Everything Your Disbursing Agent Wants You to Know Beyond How Much and When Some Practical Advice and Key Plan Distribution Provisions
When crafting your plan, you should clearly define "allowed claim." Many creditors assume they have an allowed claim if the debtor has not objected to their claim as of the effective date of the plan. Yet in many cases, claims have not yet been reconciled, and the debtor may not object to claims until the deadline for objecting to claims contained in the plan, which is typically 180 days after the effective date. Whether you include it in the definition of "allowed claim" or "disputed claim," the plan should include a definition that tells creditors what kind of claims will be allowed and which ones are disputed. An example of a definition of allowed claim that may resolve confusion provides:
"Allowed Claim" means a Claim or any portion thereof (a) that has been allowed by a Final Order of the Bankruptcy Court (or such other court as a Reorganized Debtor and the holder of such Claim agrees may adjudicate such Claim and objections thereto), or (b) as to which, on or by the Effective Date, (i) no proof of claim has been filed with the Bankruptcy Court and (ii) the liquidated and noncontingent amount of which is Scheduled, other than a Claim that is Scheduled at zero, in an unknown amount, or as disputed, or (c) for which a proof of claim in a liquidated amount has been timely filed with the Bankruptcy Court pursuant to the Bankruptcy Code, any Final Order of the Bankruptcy Court or other applicable bankruptcy law, and as to which either (i) no objection to its allowance has been filed within the periods of limitation fixed by the Plan, the Bankruptcy Code or by any order of the Bankruptcy Court or (ii) any objection to its allowance has been settled or withdrawn, or has been denied by a Final Order, or (d) that is expressly allowed in a liquidated amount in the Plan.
On a related note, the plan must include a provision that allows for the reconciliation of claims post-confirmation. This is common sense, but if the definition of allowed claim is unclear, some may argue that any claim that has not been objected to as of the effective date of the plan is an allowed claim. While this situation can be addressed with an omnibus protective objection before the effective date of the plan, a better and less-costly way to address it is to provide clear direction in the plan, as follows:
No Distributions Pending Allowance. Under the Plan, no payments or distributions will be made with respect to all or any portion of a Claim that is not an Allowed Claim unless and until all objections to such Claims have been settled or withdrawn or have been determined by a Final Order to be an Allowed Claim.
You should carefully consider the impact of setting distribution dates at the end of the quarter or at the end of the year. These dates do not allow for a reorganized debtor to make a valid judgment concerning when distributions are appropriate from a resource, accounting and efficiency standpoint. If a reorganized debtor is required to do quarterly distributions at the end of a quarter, it may be forced to expend time and resources to effectuate distributions on a very small number of claims. In addition, with the increased internal control and audit procedures many companies now require on processes of this nature, this self-imposed requirement may hinder the company from timely closing and filing financial statements.
Instead, include a provision for periodic distributions at the discretion of the debtor or disbursing agent. That way, if there are a large number of distributions to be made in a given month, the company can do a mid-month distribution if appropriate and not unduly burden the company. You might also include in a de minimus distribution provision (sampled below) language to the effect that the disbursing agent is not required to make periodic distributions unless the aggregate amount of all distributions authorized to be made in a given batch has a value more than a specified amount. The downside to making distributions at the debtor's discretion, of course, is the concern that particular creditors may demand distributions on account of their claims immediately upon settlement of their claims.1 Giving the reorganized debtor discretion to make distributions could take away some leverage. In any case, a sample plan provision providing for the disbursing agent's discretion is as follows:
"Distribution Date" means (i) the date chosen by the distribution agent in the exercise of his sound discretion for the distribution under the plan that is as soon as reasonably practicable after the Effective Date, if such Claim is then an Allowed Claim, or (ii) the date chosen by the distribution agent in the exercise of his sound discretion for the distribution under the plan that is as soon as reasonably practicable after the date such Claim becomes Allowed, if not Allowed on the Effective Date.
In most cases, there are a number of material claims that are unresolved at the time of the first projected distribution. The plan will often provide for the establishment of a reserve containing a specified amount of plan currency to distribute on account of the claims that become resolved after distributions are made. If, for example, the unresolved claims constituting the reserve become disallowed, the plan must provide a mechanism by which the reserved plan currency will be distributed on a supplemental basis to the appropriate class. It is also important to notify creditors that they will not be receiving their entire projected recovery in the first distribution, as the result of the number of material outstanding claims that need to be resolved post-confirmation. Again, it is important that the plan provision give the disbursing agent the authority to make such supplemental distributions at its discretion. A sample supplemental distribution provision provides:
Distribution Reserve/Supplemental Distributions. Each holder of an Allowed Class X Claim will receive a pro rata share of all Plan Distributions reserved in respect of Class X Claims that are not Allowed Claims as of the Effective Date that subsequently become Disallowed Claims, in whole or in part. Such supplemental Plan Distributions shall be made from time to time at the discretion of the Disbursing Agent.
Note that a committee may negotiate additional language to the effect of "in no event shall the final such supplemental Plan Distribution be made later than 60 days after the last Claim becomes an Allowed Claim or a Disallowed Claim."
Other Key Distribution-Related Plan Provisions
Claims Against Multiple Debtors. Even though a creditor is entitled to only one recovery on account of a single ground or theory of recovery, claimants often file claims against multiple debtors. To account for problems that could arise in connection with distribution, your plan should include a provision that clarifies that the claimant will receive one distribution on account of a claim. A sample provision provides:
Claims Allowable Against Multiple Debtors. Notwithstanding anything in the Plan or in the Schedules to the contrary, to the extent a Claimholder has a Claim that is allowable against more than one of the Debtors based upon the same ground or theory of liability, such Claim will only be counted once for determination of distributions to be made to such Claimholder (assuming the plans treat creditor claims against all debtors as being in one class or consolidated).
Unclaimed Distributions. An effective distribution-related plan provision is one that provides that any unclaimed distributions will revert back to the estate one year after initial distribution. This eliminates the disbursing agent from having to maintain records to comply with the appropriate state escheat laws, and provides those creditors that can be located with a potentially higher distribution. This type of treatment is consistent with the requirement that the creditor must notify the claims agent of address changes. A sample provision provides:
Unclaimed Distributions. Any Cash or other property to be distributed under the Plan, that remains unclaimed (including by an Entity's failure to negotiate a check issued to such Entity) or otherwise not deliverable to the Entity entitled thereto before the later of (a) one year after distribution or (b) 120 calendar days after such Claim becomes an Allowed Claim by a Final Order, shall become vested in, and shall be transferred and delivered to, a Trust for the benefit of holders of Class X Claims. In such event, such Entity's Claim shall no longer be deemed to be Allowed and such Entity shall be deemed to have waived its rights to such payments or distributions under the Plan pursuant to §1143 of the Bankruptcy Code and shall have no further Claim in respect of such distribution and shall not participate in any further distributions under the Plan with respect to such Claim.
Record Date for Distributions. A key plan provision that can have a significant impact on distributions is the record date for distributions. This date should be clearly set in advance of the anticipated effective date of the plan. For example, an appropriate record date might be five days after the anticipated date the confirmation order will be entered. Setting an early record date will allow for any indenture trustees or transfer agents to freeze their registers as of a date certain, and be prepared to distribute in a timely and efficient manner. If a record date is close to or on the effective date, holders of bonds or other securities may encounter a delayed distribution due to the required steps a trustee must take even after receiving a distribution from a debtor. If this occurs, the debtor will often receive numerous calls inquiring about distribution status, when in fact distribution to the trustee has already been made. Making things difficult on the indenture trustees makes it difficult on the disbursing agent because he or she will receive many calls, creating confusion for the claimant.
By providing an earlier record date, the trustee can do much of the work in advance and effectuate a more timely distribution to the ultimate creditors.
De Minimis Distributions. A plan provision providing for nonpayment of amounts less than a de minimis amount ensures that the debtor is not spending $50 to pay out $1 on a claim, especially when the recovery percentage is low. For example:
De Minimis Distributions. Neither the Distribution Agent nor any Servicer shall have any obligation to make a distribution on account of an Allowed Claim if (a) the aggregate amount of all distributions authorized to be made has a value less than $250,000, or (b) if the amount to be distributed to the specific holder of the Allowed Claim is or has a value less than $50.
In addition, setting the de minimus bar too high may effectively take away a creditor recovery. While you may feel tempted to cut and paste boilerplate distribution provisions and language into your plan without review as the finish line draws near, resist! It is important to focus your full attention on distribution provisions.
Tips for Ensuring a Smooth Distribution Process
Run the math. Always, always, always have your financial advisor or someone with similar skills run through the distribution and reserve methodologies before finalizing the plan. Often, the language contained in distribution plan provisions either does not accomplish the parties' intent or does not include some technicalities that will ensure that the disbursing agent can facilitate the parties' intent. If you do not check the math by following the proposed plan provisions, the result may be a distribution methodology that is unworkable in practice. The more complex the distribution methodology, the more thoroughly the calculation should be analyzed in a model distribution situation.
Track the distribution provisions if you represent a creditor. If you represent a creditor, you should focus on whether the plan provides that distributions will be made to individual claimants within a debtor group or individual claims. If the plan provides that distributions will be made on account of individual claims, your client may have a convenience-class claim. This distinction is often important to claims traders who may have obtained blocking positions by purchasing numerous low-dollar claims. It is likely in those circumstances that post-petition interest will not be paid on account of convenience-class claims. If the treatment is unclear in the plan or disclosure statement, there are clues based on how your client was solicited for voting purposes. Did the claimant receive one ballot per debtor or many? Is there additional information in the confirmation order? Answering these questions may give you additional clarity on this issue.
File a motion to establish creditor reserves. Some debtors have successfully obtained orders establishing maximum creditor reserves in advance of a distribution. This type of order is obtained before a distribution but after confirmation of a plan. The exhibits supporting the motion seeking an order establishing creditor reserves identify the amount reserved for every claim and indicate which claims will be included in upcoming distributions and in what amount. This provides interested creditors an opportunity to have increased visibility into the reserves and the amount of distribution they will receive. This order also prevents the disbursing agent or trustee from unnecessarily holding funds for disputed claims that clearly exceed their maximum reasonable basis, and at times allows for an interim distribution where a distribution might not have been possible absent a motion.
While you may feel tempted to cut and paste boilerplate distribution provisions and language into your plan without review as the finish line draws near, resist! It is important to focus your full attention on distribution provisions or run the risk that a great case and great plan will be overshadowed by distributions that disappoint.
1 Perhaps the greater risk is that no distribution gets made for long periods of time, leaving creditors without recovery for periods of time not contemplated by the plan or the debtor.