Everything A Secured Creditor Wants To Know About Chapter 11! But Was Afraid To Ask!

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1 Everything A Secured Creditor Wants To Know About Chapter 11! But Was Afraid To Ask! David Y. Wolnerman, Esq.! Randolph E. White, Esq.!

2 David Y. Wolnerman, Esq.! Randolph E. White, Esq.! White & Wolnerman, PLLC 110 E. 59th Street, 25th Floor New York, New York Phone: (212) Fax: (212)

3 Introduction! The fundamental entitlement of secured creditors both in and out of bankruptcy is payment in full, up to the value of its collateral.! Indeed, the very nature of secured debt is that the creditor may have the value of the securing property applied to satisfy its debt.! Bankruptcy does not change the nature of secured debt. It does not create secured claims nor does it provide the secured creditor with enhanced rights.! The issue presented in bankruptcy cases is figuring out how and when to allow secured creditors to realize upon the value of their collateral.! Value is neither self-actualizing nor constant. Accordingly, answering the how and when may make a significant difference to secured creditors and the return they realize in a given case.!

4 The Automatic Stay! Immediately upon the filing of a bankruptcy petition under Chapters 7, 11, 12, or 13, a creditor is prohibited/stayed from taking any action which has the purpose and result of collecting a debt or taking possession of property or assets of the debtor.! Additionally, in Chapter 12 and 13 cases, creditors are prohibited from attempting to collect consumer debts from co-debtors, unless the co-debtor became liable for the debt in the ordinary course of the co-debtor's business or until the case is closed, dismissed or converted to Chapter 7.!

5 Scope of Automatic Stay! Although the automatic stay is broad and encompasses most collection activities, certain exceptions exist.! The automatic stay is also inapplicable to separate legal entities such as corporate affiliates, partners in debtor partnerships or to codefendants or guarantors in pending litigation. However, some courts have extended the automatic stay to non-bankrupt third parties in "unusual circumstances."! With respect to acts against property of the estate, the automatic stay continues until such property is no longer property of the estate. With respect to all other acts, the automatic stay continues until the earliest (i) the case is closed; (ii) the case is dismissed; (iii) a discharge is granted or denied in the case of an individual bankruptcy proceeding; (iv) a plan is confirmed in a Chapter 11 case; or (v) the stay is terminated by order of the court, or by inaction of the court upon request for leave from the stay.! United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) - What happens when a secured creditor has repossessed its collateral prior to the filing of the Debtor's petition?!

6 Violating the Automatic Stay! Generally, actions taken in violation of the automatic stay are void and without effect.! Moreover, violations could lead to serious consequences for the creditor.! Section 362(h) of the Bankruptcy Code further provides that an individual injured by a willful violation of the automatic stay may be entitled to recover punitive damages in addition to actual damages which include costs and attorney's fees.! Because of the Bankruptcy Court's desire to protect debtors upon the filing of the bankruptcy petition, creditors should cease all collection or enforcement activities immediately upon learning of the bankruptcy filing. Knowledge of the filing includes any verbal or written notice received by the creditor or an agent of the creditor from the debtor, the debtor's attorney, the court or any third party source.!

7 Relief From the Automatic Stay! The automatic stay merely gives the debtor a "breathing spell" once a bankruptcy petition is filed.! Unless the stay is otherwise terminated, a secured creditor can obtain permission from the Bankruptcy Court to lift the automatic stay in order to foreclose its security interest in the collateral.! Within thirty (30) days after relief from the automatic stay is requested, the stay will terminate unless the court orders the stay continued pending the conclusion of a final hearing and determination on the request for relief.! Relief from the automatic stay will be granted if the moving party can show (i) cause, including the lack of adequate protection, or (ii) no equity in the property and the property is not necessary to an effective reorganization.!

8 Adequate Protection! The Bankruptcy Code recognizes that creditors are entitled during the pendency of a bankruptcy case to have the value of their security interest protected against any decrease in value or depreciation.! The term "adequate protection" is not defined under the Bankruptcy Code. As a result, this issue is frequently litigated by secured creditors who want to protect their collateral during the pendency of the bankruptcy case.! Section 361 of the Bankruptcy Code offers little guidance. It suggests that adequate protection may consist of: Periodic Payments, Additional or Replacement Liens, or Indubitable Equivalence.! Adequate protection is not automatically provided to a secured creditor under the Bankruptcy Code.! The concept of adequate protection is discussed at length by the Supreme Court in the landmark decision of United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988).! In the event adequate protection turns out to be inadequate, a secured creditor should file or renew its motion for relief from stay, request additional adequate protection in the form of periodic payments, or seek additional or replacement liens. In addition, 507(b) provides that a secured creditor who is entitled to adequate protection has a first priority claim to the extent that the protection has not been adequate.!

9 Use of Cash Collateral! "Cash collateral" includes a security interest in the debtor's cash, negotiable instruments, documents of title, securities, deposit accounts and other cash equivalents. 11 U.S.C. 363(a). Cash collateral also includes in the case of secured creditors proceeds, rents and profits received by the debtor after commencement of the bankruptcy case.! Not included as "cash collateral" are proceeds in which the underlying lien is unperfected or invalid or tenant deposits.! In order for the debtor to use cash collateral, the debtor must either obtain the consent of the secured creditor or petition the court for an order, following notice and hearing, to use the cash collateral.!

10 Use, Sale or Lease of Property! In a Chapter 11 bankruptcy proceeding, a debtor may use, lease or sell property under 363(b) or (c) even though the property may be subject to a security interest.! This authority to use, sell or lease property overrides any provision in a contract which purports to terminate or modify the debtor's interest in property, based upon the insolvency or financial condition of the debtor, the filing of a bankruptcy petition, or the appointment of a trustee or receiver. 11 U.S.C. 363(l).!

11 Use, Sale or Lease of Property! Section 363(c) allows the trustee or debtor to use, sell or lease collateral or other property in which a creditor has an interest in the ordinary course of business without notice or prior court hearing.! In order for a trustee or debtor to use, sell or lease property of the estate other than in the "ordinary course of business," notice and hearing are required under 363(b)(1) of the Bankruptcy Code.! The debtor or trustee may sell property free and clear of any liens only if -(i) applicable nonbankruptcy law permits sale of such property free and clear of such interests;(ii) such entity consents; (iii) such interest is a lien and a price at which such property is to be sold is greater than the aggravate value of all liens on such property;(iv) such interest is bona fide dispute; or(v) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.! At a sale of property that is subject to a lien, the secured creditor, unless the court orders otherwise, may bid at such sale and, if successful in purchasing the property, may offset its claim against the purchase price of such property. 11 U.S.C. 363(k).! Section 506(c) allows a trustee or debtor to deduct "reasonable, necessary costs and expenses" for selling the property as a cost of administration prior to turning over the proceeds to the secured creditor.! At the request of a creditor who has an interest in property to be used, sold or leased by the trustee or debtor, the court may prohibit or condition such use, sale or lease as is necessary to provide adequate protection to the secured creditor of its interest.!

12 Credit Bidding! Section 363(k) of the Bankruptcy provides: At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.! Chapter 11 of the Bankruptcy Code strikes a balance between two principal interests: facilitating the reorganization and rehabilitation of the debtor as an economically viable entity, and protecting creditors' interests by maximizing the value of the bankruptcy estate.! In furtherance of those objectives, the Bankruptcy Code permits a debtor preparing a Chapter 11 reorganization plan to provide adequate means for the plan's implementation including arranging for the sale of all or any part of the property of the estate, either subject to or free of any lien[.] 11 U.S.C. 1123(a)(5)(D).!! The plan sale authorized by 1123(a)(5)(D) contains no explicit procedures for the sale of assets that secure debts of the estate.! Section 1129(b) provides circumstances under which a reorganization plan can be confirmed over the objection of secured creditors a process referred to as a cramdown because the secured claims are reduced to the present value of the collateral, while the remainder of the debt becomes unsecured, forcing the secured creditor to accept less than the full value of its claim and thereby allowing the plan to be crammed down the throats of objecting creditors.! Section 1129(b)(1) requires the court to assess whether the proposed treatment of the secured claims is fair and equitable. Section 1129(b)(2)(A) provides three circumstances under which a plan is fair and equitable to secured creditors.!

13 Does Satisfaction of the Indubitable Equivalent Requirement Preclude a Secured Creditor s Right to Credit Bid?! In re Phila. Newspapers LLC, 599 F.3d 298, 318 (3d Cir. 2010) - the Third Circuit ruled that a reorganization plan that provides for a sale of assets free and clear of liens does not have to permit the secured creditors the right to credit-bid as specified in 1129(b)(2)(A)(ii).! In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct (2012), the United States Supreme Court held that the clear language in 1129(b)(2)(A)(ii) requiring the lienholder be allowed to credit-bid could not be overridden by the residual provision, 1129(b)(2)(A)(iii).!

14 Limiting the Right to Credit Bid! Section 363(f)(4) of the Bankruptcy Code provides that [t]he trustee may sell property... free and clear of any interest in such property of an entity other than the estate, only if... such interest is in bona fide dispute U.S.C. 363(f)(4).! The phrase bona fide dispute is not defined by the Bankruptcy Code. Although courts have not agreed on a precise definition of bona fide dispute, it entails some sort of meritorious, existing conflict. Courts have found the existence of a bona fide dispute for purposes of 363(f) (4) when there is an objective basis for either a factual or legal dispute as to the validity of the asserted interest.! The language of 363(k) allows a court, in its discretion, to abrogate a creditor's right to credit bid for cause.!

15 Valuation! Valuation is necessary to:! decide whether a creditor is entitled to adequate protection of its interest under 361, 362, 363, 364 and 1205 of the Bankruptcy Code;! decide whether the creditor I s entitled to relief from the automatic stay pursuant to 362(d) of the Bankruptcy Code;! decide whether the trustee of a bankrupt estate may sell property of the estate pursuant to 363(b) or (c) of the Bankruptcy Code;! decide whether a plan should be confirmed pursuant to 1129 of the Bankruptcy Code;! decide whether interest and attorneys' fees should be allowed pursuant to 506(b) of the Bankruptcy Code; and! decide whether the full amount of claim is secured by the collateral under 506(a) of the Bankruptcy Code.!

16 Valuation! The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after hearing on notice to the holder of the secured claim and any other person as the court may direct. Rule 3012, F.R.B.P.! A valuation proceeding is a contested matter under Bankruptcy Rule If the validity, priority or extent of a lien is at issue, in addition to the valuation of the secured claim, Bankruptcy Rule 7001(2) states that the proceeding is an adversary proceeding which is initiated by the filing of a complaint. Typically at a valuation hearing, the parties will present evidence of value, usually through testimony by appraisers or other experts.!

17 Valuation - Determination of Secured Status! Section 506(a) permits a debtor to bifurcate a secured claim into two parts depending upon the value of the collateral.! Under this analysis, a secured creditor has an allowed secured claim to the extent of the value of its collateral and an unsecured claim for any balance. 11 U.S.C. 506(a).! To the extent of any surplus value in the collateral, the secured creditor is entitled to interest and reimbursement of attorneys' fees and expenses. 11 U.S.C. 506(b). The right to interest apparently exists whether or not the documentation so provides. In re Best Repair Co., Inc., 789 F.2d 1080 (4th Cir. 1986). In the case of attorneys' fees, state law controls although the court will review the attorneys' fees for reasonableness. See Matter of Scarboro, 13 B.R. 439 (D.C.Ga. 1981).! The question in most bankruptcy cases is how to value the collateral. There is little guidance in the Bankruptcy Code on how to value collateral.! Section 506(a) suggests that "value shall be determined in light of the purposes of the valuation and proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use on a plan affecting such creditor's interest." 11 U.S.C. 506(a).The value assigned to collateral will generally be different depending upon whether the debtor proposes to dispose of the property or to retain it and use it.!

18 Valuation Methods! Going Concern Value: The going concern value of the property is appropriate when the debtor is attempting to retain the collateral and continue the operation of its business.! Forced Liquidation Value: The forced liquidation value of property is ordinarily the lowest value, and it is the appropriate standard to use when, for example, a business has ceased operations.! Other Valuation Standards: These may include book value, depreciation value, and replacement value.! The value of the collateral is generally determined as of the date for which the valuation relates.!

19 Valuation Methods! Determining Present Value. In determining the present value of income-producing real estate, most appraisers use three methods: Replacement Cost. Under this approach, the appraiser will estimate the cost of new improvements, deduct depreciation, and add the value of the "dirt." The older the property, the less reliable this approach is. Comparable Sales or "Market Data" Approach. An appraiser identifies recent sales of property which are "comparable" to the existing property. Adjustments are then made to each of the "comparable" to reflect differences such as location, size, visibility and age between the subject property and each "comparable." The appraiser will then average the "comparables" to develop a factor that can be applied to the subject property. Discounted Income or Discounted Cash Flow Approach. Under this approach, the net income generated by the property, before debt service is estimated, vacancy and other operating expenses are deducted and a capitalization rate is applied. This analysis can be skewed by such key variables as occupancy levels or vacancy rates, rents per square foot and operating expenses.! Determining Prospective Value. The method used for determining prospective value for an incomeproducing property is, in effect, the reverse of the "discounted cash flow" approach to present value. To determine prospective value using this approach, annual net operating income is estimated over the life of a hypothetical plan. As in the case of discounted cash flow, assumptions are made as to rental rates, occupancy levels and expenses. This analysis focuses on the determination of net income for the last year of the holding. Once that figure is determined, a capitalization rate is identified for that year and applied to the net income figure to determine the estimated value for the last year of the plan. After the capacity of the property to generate cash over time is estimated, this capacity is compared with the payments required under a hypothetical plan to determine whether the debtor is capable of an effective reorganization.!

20 Lien Avoidance! Perfection as a preferential transfer.! Strong-arm avoidance powers.! Section 506(d) provides for the avoidance of any lien securing a claim which is not allowed except under the following explicitly enumerated circumstances: if the claim was disallowed because it had not yet matured or was for reimbursement or contribution, or because the creditor failed to file a proof of claim.! Lien Stripping in Chapter 7, 11 and 13 cases.!

21 Plan Confirmation Issues! The general rule in bankruptcy is that valid liens that have not been disallowed or voided pass through bankruptcy unaffected. See FDIC v. Davis, 733 F.2d 1083 (4th Cir. 1984).! Secured creditors, however, should carefully review the debtor's proposed plan to see if its security interest is altered. Section 1141(c) provides that after confirmation, except as provided in the plan or in the order confirming the plan, the property dealt with by the plan is free and clear of all liens and interest of creditors of the debtor. If the plan fails to provide for continuation of the security interest after confirmation, a secured creditor's rights can be extinguished. See In re Nardulli & Sons Co., Inc., 66 B.R. 871 (Bankr. W.D. Pa. 1986); In re Arctic Enterprises, Inc., 68 B.R. 71 (D. Minn. 1986).!

22 Plan Confirmation Issues! In order for a Chapter 11 plan to be confirmed, all of the requirements under 1129(a) must be satisfied, including that the plan comply with bankruptcy law, be proposed in good faith and not by illegal means, disclose certain parties, payments and services in connection with the plan in Chapter 11 case, provide proper treatment for priority and retiree benefit claims and be accepted by at least one "impaired" class of claims.! Section 1129(a) further requires that the plan satisfy the "best interests of creditors" test. This test requires that as of the "effective date" of the plan, each creditor must receive payments or other property totaling not less than what it would receive in a Chapter 7 liquidation.! In a partnership case, a liquidation analysis includes not only the assets of the partnership, but also the net assets of the general partner.! 1129(a)(11) requires the court to find that the plan is feasible and is not likely to be followed by liquidation or the need for further reorganization of the debtor. 11 U.S.C. 1129(a)(11). Factors in determining feasibility include adequacy of capital structure, earning power of the business, economic conditions, ability of management, availability of credit and provisions for adequate working capital. In re Guilford Telecasters, Inc., 128 B.R. 622 (Bankr. M.D.N.C. 1991).!

23 Plan Confirmation Issues! Impairment determines whether a class is required to vote for or against a proposed plan. A class which is not impaired is deemed to have accepted the plan and a formal vote is not required. If a class is impaired, the class must vote to accept the plan or the proponent must resort to the "cram down" provisions under 1129(b) which are discussed below.! According to 1124, a class of claims is not impaired if the plan -(i) leaves unaltered the legal, equitable and contractual rights of a claimant;(ii) cures a default;(iii) reinstates maturity of a claim to its pre-default status; and(iv) compensates claimants for damages incurred to their reasonable reliance on particular contractual provision or applicable law.! A secured claim that is in default will be considered "impaired" unless the plan proposes to (i) reinstate the debt on the conditions prescribed by 11 U.S.C. 1124(2) referred to above, or (ii) "buy out" the secured creditor. If the plan proposes to "buy out" the secured creditor, the debtor must pay cash on the effective date of the plan equal to the allowed amount of the secured claim. 11 U.S.C. 1124(3). Payment of stock or other consideration that is not cash, even if this consideration is worth more, will not trigger this provision and the secured creditor will be deemed impaired.! If the Plan does not propose to leave unaltered the rights of the secured creditor, to restore the creditor to its original position by curing the default, or "buy out" the claim under 11 U.S.C. 1124(3), the secured claim is considered impaired. Thus, any attempt by the debtor to modify the terms of the loan documents (i.e. change the maturity date of the loan or interest rate), the security agreement or any third party agreement or guaranty, or bifurcate the claim under 506(a) constitutes impairment of a secured creditor's claim.!

24 Plan Confirmation Issues! Claims and interests of creditors are classified in Chapter 11 plans for purposes of treatment. 11 U.S.C. 1123(a)(1). A plan may place a claim or interest in a particular class only if such claim or interest is substantially similar to the other claims or interests in that class. 11 U.S.C. 1122(a).! Secured creditors are usually placed in separate classes with the proposed treatment in each class tailored to meet that creditor's particular loan and collateral. If a secured creditor is undersecured, the debtor will often classify the secured portion of the claim in one class and classify the deficiency claim in another class.! This dual classification poses problems in a single asset real estate cases since there is generally a primary secured creditor and several smaller trade creditors. By classifying the deficiency claim, which is usually large, with other unsecured claims, the undersecured creditor can affect the acceptance or rejection of the debtor's plan by that class. Faced with this prospect, the debtor is forced to meet the demands of the undersecured creditor regarding treatment of the its claim or risk having the court deny confirmation of its plan. To circumvent this problem, debtors have attempted to classify deficiency claims differently from the other unsecured creditors in order to achieve an affirmative vote on their reorganization plans.!

25 Plan Confirmation Issues! Sections 1111(b) and 1129(a)(7)(B) of the Bankruptcy Code provide secured creditors with special rights regarding treatment of their claims under a plan.! Treatment of non-recourse debt - Under 1111(b)(1), a secured creditor with a non-recourse loan will be allowed a unsecured claim for any deficiency as if the creditor had personal recourse unless the collateral is sold during the reorganization process or is to be sold under the plan or unless the secured creditor makes an "election" under 1111(b)(2) to have its entire claim treated as secured.! Unsecured Creditor - Section 1111(b)(2) permits an undersecured creditor (either recourse or non-recourse) with a lien of real or personal property to elect to have an allowed secured non-recourse claim equal to the total amount of its claim. This Section contradicts and overrides 506(a) which permits a debtor to bifurcate the claim of an undersecured creditor into a secured claim equal to the value of the collateral and an unsecured claim for any deficiency. In order to be eligible for the 1111(b)(2) election, the creditor:(i) must have a claim which is secured by a lien on the debtor's property (real or personal);(ii) demonstrate that its interest in the property is not of inconsequential value; and(iii) show that it does not have recourse against the debtor if the property is being sold under 363 or is to be sold under the plan. 11 U.S.C. 1111(b)(1)(B).! If a 1111(b)(2) election is made, the secured creditor is entitled to receive the total amount of its claim with payments having a present value equal to the value of its collateral. A secured creditor should consider exercising a 1111(b)(2) election if it believes that the collateral has been undervalued, the treatment accorded unsecured creditors is unattractive, the debtor has no free assets, the collateral will likely appreciate after the plan is confirmed, the plan will fail and the debtor will be liquidated, or the debtor will likely sell the collateral before the secured creditor is paid the present value of its interest in the collateral. A secured creditor should not make a 1111(b)(2) election, except perhaps to defeat confirmation of a plan, if the present value to be received on both its secured and unsecured claim is greater than the payments it would receive under the 1111(b)(2) election. In order to make a 1111(b)(2) election, Bankruptcy Rule 3014 requires that the election be made at any time prior to the conclusion of a hearing on the disclosure statement or within such later time as the court may fix. The election must be made in writing and signed unless made at the hearing on the disclosure statement.! Once the election is made, a creditor cannot withdraw the election unless the plan under which the election was made either fails or is materially modified by the debtor.!

26 Plan Confirmation Issues! If all of the general requirements of confirmation under 1129(a) are met, the plan may nevertheless be confirmed over the objection of a dissenting impaired class under 1129(b). In order to "cram down" a plan, the court must find that (i) the plan does not discriminate unfairly; and (ii) the plan is fair and equitable with respect to the impaired class which has not accepted the plan. 11 U.S.C. 1129(b).! The doctrine of unfair discrimination requires that a dissenting claim be treated in a manner consistent with the treatment afforded to other classes with similar claims against the debtor.! If the plan satisfies the prohibition against discrimination, the court then determines whether the treatment to the dissenting class is fair and equitable. With respect to secured claims, 1129(b)(2)(A) provides that the secured creditor must:(i) retain its lien and receive cash payments which total at least the allowed amount of its secured claim and which has a present value equal to the value of its collateral; or(ii) retain its lien on any proceeds if the collateral is sold free and clear of the secured lien; or(iii) realize the "indubitable equivalent" of its claim. Substitution of collateral and abandonment of collateral by the debtor to the creditor have been held to satisfy this requirement.!

27 Re-Characterization! The bankruptcy court may re-characterize a secured claim as an equity interest in accordance with applicable state law. In analyzing these factors, the court noted that it reviews the evidence in light of all factors, while realizing that the various factors are not of equal significance and that no one factor is controlling, and that the various factors are only aids in answering the ultimate question whether the investment, analyzed in terms of its economic reality, constitutes risk capital entirely subject to the fortunes of the corporate venture or represents a strict debtor-creditor relationship. The factors considered include the following:!! (1) the intent of the parties;! (2) the identity between creditors and shareholders;! (3) the extent of participation in management by the holder of the instrument;! (4) the ability of the corporation to obtain funds from outside sources;! (5) the thinness' of the capital structure in relation to debt;! (6) the risk involved;! (7) the formal indicia of the arrangement;! (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal;! (9) the voting power of the holder of the instrument;! (10) the provision of a fixed rate of interest;! (11) a contingency on the obligation to repay;! (12) the source of the interest payments;! (13) the presence or absence of a fixed maturity date;! (14) a provision for redemption by the corporation;! (15) a provision for redemption at the option of the holder;! (16) the timing of the advance with reference to the organization of the corporation;! (17) the name of the instrument, if any, memorializing the deal; and! (18) and the right to enforce payment of principal and interest.!

28 DIP Financing! Section 364 authorizes the trustee to obtain credit in one of four ways:! If the DIP borrows in the ordinary course of business, then the lender's claim is a first-priority administrative expense under 364(a).! The creditor may get an administrative priority if the post-petition advance and the administrative priority are approved by a court order.! If the DIP can't get unsecured credit, the court may authorize the lender to get a super-priority administrative claim, or the court may authorize the lender to take a security interest in unencumbered property (or a subordinate security interest in encumbered property).! Finally, if the DIP cannot get credit otherwise, the court may authorize a security interest that is senior or equal to an existing security interest.! In order to obtain approval of one of these escalating priorities, the DIP must show the court that financing was not available with one of the lower priorities.!

29 DIP Financing! Bankruptcy Rule 4001 Allowing others an opportunity to review.! Red-Flag provisions.!

30 Loan to Own! An investor believes the borrower's business is worthy of an investment/ownership, but is overleveraged. If the borrower can't work its way out of financial distress, the investor will act as secured creditor and propose to convert all or part of its debt to equity so that it owns the borrower, pay those creditors necessary to the business and other creditors up to the financier's valuation of the business, and eliminate the out-of-the-money creditors and equity classes.! Existing managers will be offered options to stay or be given severance packages, and are incentivized to support a transaction favorable to the investor. The entire restructure and any second-stage bankruptcy will be done on fast track, thus minimizing opposition, competition and expense.! The fully-secured investor has its ultimate threat to foreclose, which will leave all other constituents with little or nothing.! Out-of-the money creditors and equityholders cry foul claiming (1) management and the board have breached fiduciary obligations), (2) the value of borrower is much more than the investor says it is, (3) there was an inadequate effort to try to find a better transaction, (4) the investor s secured loan should be equitably subordinated, (5) the investor s secured loan should be recharacterized as equity and/or (6) any bankruptcy plan that implements the transaction proposed by the investor is not undertaken in good faith.!

31 David Y. Wolnerman, Esq.! Randolph E. White, Esq.! White & Wolnerman, PLLC 110 E. 59th Street, 25th Floor New York, New York Phone: (212) Fax: (212)

32 Everything A Secured Creditor Wants To Know About Chapter 11! But Was Afraid To Ask! David Y. Wolnerman, Esq.! Randolph E. White, Esq.!