What is cramdown of a reorganization plan?

According to Section 1129(b) of the Bankruptcy Code, a cramdown provision gives a bankruptcy court the right to disregard pleas and objections of a secured lender and approve a borrowers restructuring plan.

The plan of reorganization must be approved by at least one class of impaired creditor, excluding votes cast by corporate insiders.

If any class of impaired creditor has not accepted the plan, the court, on request of the proponent of the plan, shall confirm the plan if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class . . . [t]hat is impaired under, and has not accepted, the plan.

The plan is, in effect, forced upon impaired creditors who voted against plan approval.

In the event of a cramdown, the court will determine whether treatment of each class is fair and equitable.

In a cramdown, the following attributes of the plan must be true:

Secured Creditors

Secured creditors must retain a lien on collateral or proceeds and receive deferred cash payments equal to present value of the collateral or receive the indubitable equivalent of its claim.

Unsecured Creditors

Unsecured creditors must be paid in full or no holders of junior claims may receive any payment.

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Discussion Question

How do you feel about the ability of the court to cram down a plan on impaired creditors? What factors should the court use to determine whether the plan is fair and equitable to the impaired creditors?

Practice Question

ABC Corp files for Chapter 11 bankruptcy. The DIP puts forward a plan of reorganization. Under the plan, several classes of creditors will not receive full payment of their claims. That is, these creditors are impaired. If any of the impaired creditors object to the plan, what options are available to the DIP to seek creditor approval of the plan?

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Cramdown - Ch. 11 Bankruptcy - Explained