Legal Memorandum: Chapter 11 Reorganization Plan Confirmation

Issue: Whether a reorganization plan may be confirmed under Chapter 11 if the plan does not meet the requirements of 11 U.S.C. 1129.

A plan of reorganization may be confirmed under Chapter 11 only if the plan meets the requirements of 11 U.S.C. § 1129.  That statute provides, first, that a plan must comply with the provisions of Title 11; e.g., it must contain the information set forth in 11 U.S.C. § 1123.  See 11 U.S.C. § 1129(a)(1), (2) (2012).  Section 1123(a) lists the mandatory provisions of a Chapter 11 plan, and § 1123(b) lists the discretionary provisions. For example, § 1123(a)(1) provides that a Chapter 11 plan must designate classes of claims and interests for treatment under the reorganization.  Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.  See 11 U.S.C. § 1122. 

Next, the plan must be proposed in good faith.  29 U.S.C. § 1129(a)(3).  The good faith determination is not subject to a mechanical test.  See 9D Am. Jur. 2d Bankruptcy § 2935.  It requires that the proposed reorganization plan bear some relationship to the resuscitation of the financially troubled entity.  Id.  The good faith requirement is satisfied if the plan is proposed with the legitimate and honest purpose of reorganizing, and it has a reasonable hope of success.  Id.  A plan that is realistic, protects creditors’ rights, and provides sufficient payments to creditors may be found to have been proposed in good faith.  Id.  A plan is not proposed in good faith, by contrast, where it promotes delay that prejudices creditors, or where there is no realistic possibility of an effective […]