For many lawyers practicing bankruptcy law, the operation has become routine – “mechanized” is perhaps the more apt description.  Particularly in the area of consumer bankruptcy (Chapter 7 and 13), there are a lot of forms being generated behind the scenes because software has made it easier to spin out what’s needed to secure a filing at rocket speed.  However, the world of Chapter 11 bankruptcy has remained a bastion of creative lawyering notwithstanding the improvement in technology.

This is true because many of the subtleties of Chapter 11 Bankruptcy practice are left deliberately vague in the statute, thus allowing the creative bankruptcy attorney to fashion extremely innovative arguments to win.

Here’s a quick illustration.  In Chapter 11 Bankruptcy (business reorganization), the debtor must propose a payout to creditors which is know at the Plan of Reorganization.  This is an elaborate structure that categorizes claims into groups or classes based on their legal status.  Thus, unsecured claims are put in a different class than secured claims or tax claims.  Chapter 11 nirvana occurs when the debtor involuntarily restructures the mortgage of a secured creditor down to the value of the collateral- not the amount of the claim.  For example, a developer of a downtown office building might take out a $100 million loan secured by the building and land.  Let’s say things do not go as planned and final build-out is delayed one year.  If the collateral declines in value to say $70 million, the Chapter 11 Plan could propose a forced or “crammed-down” restructure of the loan based on a $70 million loan, not the original $100 million.  The Chapter 11 Bankruptcy Plan can offer a market rate of interest and longer payout so long as the cash stream payments have a present value of at least $70 million.  The remaining $30 million is relegated to an unsecured claim, of which only partial payment is generally required.  Ergo, the classic cram-down Chapter 11 Bankruptcy Plan.

However, there is still a twist.  To get the Chapter 11 Plan approved, the debtor must get at least one of the classes of creditors who are not getting paid 100% to vote for the plan.  In bankruptcy jargon, any creditors whose rights are negatively affected are deemed “impaired” – and the “yeah” vote of an “impaired class” is the ticket to the successful reorganization kingdom.

Several years ago I was representing a large secured creditor in a Chapter 11 bankruptcy case where my mission was to destroy the plan, shut down the bankruptcy, and foreclose on my client’s multimillion dollar collateral (a medical center).  In classic form, the debtor proposed a cram-down plan that would have tied up my client’s collateral until judgment day (so to speak).  Unfortunately, none of the impaired classes were voting against the Chapter 11 Plan.  My client was in a quandary and very unhappy.  So what did I do?  I decided to go make some new law.

Here’s what I did.  I went and bought up all the creditor claims of the unsecured creditor class (about 100 claims).  With my client’s dollars, I paid the holders of the claims 100 cents on the dollars and then had the creditors legally assign the claims to my client.  Bottom line was we bought all of the claims and owned them.  After that was taken care of, my client stepped into the shoes of creditors like restaurants, contractors and the like AND voted each claim against the proposed Chapter 11 Plan!  Yep, we found a way to ensure that no impaired class voted for the Chapter 11 Bankruptcy Plan.

Needless-to-say, the debtor cried foul play and tried to invalidate the votes.  I made a novel argument that since we owned the claims we could do what we wanted, including killing the Chapter 11 Plan.  Since there was no law on the subject, I decided to make my own.  I won.

Wild West for sure.  My client got the collateral and Chapter 11 bankruptcy had a new legal rule or “precedent” as lawyers refer to it.  Since then, other creditors have routinely bought creditor claims to get the same result.

Moral of the story is creativity and courage are the name of the game.  I guess in Wild West terms it’s best for your strategy to be “unpredictable.”  In my view, these qualities increase the likelihood of success.

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