The Cramdown on Secured Creditors: An Impetus Toward Settlement

Abstract

Chapter 11 of the Bankruptcy Code sets forth the procedures for the confirmation of a reorganization plan. Section 1129(a) includes the criteria for the most frequently used method of confirmation- that of settlement by the debtor, creditors, and equity holders. Section 1129(b) sets forth an alternative method of confirmation called the “cramdown,” which is often written about and discussed but which has occurred in relatively few cases since the Code has been in effect. The cramdown option permits the confirmation of a plan notwithstanding the failure of one or more classes of impaired claims or interests to accept the plan under section 1129(a)(8). The cramdown is one of the new provisions included in the Code to facilitate the confirmation of a plan in the face of opposition by one or more classes. The first part of the article provises a history of the cramdwon. The article then discusses the cramdown on secured creditors under sections 1129(b)(1) and (2)(A) and some of related provisions including sections 1124, 1126(f), and 1111(b). Where relevant, reference is made to cases that involve the cramdown on unsecured creditors. The article also considers the valuation problems that are involved in a cramdown on secured creditors. The Addendum includes a fact situation and related problems to elucidate the valuation risks that arise in a cramdown and to demonstrate why the cramdown provisions loom as a threat and lead parties to reach settlement.