BANKRUPTCY ARTICLE:  COMPETING PLANS

POST-ACQUISITION OF CLAIMS AS A TOOL FOR FILING
A COMPETING PLAN OF REORGANIZATION  
By Glenn R. Reiser
February 1995

      Does an unrelated entity having no prior relationship with a Chapter 11 debtor gain standing to file a competing plan of reorganization through the post-petition purchase and transfer of a pre-petition claim held by a creditor?  The answer is in the affirmative, so long as the claim purchaser does not act in bad faith by attempting to block, impede or in any way manipulate the confirmation process of a debtor’s plan, and the claim purchaser is attempting to submit an alternative plan which has the prospect of maximizing the potential benefits to all creditors.

     In this context, the motive of the claim purchaser is to gain standing as “party of interest” for purposes of filing a competing plan to purchase the Debtor’s assets or business.  Determining the standing of a post-petition purchaser as a “party of interest” involves the interrelationship between Fed. R. Bankr. P.3016(a) and 11 U.S.C. §1121(c) of the Bankruptcy Code (“Code”).

     “Fed. R. Bankr. P. 3016(a) establishes a limited restriction for filing a competing plan.”  Matter of Mother Hubbard, Inc., 152 B.R. 189, 194 (Bankr. W.D. Mich. 1993).  This rule provides:

     A party in interest, other than the debtor, who is authorized to file a plan under §1121(c) of the Code,  may not file a plan after entry of an order approving a disclosure statement unless confirmation of the plan relating to the disclosure statement has been denied or the Court otherwise directs.   Fed. R. Bankr. P. 3016(a) (emphasis noted).

      The Bankruptcy Court in Mother Hubbard explained that a competing plan proponent must satisfy the following two-part test under Rule 3016(a):

   1) The party must be a “party in interest;” and

   2)  the party must be “qualified” to file a plan in accordance with §1121 of the Bankruptcy Code.

     Although the term “party in interest” is not specifically defined in the Code, it does include “the debtor, the trustee, a creditor’s committee, a creditor, an equity security holder, or any indenture trustee.”  11 U.S.C.§1121(c).  The list of parties in interest in Section 1121(c) was not meant to be exhaustive, according to legislative history.  In re First Humanics Corp., 124 B.R. 87, (Bankr. W.D. Mo. 1991).  In fact, “courts have consistently held that party in interest status is an expandable concept depending on the factual context in which it was applied,” and therefore “the determination of whether an entity qualifies for party in interest status must be made on case by case basis.”  Id. [citing In re Amatex Corp., 755 F2d 1034, 1042 (3rd Cir. 1985)].

     A creditor qualifies as a “party in interest” who can file a plan under the limited circumstances of Section 1121(c) of the Code.   In re Rook Broadcasting of Idaho, Inc. 154 B.R. 970, 972 (Bankr. D. Idaho 1993).   Section 1121(c) provides in pertinent part:

     Any Party of interest, including...a creditor...may file a plan if and only if:

1)  a trustee has been appointed under this chapter;

2)  the debtor has not filed a plan before 120 days after the date of the order for relief under this chapter; or

3)   the debtor has not filed a plan that has been accepted, before 180 days after the date of the order for relief under this chapter, by each class of claims or interests that is impaired under the plan.   11 U.S.C. §1121(c) (emphasis added).

     The exclusivity periods of §§1121(c)(2) and (3) may be reduced or increased for cause pursuant to 11 U.S.C. §1121(d).

     In Mother Hubbard, the bankruptcy court explained the Fed. R. Bankr. P. 3016(a) supplements the exclusivity provisions of the Code Section 1121:

Reading the Code and rule together evidences  Congress’ intent to allow the filing of competing plans after the debtor has had a reasonable time to propose and confirm a plan reorganization...If a debtor fails to produce or confirm a plan within the time parameters of §1121, Fed. R. Bankr. P. 3016(a) contemplates that other parties in interest may file competing plans of reorganization.  The result is not prejudicial because the debtor retains the ability to attempt to confirm its own plan of reorganization.  In some instances, authority to file a competing plan may additionally motivate the debtor to more earnestly negotiate an acceptable consensual plan.

The ability to file a competing plan, thereby allowing creditors to cast ballots for multiple plans, also encourages a Chapter 11 policy of “creditor democracy.”  152 B.R. at 195.

     Several courts have held that a post-petition purchaser of a pre-petition claim is a “party in interest” with standing to file a competing plan under Fed. R. Bankr. P. 3016(a) and Code §1121(c).  See In Re Rook Broadcasting of Idaho, Inc., 154/B.R. 970 (Bankr. D. Idaho 1993) (court held that “under the expansive nature of term “party in interest,” party who purchases claims against Chapter 11 debtor’s post-petition has standing to propose a Chapter 11 plan where such party had attempted to comply with rules on transferring claims.”);  Matter of Mother Hubbard, Inc., 152 B.R. 189 (Bankr. W.D. Mich. 1993) (court held the “unsecured creditor, as party in interest, would be permitted to file competing plan of reorganization on behalf of Chapter 11 debtor, where debtor had failed to obtain acceptance of its plan by all impaired classes within exclusivity.”); In re First Humanics Corp., 124 B.R. 87 (Bankr. W.D. Mo. 1991) (court ruled that an “entity which had purchases claims against debtor for express purpose of acquiring standing to file proposed Chapter 11 plan on debtor’s behalf qualified as “creditor” entitled to submit such a plan, notwithstanding that its purchase of claims occurred post-petition; mere fact  that purchase was made post-petition did not indicate that entity acted in bad faith.”);  In re American 3001 Telecommunications, Inc., 79 B.R. 271 (Bankr. N.D. Tex 1987) (court held that a plan proponent became a party of interest when it purchased an unsecured claim in the amount of $30.60 and procured the transfer of that claim as required by the Bankruptcy Rules.)  See also In re Zaleha, 162 B.R. 309 (Bankr. D. Idaho 1993) (court recognized that “[T]here is not per se rule denying ‘party of interest’ status to the purchaser of a claim against the bankrupt.”).

     While the bankruptcy court in Zaleha, 162 B.R. 309, recognized that no per se rule exists denying “party of interest” status to a claim purchaser, the bankruptcy court In re Landmark Park Plaza Limited Partnership, 167. B.R. 752 (Bankr. D. Conn. 1994)recently interpreted Bankruptcy Rule 3016(a) to allow the filing of a revival plan if it is filed in good faith and has the prospect of maximizing benefits to creditors.

    To read rule 3016(a) as somehow extending the statutory exclusive period, without showing the cause required by §1121(d), and prohibiting a party in interest from filing a good faith, nonfrivolous competing plan, would create an impermissible conflict between the rule and §1121.   Landmark Park Plaza, 167 B.R. at 756.

     Since the ultimate goal of a post-petition claim purchaser is to seek confirmation of its own plan to acquire the debtor’s assets, it is not surprising that in virtually every reported case the debtor has accused the opportunistic claim purchaser of acting in bad faith. The leading case appears to be In re Allegheny International, Inc., 118 B.R. 282 (Bankr. W.D. Pa. 1990).

     In Allegheny, the court concluded that a party acted in bad faith when, absent curt approval and subsequent to approval of the debtor’s disclosure statement, it purchased a substantial dollar amount of secured claims through a tender offer for purposes of blocking the debtor’s plan and then filed its own plan at the eleventh hour before the confirmation hearing on the debtor’s plan. Allegheny, however, is very fact sensitive.  So long as a claims purchaser is not proposing a plan to unduly delay or prejudice any party, especially the debtor, and such a plan has the prospect of maximizing benefits to creditors, Bankruptcy Rule 3016(a) and Code §1121 permit the good faith filing of rival plans.  See Landmark Plaza Park, supra and First Humanics, supra.  See also Code §1129(c) which contemplates creditors voting on multiple plans.

CONCLUSION

     If a Chapter 11 trustee is appointed or the exclusivity periods of Section 1121 have expired, Bankruptcy Rule 3016(a) permits a “party of interest” to file a competing plan.  A party who effects the post-petition purchase of pre-petition claim qualifies as a “party of interest” under Section 1121 with standing to file a competing plan under Bankruptcy Rule 3016(a), provided that the proponent acts in good faith and intends to present a plan that will maximize the potential benefit to all creditors.  Such a result furthers the Chapter 11 policy of creditor democracy, while at the same time preserves the debtor’s right to pursue confirmation of its own plan.

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