Lugar de Noticias Haynes and Boone
Cramdown: Everything You Wanted to Know and More About Rate and Term
Robin E. Phelan
Eric D. Poole, Hon. Leif M. Clark, Frank A. Merola, John Tittle Jr.
In Chapter 11, a debtor can use the “cramdown” threat (as in “cram the plan down the creditors’ throats”) to facilitate dealings with significant creditor constituencies and, if necessary, to override creditor objections to the plan. If certain requirements are met, the cramdown provisions of the Bankruptcy Code allow a debtor to confirm a plan even if one or more impaired classes of claims or interests rejects the plan. Cramdown is only available once a Chapter 11 petition is filed.
Under the “non-acceptance” or “cramdown” method of confirmation at least one class of impaired claims (but not interests) has voted in the requisite number and amount to accept the plan, and certain other requirements are met with respect to all non-consenting impaired classes of claims or interests. Cramdown may become necessary if a class of claims or interests rejects the plan. Section 1129(b) provides for the “cramdown” confirmation of a plan if the proponent of the plan requests confirmation, the plan does not discriminate unfairly, and the plan is fair and equitable. Generally, a plan will be fair and equitable if the claims held by each senior class of creditors are paid or provided for in full before any junior class of creditors receives anything under the plan or if no junior class of claims or interests receives anything pursuant to the plan. This concept is generally referred to as the “absolute priority rule”.
To comply with the absolute priority rule with respect to a dissenting class of unsecured creditors, the plan must provide that the dissenting class receives property with a present value equal to the allowed amount of its claims or that no junior class of creditors or interests receives anything under the plan. The term “property” is used in its broadest sense, and may consist of stock or other securities, notes, tangible personal property, real estate and other items.
Holders of equity interests must receive or retain property of a value of any fixed liquidation preference or redemption price or the holders of any interests junior to such dissenting class of holders must receive nothing pursuant to the plan. Of course, the absolute priority rule can also be violated if a class of creditors or interest holders receives more than the allowed amount of its claims or interests.
Assuming all of the requirements of section 1129(a) have been met, a plan may be confirmed over the objection of a dissenting class of creditors, i.e., crammed down, if it is fair and equitable and does not unfairly discriminate. The cramdown provision of the Bankruptcy Code provides in pertinent part:
. . . if all of the applicable requirements of subsection (a) of this section other than paragraph 8 [acceptance] are met with respect to a plan, the court . . . shall confirm the plan . . . if the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under, or has not accepted, the plan.