Exclusive Solicitation Period in Chapter 11

Extending the Exclusive Solicitation Period in Chapter 11 Bankruptcy

 

11 U.S.C. § 1121(c)(3) grants the debtor the exclusive right to obtain acceptance of a plan filed within the exclusivity period for the first 180 days following the date of the order for relief.  “Upon request of a party in interest,” this period of exclusivity can be increased by the court “for cause.”  11 U.S.C. § 1121(d)(1).  Although the Bankruptcy Code does not define “cause” for purposes of an extension request under 11 U.S.C. § 1121(d), it is well established that the decision to extend a debtor’s exclusivity period for “cause” is committed to the sound discretion of the court and should be based upon the facts and circumstances of a particular case.  See, e.g. In re Amko Plastics, Inc., 197 B.R. 74, 77 (Bankr. S.D. Ohio 1996) (noting that in determining whether the requisite “cause” exists, “the legislative intent has been construed to leave the question to the reorganization court in the exercise of its discretion and to promote maximum flexibility to suit various types of reorganization proceedings.”) (citations omitted).  Congress has acknowledged that permitting adequate time “in order to allow a debtor to reach an agreement [with its creditors]” is a valid reason for extension.  H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 232 (1977).

Bankruptcy courts typically examine several non-exclusive factors in determining whether there is “cause” to extend exclusivity, including:

(i)         the size and complexity of a debtor’s case;
(ii)        the necessity for sufficient time to permit a debtor to negotiate a plan of reorganization and prepare adequate information;
(iii)       the existence of good faith progress towards reorganization;
(iv)       the fact that a debtor is paying its bills as they become due;
(v)        whether a debtor has demonstrated reasonable prospects for filing a viable plan;
(vi)       whether a debtor has made progress in negotiations with its creditors;
(vii)      the amount of time which has elapsed in the case;
(vii)      whether a debtor is seeking an extension of exclusivity in order to pressure creditors to submit to the debtors’ reorganization demands; and
(ix)       whether an unresolved contingency exists.

 

In re Adelphia Communications Corp., 352 B.R. 578, 587 (Bankr. S.D.N.Y. 2006) (citing In re Dow Corning Corp., 208 B.R. 661, 664 (Bankr. E.D. Mich. 1997) (“Dow Corning).  The factors enumerated in Dow Corning are “standardly considered.”  In re Henry Mayo Newhall Memorial Hospital., 282 B.R. 444, 452 (9th Cir. B.A.P. 2002).  Not all factors, however, are relevant to every case, and courts have found “cause” to extend exclusivity based on various combinations of these factors, as well as others.  See, e.g., Rinehart v. Hoffinger Indus., Inc. (In re Hoffinger Indus., Inc.), 292 B.R. 639, 644 (B.A.P. 8th Cir. 2003) (“It is within the discretion of the bankruptcy court to decide which factors are relevant and give appropriate weight to each.”); In re Express One Int’l, 194 B.R. 98, 100 (Bankr. E.D. Tex. 1996) (finding “cause” based on only four factors); In re United Press Int’l, Inc., 60 B.R. 265, 269 (Bankr. D.D.C. 1986) (finding “cause” based on only three factors).

Further, as noted in In re Perkins, 71 B.R. 294, 299 (W.D. Tenn. 1987), the standard for demonstrating “cause” to extend the exclusivity period within which a debtor may solicit acceptances of a plan is more lenient where the debtor has already filed a plan.  The Perkins court explained that:

. . . if the debtor has filed a plan; [sic] potential for upsetting the bargaining balance is more remote. No longer in the dark with respect to the debtor’s intentions, the creditors have a basis for decision, and can either accept the plan or fight extensions to the exclusivity period, in order to file a competing plan. Therefore, extensions of the exclusivity period for gaining acceptances do not have the potential for detrimental impact upon the creditors’ bargaining position occurring where no plan has been filed. Accordingly, cause may be measured by a more lenient standard in the determination to grant an enlargement of time in which to gain acceptances to a filed plan.

Id. at 299.


By: Jamie L. Harris, Esq.

 

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