Several weeks ago I had posted here and here about the decision of Bankruptcy Judge Gregg to reject the contention of the management of Family Christian Stores that a a bid by an entity controlled by Richard Jackson, former owner and one of the largest creditors of FCS, to buy the assets of the foundering company, was the highest. (For a director's cut of earlier FCS posts go here, here, and here.) The judge's job was made difficult because the bid competing bidders, who proposed to liquidate the assets of FCS, was subject to a variety of contingencies. In other words, while the liquidation could have netted creditors more than the Jackson bid, it ultimately could have generated a smaller recovery.
In any event. FCS was scheduled to go back on the block this week.
But hold the presses! FCS has now filed a Plan of Reorganization!!
Reorganizations of retail firms have become scarcer than hens' teeth over the past decade. (Michelle Harner explains why here.) Reorganization requires the submission of a Plan and Disclosure Statement, a hearing on the adequacy of the Disclosure Statement, balloting, and then--assuming the creditors vote in favor of the Plan--a hearing on its confirmation. This process is neither cheap nor quick so why, one might wonder, has FCS made an about-face and taken the road less travelled?
The short answer is, the route of reorganization gets rid of the threat posed by the liquidation bidders. The disgruntled bidders are not creditos; they will not vote on FCS's plan. Yet, the creditors who believe a liquidation bird in the hand is better than a reorganization one in the bush will vote against the Plan. Then what?
Creditors vote by class. Leaving aside the possibility of gerrymandering, a class is deemed to have supported a plan if more than one-half of its members holding more than two-thirds of its debt vote "aye." Dissenters are bound.
But there's more. Even if they're outvoted, dissenting creditors can still object to confirmation of a plan. Two bases for objection might be credible in the case of FCS. To be confirmed, even with the vote of all classes of creditors, requires the Bankruptcy Court to find that the Plan was proposed in "good faith" and that it is in the "best interests" of all creditors, including those who voted "no."
I won't prolong this post except to point folks who are interested in the "best interests" test to my article addressing its application in Chapter 9 municipal bankruptcy, Municipal Bankruptcy: When Doing Less Is Doing Best (download here).