Businesses and, in some cases, individuals who have incurred a significant amount of debt can voluntarily file for bankruptcy under chapter 11 of the Bankruptcy Code as a means of settling their debts with their creditors and preserving their businesses as going concerns. Chapter 11 is a vehicle for businesses to achieve this goal because it emphasizes debtor reorganization and rehabilitation rather than liquidation. Chapter 11 strikes a balance between rehabilitating the debtor and maximizing value to creditors. Public policy encourages reorganization as opposed to liquidation wherever possible because the successful rehabilitation of debtors is in the best interest of creditors and the economy.
Consequently, the role of bankruptcy courts in chapter 11 cases is to determine whether the proposed reorganization or liquidation has a legitimate possibility of being successful. Among other things, section 1129 of the Bankruptcy Code outlines the factors courts consider when determining whether it is reasonable to expect that a debtor will be able successfully consummate its proposed plan of reorganization or liquidation. A court might determine that a debtor’s plan is not feasible for a variety of reasons. For example, in chapter 11 cases that involve numerous creditors it is common for there to be non-bankruptcy litigation between a debtor and its creditors or other parties-in-interest. In such a situation, the bankruptcy court may determine that a plan is not feasible for the debtor due to concerns about what effect the outcome of such pending litigation may have on the debtor’s current state of affairs.
For example, the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals recently considered this very issue, and its impact on chapter 11 plan confirmation, in In re RCS Capital Development. There, the court held that in certain situations, a debtor’s plan can be feasible even if the debtor is involved in ongoing civil litigation. This Article will discuss Section 1129 of the Bankruptcy Code which codifies what is required for confirmation of a chapter 11 reorganization plan. Part I will analyze the relevant provisions of Section 1129. Part II will take a closer look at the requirement that a chapter 11 plan be feasible. Finally, Part III will analyze the effect ongoing civil litigation has on chapter 11 plan feasibility.