In Chapter 11 bankruptcy, after a debtor has submitted a reorganization plan, the creditor has the right to vote on that plan. However, the right to vote on that plan is grounded in the understanding that the creditor will not vote against a debtor’s reorganization plan in bad faith. If a court finds that the creditor rejected the plan in bad faith, the court may “designate” the votes of the creditor that voted against the plan. But the issue of good faith does not solely lie with the creditor’s behavior. Reorganization under Chapter 11 also demands that the debtor put forward a plan that is in good faith. Further, the plan must protect creditors by assuring that they will not receive an amount that is less than the amount they would receive under Chapter 7 liquidation.
This article will examine the meaning of good faith on the part of the debtor, good faith on the part of the creditor, and the protection of the debtor’s financial investment through the reorganization. Part I examines what constitutes good faith on the part of a creditor who votes against a reorganization plan, and how far they may go in protecting their interests before a court opts to grant the debtor’s request to designate the creditor’s vote. Part II examines how a debtor may satisfy its good faith requirement when proposing the plan. Finally, Part III discusses the requirement that the creditor be protected by the maintenance of parity in the recovery of the debt under Chapter 11 reorganization versus Chapter 7 liquidation.