Opinion ID: 69782
Heading Depth: 2
Heading Rank: 1

Heading: Failure to provide a conversion method

Text: Several of Appellants' objections to the Plan rest on a single alleged infirmity: the Plan does not express a method to convert Class 7 claims into Class 8 shareholder interests. Under § 1123(a)(3), a Plan must specify the treatment of any class of claims or interests that is impaired under the plan before it can be confirmed. 11 U.S.C. § 1129(a)(1). The Plan provides that Classes 7 and 8 will share any remaining liquidation proceeds pro rata, but as noted above, it specifies no mechanism to convert Class 7 claims (denominated in dollars) into Class 8 interests (denominated in shares). Appellants contend that without a conversion mechanism, the Plan fails to comply with § 1123(a)(3). Whether the Bankruptcy Code requires a Chapter 11 plan to provide an explicit conversion mechanism between subordinated securities claims and equity interests seems to be an issue of first impression. We suspect this is because equity interests so rarely receive any payment following a corporate bankruptcy. The court approved the Plan language only after the parties failed to reach agreement on a conversion formula between Class 7 claims and Class 8 interests. Neither the failure to agree nor the decision to resolve conversion at a later date is surprising or subject to criticism. Class 7 claimants are required to look first to directors' and officers' insurance proceeds to satisfy their claims. Only after insurance proceeds are paid and further litigation occurs will the overall size and individual claims of Class 7 members be known. The interrelation of Classes 7 and 8 is contingent and presently unknowable. The court's decision to approve a plan that provides, at the end of the day, for statutorily correct pro rata treatment of Classes 7 and 8, adjudicated in an adversary proceeding if necessary, furnished adequate specificity and complied with § 1123(a)(3). [5] As the Appellees explain, the Plan identified the source of distributions, the proportionate share of distributions among classes, and the respective priority of distributions. The post-confirmation procedure approved by the court deals with the allowance of Class 7 and 8 claims and interests, rather than their treatment. This situation is no different from a plan that states that all unsecured claims will share in the proceeds from sales of assets. The class of unsecured claims typically includes some that are unliquidated or contingent. A party to a rejected executory contract with the debtor, for instance, would have to liquidate his damages, possibly in an adversary proceeding, before receiving compensation from the plan. 11 U.S.C. § 502(g). Other unsecured creditors would not know their pro rata recovery until the unliquidated claim becomes fixed. Despite the uncertainty and lack of an articulated ex ante formula to convert the executory contract's damages into dollars, however, there is no impediment to confirming a reorganization plan with unsecured claims treated in this way. Appellants also contend that the absence of a conversion mechanism violates 11 U.S.C. § 1123(a)(4), which requires that the Plan provide the same treatment for each claim or interest of a particular class unless the holder agrees to less favorable treatment. According to Appellants, without a conversion mechanism for Classes 7 and 8, the parties cannot determine if this provision will be fulfilled. This argument is meritless. Section 1123(a)(4) only requires equal treatment of members within the same class. Despite having equal priority, Class 7 and Class 8 are different classes, and the Plan treats them pro rata as required by 11 U.S.C. § 510(b).