Can Creditors Object to Chapter 11?
Creditor objections often play a pivotal role in shaping or defeating a Chapter 11 plan. In Chapter 11 bankruptcy, the debtor proposes a reorganization plan to restructure debts while continuing operations. It is like a Chapter 13 plan except that it’s for businesses. But this doesn’t mean creditors are powerless. On the contrary, creditors have the right to object to the proposed reorganization plan if it fails to comply with the Bankruptcy Code or unfairly impairs their rights.
The Bankruptcy Code requires the plan to meet specific requirements, such as:
- Compliance with all applicable provisions of the Code
- A proposal submitted in good faith
- No provisions that are prohibited by law
- Court approval of any payments made by the debtor, confirmed as reasonable
Creditors may challenge the plan on various grounds, with objections typically raised during the confirmation hearing. This is where the court evaluates whether the plan meets the legal requirements outlined above. If an objection is valid, the debtor may need to modify the plan to satisfy creditors. If the plan fails to meet statutory requirements, it may be rejected.
Here is a look at some reasons why a creditor may object to the reorganization plan:
Unfair Discrimination
The plan must not unfairly discriminate against any class of creditors. If two similar classes of unsecured creditors receive different treatment without justification, the disadvantaged creditors can object.
Failure to Meet the Best Interests Test
Each creditor must receive at least what they would have received in Chapter 7 liquidation. If the plan offers less, creditors can object.
Lack of Feasibility
The debtor must prove the plan is financially viable and likely to succeed. If creditors believe the projections are unrealistic, they can argue the plan is not feasible and will likely lead to future default.
Improper Classification of Claims
Claims must be properly classified based on their legal rights. For example, a debtor may try to separate similar creditors into different classes to gain approval from friendlier creditors. If done unfairly, creditors can challenge it.
Lack of Good Faith
The plan must be proposed in good faith and comply with bankruptcy laws. Creditors can object if they believe the debtor is acting fraudulently or using bankruptcy to delay payments unfairly.
Unfair Treatment of Executory Contracts and Leases
Contract holders may object if the plan rejects or modifies contracts and leases in a way that harms them.
Why Objecting to a Chapter 11 Plan Matters
Creditor objections can lead to significant changes in a proposed reorganization plan or, in some cases, defeat confirmation altogether. A successful objection may:
- Force the debtor to renegotiate more favorable terms
- Prevent improper impairment of your claim
- Lead to the appointment of a trustee or conversion to Chapter 7
- Protect your collateral or contractual rights
Timely, strategic objections can dramatically shift the outcome of a Chapter 11 case.
Contact Us Today
At Brown Dunning Walker Fein Drusch PC, our attorneys represent institutional lenders, commercial landlords, trade creditors, and other stakeholders in bankruptcy proceedings throughout Colorado. We know how to identify plan deficiencies and use the objection process to safeguard your rights and maximize recoveries. Call (303) 329-3363 to schedule a consultation, or reach out online, and learn how we can help you respond effectively to a proposed Chapter 11 plan.