Death Trap Provisions in Chapter 11 Plans: Minimizing the Likelihood of a Cramdown; Incentivizing Consensus

This CLE webinar will discuss how restructuring counsel use "death trap" provisions and related tools to create an accepting impaired class of creditors and thereby ensure confirmation but without violating the confirmation requirements or running afoul of the prohibition against sub rosa plans or the absolute priority rule.

A plan of reorganization proposes what each class will receive based on the debtor's projected post-confirmation value. But even reasonable minds can differ on valuation, and different constituencies in the case such as the debtor, second-tier lienholders, or equity holders often advocate for a higher or lower value based on preferred outcomes. Creditors may feel entitled to distribution.

To avoid long and costly valuation or cramdown litigation that results in a Pyrrhic victory, a death trap offers a junior impaired class more to accept a plan and less if they reject it. Restructuring agreements may require such provisions.

But these provisions can run afoul of the Bankruptcy Code's prohibition against sub rosa plans or the absolute priority rule and generate their own litigation. It can be difficult to determine if these provisions strip creditors of existing rights. They can also be tied to overreaching releases or other "coercive" provisions that attempt to shield controversial provisions from objection or put creditors in an impossible position.

Listen as this esteemed panel discusses how these provisions started and evolved, how they can be used effectively in any size case, and what creditor classes that anticipate facing death trap provisions can do.