Legal Memorandum: Cramdown Principle in a Chapter 11 Plan

Issue: What are the elements of the ‘cramdown’ principle in relation to a small business plan of reorganization?

Area of Law: Bankruptcy & Creditors Rights
Keywords: Cramdown principle; Plan of reorganization
Jurisdiction: Federal, Minnesota
Cited Cases: 968 F.2d 647
Cited Statutes: 11 U.S.C. § 1129(a); 11 U.S.C. § 1129(a)(8); 11 U.S.C. § 1129(b)(1); 9D Am. Jur. 2d Bankruptcy § 2962; 9D Am. Jur. 2d Bankruptcy § 2963; 11 U.S.C. § 1129(b)(2)(A)(i); 11 U.S.C. § 1129(b)(2)(II); 11 U.S.C. § 1129(b)(2)(B); 11 U.S.C. § 1129(b)(2)(C); 9D Am. Jur. 2dBankruptcy § 2964; 11 U.S.C. § 1121(e); 11 U.S.C. § 1121(c)(3); 9D Am. Jur. 2dBankruptcy § 2992
Date: 12/01/2012

If all of the requirements of 11 U.S.C. § 1129(a) are satisfied, except for the requirement in § 1129(a)(8) that all classes either accept or not be impaired by the plan, the court may still, upon request of the plan’s proponent, confirm the plan if it does not discriminate unfairly, and is fair and equitable, with respect to each class of claims that is impaired but has not accepted the plan.  11 U.S.C. § 1129(b)(1).  This general “cramdown” principle permits confirmation notwithstanding an impaired class’s failure to accept the plan, if that class and all below it in priority are treated according to the absolute-priority rule, which requires that the dissenting class be paid in full before any junior class may share under the plan.  9D Am. Jur. 2d Bankruptcy § 2962.  Treatment of secured creditors is slightly different, because they do not fall on the priority ladder, but the general principle is the same.  Id.   

The unfair discrimination standard applied in cramdown cases prevents disparate treatment to similar claims or groups of claims.  9D Am. Jur. 2d Bankruptcy § 2963.  A plan discriminates unfairly if it singles out a holder of some claim(s) for particular treatment.  Stated another way, a plan discriminates unfairly if similar claims are treated differently, with no reasonable basis for this disparate treatment.  Id.  To determine whether there is unfair discrimination, the bankruptcy court will look at whether the discriminatory treatment has a reasonable basis, if it is proposed in good faith, whether the debtor can complete […]

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