Page 107 - Bankruptcy Volume 1

tionally, cannot "discriminate unfairly" and must be "fair and equitable" with respect to the nonaccepting
impaired class or classes.

The requirement that there be no unfair discrimination ensures that dissenting classes receive the same
value under the plan as other similarly situated classes. Although the Bankruptcy Code does not define
what it means to discriminate unfairly, Section 1129(b) clearly does not prohibit all discrimination, but
rather only discrimination that is "unfair." Discrimination is fair, and thus permissible, if the discrimina-
tion (including the degree thereof) has some rational justification and is necessary for reorganization.

The requirement that a nonconsensual plan be "fair and equitable" to the nonaccepting, dissenting class
likewise is left undefined in the Bankruptcy Code. However, the Bankruptcy Code does include specific
examples (categorized according to whether the dissenting class is made up of secured claims, unse-
cured claims, or equity interests) of how a plan can be fair and equitable with respect to the dissenting
class.

For secured creditors, the Bankruptcy Code provides three alternatives by which a plan can meet the fair
and equitable requirement with respect to secured claims: (a) the secured creditors retain their liens and
receive deferred cash payments equal to the present value of the collateral securing their claims; (b) the
plan provides for the sale, subject to the secured creditors’ right to credit bid their debt, of the secured
creditors’ collateral, with the liens attaching to the proceeds; or (c) the plan provides the secured credi-
tors with the "indubitable equivalent" of their secured claims. The deferred payments required by the
first alternative require a stream of cash payments over time, which total the allowed amount of the cred-
itors’ secured claims, and the value of those payments, when discounted to present value, is at least
equal to the value of the collateral securing the claims. Thus, for example, assume a dissenting secured
creditor has a $1 million claim, but its collateral is only worth $750,000. Under the Bankruptcy Code,
this claim would be bifurcated into a $750,000 secured claim and a $250,000 unsecured claim. In a
cramdown, the creditor must receive at least $750,000 in total payments (the amount of the secured
claim), and the present value of those payments over time must be at least $750,000 (the value of the
collateral).

When a Chapter 11 plan proposes to cram down a nonaccepting class of unsecured claims or equity in-
terests, the "fair and equitable" standard requires that the plan provide either that (a) each holder of a
claim or interest in the nonaccepting class be paid in full or (b) "the holder of any claim or interest that is
junior to the claims of such class . . . not receive or retain under the plan on account of such junior claim
or interest any property." As discussed previously, the absolute priority rule’s purpose is to ensure that
junior classes of claims or interests do not receive or retain property under a plan unless all senior clas-
ses either accept the plan (as a class) or are paid in full. The new-value exception or corollary to the ab-
solute priority rule allows lower priority creditors or equity holders to receive or retain property to the
extent that they receive or retain such property solely on account of new value that such parties provide
to the debtor — such as, for example, where an equity holder sponsors and backstops a rights offering
— and not on account of their existing claims or interests.

Given the valuation aspects of cramdown, accountants and other financial professionals often play an in-
tegral role in designing a plan that will satisfy the cramdown requirements.

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