate the probable success of the plan.

Solicitation and Voting
When the court approves of the disclosure statement, it also sets a time to collect all votes. Creditors receive ballots in which they choose to either accept or reject the plan. The ballots must be returned by the prescribed time, or their vote is not counted.

The Chapter 11 Code has specific rules about who can vote and how the votes are counted. Creditors and equity holders are placed in classes, according to the type of collateral or the priority of their claims. For instance, secured and unsecured creditors would be in separate classes, as would be preferred and common stockholders. Often, all unsecured claims of little value are also placed in a class separate from other unsecured creditors to reduce administration expenses.

Since creditors and equity holders vote as a class, how they are classified will affect their voting rights. Although the DIP classifies the creditors and equity holders, to prevent classification schemes designed to manipulate votes, the classification must have a reasonable basis and the court must approve of the classification.

The plan must describe how the creditors will be classified, particularly which classes will be impaired, since they will be the only ones voting on the plan. An impaired class is one whose rights are being altered under the plan from nonbankruptcy law, which, in most cases, means that they are getting less than the full amount of their claim.

Unimpaired classes are deemed to accept the plan, since their nonbankruptcy rights are not altered, except that the debtor has the right to cure defaults and to decelerate loans by compensating the class for the delay in payment. An impaired class who is getting nothing under the plan is deemed to reject the plan. Hence, only impaired classes who are getting something get to vote on the plan.

Although each member of an impaired class gets to vote, only the class vote matters. Under §1126(c) of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least 2/3 in amount and more than ½ in number of the allowed claims in the class. Those creditors who rejected the plan are at least entitled to receive the present value of what they would have received under a Chapter 7 liquidation.

For those holding interests in the debtor, such as shareholders, a class of interests is deemed to have accepted the plan if at least 2/3 of the class voted in favor of the plan.

link to full BK codes
http://thismatter.com/money/credit/bankruptcy/chapter-11/chapter-11-overview.htm