Everything Your Disbursing Agent Wants You to Know Beyond How Much and When Some Practical Advice and Key Plan Distribution Provisions

While
the "exciting" aspects of bankruptcy traditionally involve complex
legal issues, the end game is the same for most stakeholders—<i>i.e.</i>,
"when am I going to get paid and in what manner." There is only one
Bankruptcy Code section (1143) and one Bankruptcy Rule (3021) devoted to distributions,
and those provisions do not provide any technical guidance concerning the distribution
process. Thus, the most common boilerplate distribution plan provisions were
developed over time as we learned what does and doesn't work. In this article,
we study that boilerplate and explain why it is important. By the end of this
article, you will understand the various plan provisions and definitions that
make distributions on account of claims and interests more efficient and hopefully
pick up a number of practical tips. The definitions of the following key terms
will impact distributions: (1) allowed claim, (2) distribution dates and (3)
supplemental distributions.
</p><p><b>Allowed Claim </b>
</p><p>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:
</p><blockquote>
<p>"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. </p>
</blockquote>
<p>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:
</p><blockquote>
<p><i>No Distributions Pending Allowance</i>. 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. </p>

</blockquote>
<p><b>Distribution Dates </b>
</p><p>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.
</p><p>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 <i>de
minimus</i> 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:
</p><blockquote>
<p>"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. </p>
</blockquote>
<p><b>Distributions</b>

</p><p> 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:
</p><blockquote>
<p><i>Distribution Reserve/Supplemental Distributions</i>. Each holder of an
Allowed Class X Claim will receive a <i>pro rata</i> 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. </p>
</blockquote>
<p>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."
</p><p><b>Other Key Distribution-Related Plan Provisions </b>
</p><p><i>Claims Against Multiple Debtors</i>. 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:
</p><blockquote>

<p><i>Claims Allowable Against Multiple Debtors</i>. 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). </p>
</blockquote>
<p><i>Unclaimed Distributions</i>. 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:
</p><blockquote>
<p><i>Unclaimed Distributions</i>. 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. </p>
</blockquote>
<p><i>Record Date for Distributions</i>. 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.
</p><p>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.
</p><p><i>De Minimis Distributions</i>. A plan provision providing for nonpayment
of amounts less than a <i>de minimis</i> 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:

</p><blockquote>
<p><i>De Minimis Distributions</i>. 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.
</p>
</blockquote>
<p>In addition, setting the <i>de minimus</i> 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.
</p><p><b>Tips for Ensuring a Smooth Distribution Process </b>
</p><p><i>Run the math</i>. 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.
</p><p><i>Track the distribution provisions if you represent a creditor</i>. 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.
</p><p><i>File a motion to establish creditor reserves</i>. 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.

</p><p><b>Conclusion</b>
</p><p>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.
</p><hr>
<h3>Footnotes </h3>
<p>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.
</p>