Deemed Rejection
Deemed Rejection is the Section 1126(g) rule that treats a Chapter 11 class as not accepting a plan when holders in that class receive or retain no property under the plan on account of their claims or interests.
How it works
A zero-recovery class does not need a ballot process merely to establish rejection. Section 1126(g) supplies the result automatically. The class is treated as dissenting for confirmation purposes, which can require the Plan Proponent to satisfy applicable cramdown requirements.
Section 1126(g) eliminates unnecessary voting
A class receiving no property on account of its claims or interests is deemed not to accept.
The rule commonly applies to out-of-the-money classes
Deeply subordinated claims or equity can receive no distribution when enterprise value is exhausted by senior stakeholders.
Deemed Rejection differs from a negative ballot result
The class does not reject because a majority voted no. The Code supplies the result without solicitation.
Cramdown analysis can follow
A deemed rejecting impaired class can require Section 1129(b) satisfaction if confirmation is sought over the rejection.
Worked example: equity below the value break
Senior claims total $500 million while reorganization value is $430 million. Common equity receives nothing and can be deemed to reject.
Why valuation matters
Moving estimated value above or below a priority layer can determine whether a class receives property and whether Section 1126(g) applies.
Common mistakes
Sending ballots to establish rejection; assuming any dissenting class is deemed rejecting; ignoring property received for a distinct legal reason; and treating deemed rejection as automatic plan defeat.
Example
A plan values the enterprise below the amount of senior debt and gives existing common equity no property on account of its shares. The equity class is deemed not to accept the plan under Section 1126(g).
Example
A plan values the enterprise below the amount of senior debt and gives existing common equity no property on account of its shares. The equity class is deemed not to accept the plan under Section 1126(g).
Professional note
Receiving nothing on account of the class’s claim or interest is the key trigger. Separate consideration provided for a different legal reason can require analysis before applying the rule.
Related terms
- Cramdown
Cramdown is the Chapter 11 mechanism under Bankruptcy Code Section 1129(b) that can allow a court to confirm a plan despite rejection by an impaired class, if the statutory confirmation requirements are satisfied and the plan does not discriminate unfairly and is fair and equitable with respect to the rejecting class.
- Absolute Priority Rule
The Absolute Priority Rule is the Chapter 11 principle reflected in Bankruptcy Code Section 1129(b) that, in specified cramdown circumstances, prevents a junior class from receiving or retaining property on account of its junior claim or interest when a senior dissenting class is not paid in full.
- Impaired Class
An Impaired Class is a Chapter 11 class of claims or interests whose legal, equitable or contractual rights are altered by the plan in a manner that does not qualify as unimpaired treatment under Bankruptcy Code Section 1124.
- Class Acceptance
Class Acceptance is the Chapter 11 voting determination under Section 1126 that establishes whether a class of claims or interests has accepted a proposed plan based on the votes actually cast by eligible holders.
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