Creditor Defense/Offense in Chapter 11

Unsecured creditors. Unsecured Creditors are a powerful force in Chapter 11. They are entitled to be paid in full before an stockholder or owner is paid anything. But in order to be effective, they must be grouped, the must be large or they must be levered.

Although they are the most powerful force, the only thing that they have to really work with is the remainder of what is left over after the secured creditors have (before the bankrutpcy) taken their respective pieces of the debtor in the form of liens.

If the unsecured creditors are grouped, they can form an unsecured creditor's committee and effectively control a Chapter 11. They can effectively control it because under normal circumstances the bankrupty judge will approach the Chapter 11 as having the primary be to provide the maximum benefit to the unsecured creditors and minimize their loss. If they wish, grouped creditors can simply take over a business through a Chapter 11.

If an unsecured creditor has a large claim, it can control a separate class of creditors and singlehandedly direct the terms of the plan.

A single unsecured creditor can, given the appropriate opportunity, have a significant impact on a Chapter 11.

At a minimum, an unsecured creditor should file a claim and review the plan to determine how the debtor intends to treat him. If it is insufficient given the circumstances, he should object to the confirmation of the plan.

Charles Chesnutt