Page 90 - Bankruptcy Volume 1
P. 90
Interests
Holders of equity securities of a debtor are required to file a proof of interest in order to vote on the plan
or take distributions under it (Fed. R. Bankr. P. 3003(c)(2)). Much like a proof of claim, the holder of an
equity interest must file a proof of interest in advance of the bar date or be barred from voting on the
plan or recovering under it unless the interest was scheduled by the debtor in a manner that does not
show the obligation to be contingent, unliquidated or disputed (11 USC 1111). Unless the class of credi-
tors agrees otherwise, equity interests cannot receive consideration unless other classes are paid in full.
This is the general statement of Section 1129(b) of the Bankruptcy Code, which provides that a plan
must be "fair and equitable" with respect to each impaired class rejecting the plan. This is usually re-
ferred to as the absolute priority rule.
Interest on Claims
Interest stops accruing at the time the petition is filed and the unpaid interest earned to the date of the pe-
tition is considered a prepetition claim. However, Section 506(b) provides that postpetition interest on
prepetition secured claims is allowed to the extent that the value of the collateral exceeds the debt. Ac-
countants are frequently retained to value collateral in such instances. Interest on unsecured claims is
generally paid in Chapter 11 only if creditors are receiving full payment for their claims. Section
726(a)(5) provides that in case of a Chapter 7 liquidation, a creditor can receive interest accruing during
the proceeding on prepetition debt only after all other creditors’ claims have been satisfied.
Claim Objections
Once a proof of claim has been filed, it is deemed to be prima facie valid unless and until the debtor ob-
jects to such claim. Section 502 of the Bankruptcy Code provides a mechanism for a debtor to object to
claims that it views to be invalid or overstated in terms of the amount or priority sought. The debtor may
object to a single claim or to multiple claims with a common defect (an "omnibus objection") in the
same pleading. Local court rules govern the debtor’s ability to file omnibus objections. Though single-
claim objections are fact specific, omnibus objections fall into two general types, nonsubstantive and
substantive objections. However, definitions of what constitutes nonsubstantive objections vary by ju-
risdiction and local rules; generally, nonsubstantive objections are those that can be resolved without
getting to the merits of the claim itself and include objecting to claims that are duplicative of another
filed claim or are amended or superseded by another filed claim. Substantive objections are objections
that address the merits of the claim. It is important to note that, in some jurisdictions, a debtor is allowed
only one opportunity to make a substantive objection to a given claim and will be barred from later rais-
ing additional substantive objections to the claim.
Classification of Claims and Interests for Plan Purposes
Section 1123(a)(1) of the Bankruptcy Code requires that any plan of reorganization designate classes of
claims other than priority claims as well as interests. The Bankruptcy Code classifies these claims as ei-
ther impaired or unimpaired. An impaired class of claims is simply a class of claims that is treated dif-
ferently under the plan of reorganization than it would have been otherwise. The plan of reorganization
must specify which classes are impaired and unimpaired. With respect to impaired classes of claims, the
plan must specify how they are treated under the plan. The plan must provide for the same treatment of
each claim or interest in a particular class unless a particular claim holder or interest holder agrees to a
less favorable treatment for the particular claim or interest.
88 © 2020 Association of International Certified Professional Accountants