Chapter 11 bankruptcy is challenging and replete with pitfalls. Debtors face very low odds of success. The process takes cooperation from lenders and creditors, plus a strong trustee to formulate a plan of reorganization, navigate that through the court, and keep the business operating. If the debtor makes it that far, the plan needs to be quickly and decisively implemented.
Contested plans lower the odds. Challenges to a plan are often time-consuming, expensive and fraught with risk for all parties.The reorganization gets bogged down in discovery, depositions and expert witness testimony. Everyone incurs significant costs preparing for and attending evidentiary hearings or trials before the court issues a ruling.
Debtors risk having an original or amended plan disapproved and going back to the drawing board when they may not have the time and credit support to do so. Lenders and creditors risk being forced into a worse position by having the bankruptcy court order terms or conditions such as a lower interest rate or longer payment schedules.
The recently confirmed bankruptcy Rothstein Rosenfeldt Adler offers an insight into how just how contested — and amicably resolved — the process can be. The criminal aspects of the case — the largest fraud in Florida history — made the appointment of a trustee, Herbert Stettin, a “fait accompli.”
Complicated lending relationships along with sophisticated creditors, aggressive litigators and a significant amount of actual recoveries, along with potential additional recoveries, caused the case to be contentious.
The stakes were high as the possible returns and results were equally high. A cadre of the best attorneys in South Florida rose to the challenge of getting their constituencies a bigger piece of the pie. Although I had a small retention in the case, I was not involved in the plan process or negotiations with the parties.
Stettin, in consultation with his advisors and counsel, proposed a plan that was not consensual with certain stakeholders in the case. That is not rare. Sometimes, the trustee will file a plan and then work with the parties to build consensus.
The creditor’s committee proposed a plan and another creditor filed a plan on the eve of the confirmation. Many parties contested parts of the trustee plan. A second amended plan was filed and negotiations continued.
Lines were drawn over the trustee’s business judgment, versus creditors’ judgment versus individual creditors’ judgment about current matters, future litigation and recoveries. These divergent positions, based upon litigation positions and potential recoveries, must be mitigated by the downside risk of taking an aggressive litigation position and losing.
Creditors try to exert more influence over a reorganization when future profits are more speculative or based upon the outcome of litigation. When BankUnited Financial Corp. filed Chapter 11 bankruptcy after the FDIC took over its namesake bank, the creditor’s committee included large stakeholders of bond debt who were the beneficiaries of the outcome of legal action and wanted to control the strategy.
Lenders apply more pressure when their collateral is discounted by market or business conditions, giving rise to secured and unsecured claims that will likely swamp the other classes of creditors. In the bankruptcy of Medical Staffing Network Holdings Inc. and related entities, a secured lender found a solution by proposing, and then funding, a plan of reorganization to maximize value for its claims and some value to general unsecured creditors.
It is incumbent upon a trustee to balance swinging for a home run versus striking out. Some creditors would rather keep a safe recovery, a double if you will, rather than the risk of the striking out and getting nothing. On the other hand, some parties want the trustee to swing for the fences in order to get everything owed.
This is negotiation at its finest and it occurs in Chapter 11 cases every day. Although the parties did not formally engage in mediation, it is my understanding that the parities participated in a form of shuttle diplomacy to build consensus on a plan that they ultimately all agreed with.
The consensual approach has worked well. HearUSA Inc. proposed a reorganization plan that involved significant input and consensus from the secured lender, creditor’s committee, equity committee,and a major supplier. The plan was easily approved and implemented. The Greenspoon Marder law firm purchased the assets of Ruden McCloskey in a form and fashion that provided value to all classes of creditors and ended with a confirmed plan of reorganization.
It is always better to resolve differences to reduce the strains on the debtor. Think of a business as a rubber band. It can be stretched, twisted, turned and still return to its original shape. If the rubber band is stretched too far by a lender or creditor challenge, it can break.
Once the band breaks, the business may lose significant value. It is imperative for restructuring counsel, advisors and business professionals to work together and with their clients to set realistic expectations, craft solutions, focus on the outcome and know when to say “we have a deal.”