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Berger Singerman's 13th Bill: Researching Cramdowns - Updated
Tuesday, October 14 2008 @ 11:01 AM EDT

I don't want to overstate anything, but I can't help but notice that Berger Singerman's 13th bill has just been filed, and it includes this intriguing notation on Exhibit A [PDF], the breakdown of how it spent its hours in September on SCO's behalf:
9/26 - AJS - Review Memo by I. Marcushamer Regarding Cramdown of Stand Alone Plan and Prepare Correspondence to Him Regarding Same - 0.20
A cramdown is exactly what it sounds like, I gather from my research, a bankruptcy court's approving a reorganization plan over the objections of one or more creditors. I say I don't want to overstate it because lawyers are supposed to research all likely and even reasonably conceivable alternative possibilities, so this doesn't necessarily mean that the hopes for cash infusions are over. It does indicate that SCO's lawyers are at least thinking about the alternative, having to do a standalone plan that at least some creditors might not like so very much. And creditors do get to vote, or more accurately some creditors do.

Other interesting tidbits from the exhibit are several interfaces with Boies Schiller guys, including Ted Normand helping to prepare Darl for his testimony at the most recent bankruptcy hearing and "Mauricio" discussing the "Novell constructive trust issue", Mauricio presumably being Mauricio Gonzales of Boies Schiller.

Here are the documents:

578 - Filed & Entered: 10/11/2008
Application for Compensation
Docket Text: Monthly Application for Compensation [Thirteenth] for Services and Reimbursement of Expenses, as Co-Counsel to the Debtors in Possession for the Period from September 1, 2008 through September 30, 2008 Filed by Berger Singerman, P.A.. Objections due by 10/30/2008. (Attachments: # (1) Notice # (2) Exhibit A# (3) Certificate of Service and Service List) (Makowski, Kathleen)
So, why might a creditor object to a plan? If it gets less than it thinks it should. If the plan gives creditors only a portion of what is owed, the question is how much is enough to be fair? The debtor and all the creditors may not agree on the perfect place to draw the line. When Delta Airlines filed a reorganization plan, which included arrangements for creditors to be paid in stock in the new company instead of cash, the issue of a cramdown was discussed in this International Herald Tribune article from 2006:
Typically, in each class of creditors Delta's plan would have to be approved by holders of two-thirds of the claims and a majority of the number of individual creditors, said New York bankruptcy lawyer William Rochelle. If a class is not impaired — that is, if they are guaranteed of getting all of their money back no matter what — they generally don't get to vote, Rochelle said.

If one or more classes of creditors do not approve the plan, Delta could still confirm the plan through a cramdown, a maneuver in which it must show the court that the dissenting class will receive more under the plan than it would under a Chapter 7 bankruptcy liquidation, Rochelle said. The company also would have to show that any subordinate class, such as shareholders, would get nothing in the way of recovery under the reorganization plan, Rochelle said.

Delta already has met that second test because its plan calls for current shares of the company to be wiped out.

If a competing plan were filed, creditors would vote on each individually. There have been bankruptcy cases where two competing reorganization plans were approved by creditors; in such a case, a judge decides which plan is confirmed after holding a hearing to determine which plan is in the "better interest" of the creditors.

"Bankruptcy is like anything else," Rochelle said. "Money talks at the end of the day."

Money talks. Ain't that the truth? But you can understand from this article why Novell was arguing against another extension of the period of exclusivity at the last hearing. It didn't prevail, but the idea was that if others were free to offer reorganization plans, it could be a good thing, since then the judge can pick which is the best, an enhancement of Novell's and other creditors' options. But I also notice that a cramdown, according to this attorney quoted, requires that shareholders get nothing. I can't help but remember Arthur Spector telling the judge at that same hearing that SCO had not given up hope of caring for the interest of shareholders by raising cash instead of doing a standalone, so that too tells me that this research doesn't necessarily mean it's the new path SCO has decided to go down. Rather, it more likely is "what if" research, just in case they can't get investors on board. But that's just a guess.

Anyway, some of Delta's creditors didn't like the plan, and there was some dustup about that. But eventually, 95% of the creditors came around, and the plan was approved without a cramdown. Adelphia wasn't so fortunate in its bankruptcy. If you want to see just how complicated a cramdown can be, read Adelphia's 8K from 2006 on the various issues that came up in its case, and all the options it had to try to think through. For example, the plan evoked numerous objections, but some of them were, it writes, contradictory, so how do you amend a plan in the face of that kind of opposition? In the end, according to this article by White & Case, which represented a group of creditors who objected to being paid only 20 cents on the dollar, it faced years of litigation, and in the end it paid that group of creditors almost the full amount owed, after White & Case itself offered a plan.

SCO has a number of options now, but it's running out of time. Remember they discussed that at the September 16th bankruptcy hearing? It's got a drop dead date, by which time any plan must be offered and approved, and that is likely why it's looking into all options now.

This article on Chapter 11 Bankruptcy Basics, provided by the Administrative Office of the U.S. Courts, provides some more info:

Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a chapter 11 plan, and section 1123(b) lists the discretionary provisions. Section 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.

Under section 1126(c) of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class. Under section 1129(a)(10), if there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered). Moreover, under section 1126(f), holders of unimpaired claims are deemed to have accepted the plan....

Because more than one plan may be submitted to the creditors for approval, every proposed plan and modification must be dated and identified with the name of the entity or entities submitting the plan or modification. Fed. R. Bankr. P. 3016(b). When competing plans are presented that meet the requirements for confirmation, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm.

Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on confirmation of a plan. If no objection to confirmation has been timely filed, the Bankruptcy Code allows the court to determine whether the plan has been proposed in good faith and according to law. Fed. R. Bankr. P. 3020(b)(2). Before confirmation can be granted, the court must be satisfied that there has been compliance with all the other requirements of confirmation set forth in section 1129 of the Bankruptcy Code, even in the absence of any objections. In order to confirm the plan, the court must find, among other things, that: (1) the plan is feasible; (2) it is proposed in good faith; and (3) the plan and the proponent of the plan are in compliance with the Bankruptcy Code. In order to satisfy the feasibility requirement, the court must find that confirmation of the plan is not likely to be followed by liquidation (unless the plan is a liquidating plan) or the need for further financial reorganization.

That's basically describing a cramdown, if you read it carefully. The word isn't used, but the part about the judge being the one who decides on final approval of a plan, but taking into consideration the "preferences" of creditors and equity security holders, is essentially describing it. Creditors get to prefer; he gets to ultimately decide.

Incidentally, I did some updates to the article on SCO's Omnibus Claims Objections motion, which may interest you if you are on the list. Specifically, the same article on Bankruptcy Basics explains the position of folks who own shares:

Equity Security Holders

An equity security holder is a holder of an equity security of the debtor. Examples of an equity security are a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a share, security, or interest of a share in a corporation or an interest in a limited partnership. 11 U.S.C. § 101(16), (17). An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim. A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled as disputed, contingent, or unliquidated. 11 U.S.C. § 1111. An equity security holder whose interest is not scheduled or scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it. Fed. R. Bankr. P. 3003(c)(2). A properly filed proof of interest supersedes any scheduling of that interest. Fed. R. Bankr. P. 3003(c)(4). Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest.

Update: I've been reviewing SCO's most recent quarterly, and lo and behold, it addresses cramdowns:

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive, or as to the timing of such distributions, if any. A plan of reorganization could result in holders of the Company’s stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of the Company’s equity security holders.
Interesting, no? Especially considering SCO's longtime habit of foreshadowing its next moves. Speaking of which, here's another tidbit:
The Company’s management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and the Company’s entry into Chapter 11, among other factors, there is substantial doubt about the Company’s ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.

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