Absolute Priority Rule Absolutism? Strict Interpretation of Bankruptcy Code Cramdown Provisions Nearly Causes Hawker Beechcraft Plan Confirmation to Skid Along the Runway

Absolute Priority Rule Absolutism? Strict Interpretation of Bankruptcy Code Cramdown Provisions Nearly Causes Hawker Beechcraft Plan Confirmation to Skid Along the Runway

By nearly any measure, the Chapter 11 cases of Hawker Beechcraft and its affiliates (the "Debtors") stand as a significant success. The cases began as a standalone reorganization predicated upon a restructuring support agreement (the "RSA") among the Debtors' senior lenders and noteholders, which soon thereafter gained the support of the creditors' committee. The cases then switched over to a sale process, and when that bogged down the Debtors seamlessly restarted the standalone reorganization based on the RSA. The Debtors' plan of reorganization (the "Plan") provides for the cancellation of all existing equity of the existing corporate parent, Hawker Beechcraft, Inc. ("HBI") and the issuance of equity in a new holding company to creditors, with 89% going to the Debtors' senior bank lenders and the remaining 11% going to noteholders and other unsecured creditors. The Plan contemplates that the Hawker Beechcraft corporate structure will otherwise remain the same, with existing intercompany interests being unimpaired.  (Kelley Drye & Warren LLP represents a major Hawker Beechcraft creditor.) 

The Debtors went into the confirmation hearing for the Plan last week with almost no major objections and without any substantial litigation having taken place along the way, a remarkable achievement for Chapter 11 cases of the Debtors' size and complexity. It therefore surprised nearly everyone in the courtroom when Judge Stuart Bernstein raised an objection on his own based on the alleged failure of one Debtor to satisfy the cramdown requirements of Section 1129(b) of the Bankruptcy Code

The Plan required the approval of creditors of each of the separate Debtors. When the votes were tabulated, however, the unsecured creditors of one Debtor, Hawker Beechcraft Corporation ("HBC"), had voted to reject the plan. This in and of itself did not give rise to substantial concern, as the Debtors believed that they would readily be able to confirm the Plan over the HBC creditors' rejection under the cramdown provisions of Section 1129(b). That section provides that a plan may be confirmed notwithstanding the rejection of one or more classes of creditors (i.e., "crammed down"), so long, among other things, as it is "fair and equitable." With respect to unsecured creditors who are not paid in full, "fair and equitable" requires adherence to the "absolute priority rule", which in turn means that

the holder of any claim or interest that is junior to the claims of the [rejecting] class will not receive or retain under the plan on account of such junior claim or interest any property . . .

Read this article in its entirety at Kelley Drye & Warren LLP's Bankruptcy Law Insights blog

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