By: J. Ellsworth Summers, Jr. & Scott St. Amand
Cramdown. The very word makes the hair on the back of lenders’ necks stand up, because in the past, there was little a lender could do once the bankruptcy court confirmed a Chapter 11 plan. However, in the 2011 decision of In re Lett , the Eleventh Circuit loosened the stranglehold and allowed a creditor to appeal the confirmation of a plan on the basis of a violation of the “absolute priority rule,” even though the creditor had not formally objected to the issue prior to the confirmation.
In civil court, the “plain error rule” prevents a litigant from raising an issue in an appeal not raised during the trial, unless the litigant could prove that a “miscarriage of justice” would result. The Eleventh Circuit held that because it places the burden of enforcement on the court by “set[ting] out strict requirements that a court must ensure are met before a proposed plan may be confirmed,” and “because of the unique nature of the absolute priority rule and the statutory obligations facing a bankruptcy court in a cramdown proceeding,” the civil plain error rule was not applicable.
The absolute priority rule prevents a holder of equity interests, whose claim is junior to that of unsecured creditors, from retaining property interests under the plan unless dissenting impaired unsecured creditor classes are paid in full. The question in Lett was whether an impaired creditor in a dissenting class may challenge cramdown and confirmation of the plan, even if the dissenting creditor did not formally object prior to confirmation.