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Chapter 11: Exclusivity
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Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)

ID Name Group Other Code
Problem Referenced Proposed Solutions
NBRC-0007 Leon S. Foreman Scholar-in-Residence - American College of Bankruptcy - Selective Professional Association of 7, 13 & 11 Attys; Accts; Professors; Judges * Gov't Officials (Approx. 300 Fellows).
Are exclusivity provisions working acceptably Exclusivity provisions are working acceptably, although on some occasions they are abused by debtors.
NBRC-0180 Marc S. Young Disputed Secured Creditor
1121 Rule 3016 In order to ensure that all relevant information is considered in a plan, creditors should be able to contribute to its creation and solicit support from other creditors. In particular, securing future credit from existing secured creditors, especially for the procurement of new inventory, is an essesntial ingredient of any successful plan and should be provided for under the Bankruptcy Code. Code should be "liberalized" to allow creditors to prepare competing plans and solicit support from other creditors prior to submission of the debtor's plan.
NBRC-0180 Marc S. Young Disputed Secured Creditor

Bankruptcy Code puts creditors in an unnecessarily awkward position because they cannot take any action to protect themselves or the public, such as notifying the Better Business Bureau, that would endanger the viability of the debtor's business. Creditors must simply "stand on the sidelines" and hope that the debtor makes enough profit to pay its debts. The "real shame" of the bankruptcy system is that the courts will give ailing businesses 120 days to reorganize, even though the odds do not favor success. Regretfully, requests to convert Chapter 7 filings to Chapter 11 filings are generally denied until the court believes the business is beyond saving, at which point there are often few assets left to pay unsecured creditors. Courts should convert less promising Chapter 11 filings to Chapter 7 liquidations early in the bankruptcy process in order to prevent debtors from maintaining failing businesses and further depleting assets.
NBRC-0208 L. E. Creel, III Acting Chairman, American Bankruptcy Institute
Trading exclusivity for "new value" would be disastrous for the debtor and the reorganization system. The author predicts that if this one-sided compromise were achieved, especially in single asset real estate cases, "at the time of commencement of the Chapter 11 case, or shortly thereafter, the Lender will file a liquidation plan; will control the vote for its liquidation plan (and against the Debtor's); will, from its own more available resources, advance more 'new value' than the Debtor can accumulate; get its Lender's plan confirmed; then pay the 'new value' back to itself as a credit on the Lender's deficiency--and, thus, the Debtor will be denied any opportunity for effective reorganization. Such a structure is patently offensive to the reorganization purposes of the Code....[T]he 'new value' device has merit and encourages fair reorganization, but I would not trade it for loss of exclusivity." Section 1129 already provides lenders adequate protection and does not need to be amended. Any perceived problem with application of this section is attributable solely to inconsistent interpretation by the courts. If the "new value" concept has merit, clarifying language could be added to § 101, but exclusivity is a valuable tool that should continue to be available to the debtor.
NBRC-0253 Barry E. Adler Professor, NYU School of Law
Author notes that the NBRC is considering a proposal providing that a debtor's plan-proposal exclusivity period would expire when the debtor or its equity holders attempt to cram down a new-value contribution in a reorganization plan. Author concludes that this proposal has two problems: (1) the exclusivity period would terminate whenever a debtor proposed a plan that would distribute prioerty to anyone other than a preferred stockholder or a creditor, and (2) holders of fixed claims or interests would not be protected from false insolvency claims. Along with a corresponding technical amendment, amend § 1121(c)(4) to read: "the debtor has filed a plan that provides for property to be received or retained by an entity other than (i) a holder of an allowed claim; or (ii) a holder of an interest with an allowed fixed liquidation preference or an allowed fixed redemption price.
NBRC-0303 Commercial Law League of America Commercial Law League of America (CLLA)

The Commerical Law League of America believes that the following issue should be considered by the NBRC: Do the current rules adequately limit exclusivity to file a plan of reorganization Should exclusivity periods be more or less restrictive Would a standard for exclusivity rather than a time-based rule be more effective What steps can be taken to get chapter 11 cases concluded more quickly The CLLA believes that these issues should receive moderate priority (no additional details are provided).
NBRC-0320 Robert M. Zinman, on behalf of the Bankruptcy Institute American Bankruptcy Institute ("ABI") Numerous position papers, memoranda and research material

Valuable time is wasted through prolonged exclusivity periods, successive postponments, and unnecssary filings with regard to exclusivity. Code should be amended to shorten exclusivity periods, and these periods should be terminated if the debtor does not file a 100% payment plan.
NBRC-0429 Mark Homan England Partner, Price Waterhouse, UK
Chapter 11 permits the debtor to hold the creditor to ransom during the exclusivity period in some cases long after the business has no hope of reconstructing. The negotiating position this gives the debtor distorts absolute priority.
Place the burden of proof on the debtor to show why he should remain in Chapter 11 rather than Chapter 7 and take steps to insure that a sale of the business can occur at the appropriate time. Reduce the period of exclusivity. This last suggestion would help, but not to the same extent as the two prior solutions.
NBRC-0710 Franklin Feldman Attorney Exhibit A - a collection of letters from and to author concerning the enforcement of a Guarantee and legal representation of the company; and, Exhibit B - exchage of letters between author and Michael L. Cook concerning a request for legal fees and a threat of sanctions. 1121
Author invested in company which had filed chapter 11 but which got a new president and CEO whom author thought could turn the company around. Author later became convinced that the CEO had acted in his own best interests, and not those of the company, when the company had to file chapter 11 two more times. Author petitioned for the appointment of a trustee or examiner and was denied, and has been actively involved in the legal procedings of the bankruptcy. Author writes with suggestions for changes in the bankruptcy code based on his experience. A Debtor's exclusive right to present a Plan should expire at the end of 120 days, and may not be extended. After that point any creditor or stockholder should be permitted to file a Plan.
NBRC-0795 Karen Cordry Bankruptcy Counsel, National Association of Attorneys General (NAAG) (comments are her own, however, because there was not enough time to review the issues in depth with the Attorneys General)

"I have read and fully support the comments in the Department of Justice's filing with respect tot eh new valued and claims classification proposals. I would only like to supply some brief additional domments based on my experience on a creditors' committee in the Celotex bankruptcy, in which a new value plan was initially proposed and tenaciously adhered to until the unique circumstances of that case forced its abandonment." "The current proposal would allow a new value proposal to be made at will; only if the debtor moved to cram down such a plan would the court's review process come into play, along with the automatic termination of exclusivity. This timing, I fear, gives the debtor far too much control over the process and does not adequately recognize the creditor's rights." "My personal preference would be for exclusivity to terminate at the point where the debtor seeks to solicit votes for a plan that is not supported by existing creditors' committees. If the Commission believes that this puts too much power in the hands of the creditors, author suggests four additions which should be made to the current proposal.
NBRC-1028 Jim Gulechyn National Credit Manager, General Mills, Inc.
1121, 1129
Often the debtor seeks an extension of the exclusive period in which to file a plan and solicit acceptances. Because the "best interests of creditors" test of §1129(a)(7) is met if creditors receive a plan as little as the liquidation value at the timeof confirmation, creditors often lose substantial value against their wishes and best interests because of extensions of exclusivity. "To solve this problem, §1129(a)(7) could be amended to provide that, in a plan (other than a plan of liquidation) confirmed after an extensionof exclusivity, the time to measure the "best interests of creditors" is when exclusivity was first extended, not when the plan is confirmed."
NBRC-1069 T.C. Walthour Director, Corporate Credit, Dean Foods
1121, 1129(a)(7)
Debtors often get an extension of the period of exclusivity. During this time, the value of the estate can diminish. "Because the 'best interests of creditors' test of §1129(a)(7) is met if creditors receive a plan as little as the liquidation value at the time of confirmation, creditors often lose substantial value against their wishes and best interests because of extensions of exclusivity." "To solve this problem, §1129(a)(7) could be amended to provide that, in a plan...confirmed after an extension of exclusivity, the time to measure the 'best interests of creditors' is when exclusivity was first extended, not when the plan is confirmed."
NBRC-1141 L.E. Creel, III Acting Chairman, American Bankruptcy Institute (ABI)

Author feels that the trade of (i) the elimination of the Debtor's 180 day exclusive period for (ii) the inclusion of "new value" is too one-sided. It is "a disastrous trade for the Debtor and for the reorganization system." "There is nothing unfair about the Code's balanced approach to resolving the basic issue between the Debtor and the Lender." "Personally, I believe the 'new value' device has merit and encourages fair reorganization, but I would never trade it for loss of exclusivity."


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