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'Dirt for Debt' In Bankruptcy Plans of Reorganization
A debtor's goal in a Chapter 11 Bankruptcy is to confirm a "plan of reorganization," which permits it to continue in business or liquidate its assets in an orderly manner. Creditors usually have the right to vote for or against a plan, and in many cases, plans are confirmed consensually through affirmative votes by classes of creditors and equity interests. But in other cases, a plan can be confirmed over the objection of one or more classes of creditors. This is called a "cram-down."
The Bankruptcy Code's rules governing cram-down are complex and differ for secured and unsecured classes of creditors. This article shows how bankruptcy courts have ruled on a particular method of cram-down known as a "dirt-for-debt" plan.
A Chapter 11 plan of organization must be "fair and equitable" to all classes of creditors, especially if the plan will be crammed down over the creditor's objections. For creditors whose claims are secured by real or personal property, a plan is "fair and equitable" if it satisfies at least one of these three criteria:
- The secured creditor retains its lien on property and is paid the present value of its claim over time;
- The property securing the claim is sold and the secured creditor's lien attaches to the proceeds of the sale; or
- The secured creditor realizes the indubitable equivalentof its secured claim.
See, 11 U.S.C. §1129(b)(2)(A)(i)-(iii) (emphasis added.).
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