Definition
In bankruptcy, a cram down is a legal mechanism that allows a court to approve a reorganization plan that reduces the claims of certain creditor classes to a lower amount, even if these creditors do not consent. This process is governed by Section 1129(b) of the Bankruptcy Code and requires the debtor to demonstrate that the plan is fair, equitable, and does not unfairly discriminate against any dissenting creditor class.
Examples
- United Airlines Bankruptcy: During its bankruptcy proceedings, United Airlines presented a reorganization plan that was voted against by its retired pilots. The court approved the plan through a cram down after determining that it met the necessary legal standards.
- Retail Company’s Reorganization: A retail company undergoing bankruptcy had a plan that was consensually agreed upon by its secured creditors but was opposed by its unsecured creditors. Through the cram down procedure, the court approved the plan since it was deemed fair and equitable to all parties involved.
Frequently Asked Questions
Q1. When can a cram down be used in bankruptcy?
A1. A cram down can be used when at least one class of impaired creditors votes in favor of the reorganization plan, but other classes vote against it. The debtor must then prove that the plan is fair and equitable to the dissenting classes and that it does not unfairly discriminate against them.
Q2. What does “fair and equitable” mean in the context of a cram down?
A2. “Fair and equitable” means that the reorganization plan must comply with specific requirements such as ensuring that secured creditors receive the value of their collateral and that unsecured creditors receive a distribution equal to or greater than what they would receive in a liquidation scenario.
Q3. What is the significance of “numerosity” in the cram down process?
A3. Numerosity refers to the requirement that more than 50% of the number of creditors in at least one class and 75% of the total value of claims must vote in favor of the plan for it to proceed to a cram down.
- Bankruptcy Code: The set of laws that govern bankruptcy proceedings in the United States, including the rules for cram downs.
- Reorganization Plan: A plan proposed by a debtor in bankruptcy for restructuring its debts and business operations.
- Secured Creditor: A creditor with a legal claim to specific collateral securing the debtor’s obligation.
- Unsecured Creditor: A creditor whose claim is not backed by any specific collateral.
Online References
Suggested Books for Further Studies
- “Bankruptcy and Insolvency Accounting, Practice and Procedure” by Grant W. Newman
- “The Law of Debtors and Creditors” by Elizabeth Warren, Jay Lawrence Westbrook, Katherine Porter
- “Chapter 13: The Federal Bankruptcy System” by Henry J. Sommer
Fundamentals of Cram Down: Bankruptcy Basics Quiz
### What is a cram down in bankruptcy proceedings?
- [ ] It refers to the process of immediately liquidating a company's assets.
- [x] It refers to reducing the amount of debt owed by certain classes of creditors despite their objections.
- [ ] It refers to paying off all creditors in full immediately.
- [ ] It refers to a temporary halt on debt repayments.
> **Explanation:** A cram down in bankruptcy is a legal process that allows a reorganization plan to be approved by the court even if some classes of creditors object, provided it meets certain fairness criteria.
### Under which section of the Bankruptcy Code can a cram down be approved?
- [ ] Section 7(b)
- [ ] Section 22(c)
- [ ] Section 362(d)
- [x] Section 1129(b)
> **Explanation:** A cram down is governed by Section 1129(b) of the Bankruptcy Code.
### What must be proven for a cram down to be approved?
- [ ] That the plan was only partially objected to.
- [x] That the plan is fair and equitable and does not unfairly discriminate against the dissenting class.
- [ ] That all creditors agree at least partially.
- [ ] That the debtor has no more than six debt classes.
> **Explanation:** To approve a cram down, it must be demonstrated that the reorganization plan is fair and equitable and does not unfairly discriminate against dissenting classes of creditors.
### Who determines if a reorganization plan is fair and equitable during a cram down?
- [ ] The debtor
- [ ] The creditors collectively
- [x] The bankruptcy court
- [ ] Independent auditors
> **Explanation:** The bankruptcy court is responsible for determining if a reorganization plan is fair and equitable during a cram down.
### What is required from creditors for a plan to be eligible for a cram down?
- [ ] Unanimous approval from all classes.
- [x] At least one class must vote in favor with more than 50% of the number of creditors and 75% of the claim value.
- [ ] Approval from secured creditors only.
- [ ] All unsecured creditors must consent.
> **Explanation:** For a plan to be eligible for a cram down, at least one impaired class of creditors must vote in favor of the plan by meeting the specific numerosity and value thresholds.
### What can creditors do if they feel the cram down plan is unfair?
- [x] They can challenge the fairness in bankruptcy court.
- [ ] They must accept the plan without objection.
- [ ] They can switch their vote at the last minute.
- [ ] They can only seek recourse after the plan is executed.
> **Explanation:** Creditors can challenge the fairness of the cram down plan in bankruptcy court.
### What type of creditor is typically involved in a cram down?
- [ ] Only corporate creditors.
- [ ] Only individual creditors.
- [x] Both secured and unsecured creditors.
- [ ] Creditors with no interest in the company's future.
> **Explanation:** Both secured and unsecured creditors can be involved in a cram down.
### Does a cram down require unanimous consent from creditors?
- [ ] Yes
- [x] No
- [ ] Sometimes
- [ ] Only from unsecured creditors
> **Explanation:** A cram down does not require unanimous consent; it can proceed if at least one class votes in favor and the plan is deemed fair and equitable.
### When a plan is crammed down, what happens to the nonconsenting class's claims?
- [ ] They retain their original claims without any changes.
- [ ] They lose their claims entirely.
- [x] Their claims are adjusted according to the reorganization plan.
- [ ] They become new equity shareholders.
> **Explanation:** When a plan is crammed down, the nonconsenting class's claims are adjusted according to the approved reorganization plan.
### Which airline's reorganization plan was notably approved via a cram down?
- [ ] Delta Airlines
- [x] United Airlines
- [ ] American Airlines
- [ ] Southwest Airlines
> **Explanation:** United Airlines had its reorganization plan approved through a cram down despite objections from its retired pilots.
Thank you for exploring the intricate details of cram down in bankruptcy and participating in our knowledge quiz. Keep deepening your understanding of bankruptcy law!