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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A firm in Chapter 11 has a reorganization plan in which the class of senior unsecured creditors rejects the plan, while at least one impaired class has accepted it. Management wants the court to confirm the plan anyway. Which mechanism allows this, and what must be satisfied with respect to the dissenting class?

The mechanism is cramdown. A court can confirm a Chapter 11 plan over a dissenting class if at least one impaired class accepted and the plan does not discriminate unfairly and is fair and equitable, which broadly means junior holders receive nothing before the dissenting senior class is paid in full.

  1. ACramdown; the plan must be fair and equitable and not discriminate unfairly, which includes respecting the absolute priority rule for that classCorrect
  2. BConversion to Chapter 7; the plan must pay equity holders first
  3. CAutomatic stay; the dissenting class must receive cash equal to par
  4. DSection-free exchange offer; all classes must consent unanimously

Explanation

Cramdown lets the court confirm over a dissenting class if the plan does not discriminate unfairly and is fair and equitable, which generally means no junior class receives value before the dissenting senior class is paid in full. The other options misstate the mechanism: conversion, stay and unanimous exchange are not cramdown.

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