Welcome to the twenty-eighth Pari Passu newsletter,

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Today, we will learn more about:

1. Cram Downs

2. Weaponization of the Dollar

Cramdowns

Two weeks ago, we learned about cram-ups, which are when poor terms are imposed on objecting senior creditors as part of the Chapter 11 process. In contrast, a cramdown is when a court ignores the objection of junior creditors and approves a debtor's plan of reorganization (POR). As a reminder, in a Chapter 11 bankruptcy, a POR classifies the claims against the debtor, describes how each class of creditor will be treated under the plan, and how the plan will be carried out. The bankruptcy plan must be approved by a majority of the creditors and the bankruptcy court. For a plan to be accepted by a class of creditors, it must be approved by a majority in number and two-thirds in dollar amount of claims. Therefore, any investor (or group of investors) that accumulates a 33.4% position in the claims of a class can prevent approval by voting no. Alternatively, a majority of claims within a class can come together to vote no and also block the plan.

However, according to Section 1129(b) of the Bankruptcy Code, a bankruptcy court has the right to disregard the objections of a class of creditors and approve a borrower's restructuring plan if certain conditions are met. Essentially, the plan is, in effect, forced upon impaired creditors who voted against plan approval. This is called a "cramdown."

Why Do Creditors Oppose Plans?

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