If any class of creditors under a chapter 11 plan is "impaired," the Bankruptcy Code provides that the plan can be confirmed by the bankruptcy court only if at least one impaired class of non-insider creditors votes to accept the plan. This "impaired class acceptance" requirement—stated in section 1129(a)(10) of the Bankruptcy Code—is straightforward in cases involving a single debtor, or in cases where the bankruptcy estates of several debtors are "substantively consolidated" so that the assets and liabilities of each debtor are deemed to belong to a single consolidated entity.However, the requirement is more difficult to apply in cases involving multiple affiliated debtors that propose a joint chapter 11 plan, but whose estates are not substantively consolidated, or are consolidated only for purposes of plan confirmation (sometimes referred to as "deemed substantive consolidation"). In such cases, the question is whether an impaired class of each debtor must accept the plan (the "per debtor" approach) or whether the acceptance of the joint plan by an impaired class of a single debtor, or fewer than all of the debtors, is sufficient (the "per plan" approach). This question is disputed among the courts. The U.S. Bankruptcy Court for the District of Massachusetts recently weighed in on this issue in In re NESV IC

Distributions are to be made pro rata to parties of equal priority within each of the six categories specified in section 726. If claimants in a higher category of distribution do not receive full payment of their claims, no distributions can be made to parties in lower categories.In a chapter 11 case, the chapter 11 plan determines the treatment of secured and unsecured claims (as well as equity interests), subject to the requirements of the Bankruptcy Code. If a creditor does not agree to impairment of its claim under the plan—such as by agreeing to receive less than payment in full—and votes to reject the plan, the plan can be confirmed only under certain specified conditions. Among these conditions are the following: (i) the creditor must receive at least as much under the plan as it would receive in a chapter 7 liquidation (11 U.S.C.§ 1129(a)(7)) (commonly referred to as the "best interests" test); and (ii) the plan must be "fair and equitable" (Id. § 1129(b)(1)).Section 1129(b)(2)(B) of the Bankruptcy Code provides that a plan is "fair and equitable" with respect to a dissenting impaired class of unsecured claims if the creditors in the class receive or retain property of a value equal to the allowed amount of their claims or, failing that, if no creditor or equity holder of lesser priority receives any distribution under the plan. This is known as the "absolute priority rule."Disallowance of Claims for Unmatured Interest and the Solvent Debtor ExceptionSection 502(b)(2) of the Bankruptcy Code provides that a claim for interest that is "unmatured" as of the petition date shall be disallowed.

This article explores issues secured creditors face in raising objections to confirmation based on the absolute priority rule.I. Cramdown and the Absolute Priority RuleSection 1129(a) of the Bankruptcy Code sets forth 16 requirements that a debtor generally must satisfy to confirm a Chapter 11 plan. See 11 U.S.C.A. § 1129(a) (2006) ("The court shall confirm a plan only if all of the following requirements are met"). One of these requirements is that each impaired class of creditors must accept the plan.

Section 1124 originally included a third option, then section 1124(3), for rendering a claim unimpaired—by providing the claimant with cash equal to the allowed amount of its claim. In In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), the court ruled that, in light of this third option, and because sections 726(a)(5) and 1129(a)(7) of the Bankruptcy Code (described below) are applicable in a chapter 11 case only to impaired creditors, a solvent debtor's chapter 11 plan that paid unsecured claims in full in cash, but without postpetition interest, did not impair the claims. The perceived unfairness of New Valley led Congress to remove this option from section 1124 of the Bankruptcy Code in 1994.

ired" by a chapter 11 plan. The distinction is important because only impaired classes have the ability to vote to accept or reject a plan. Under section 1126(f) of the Bankruptcy Code, unimpaired classes of creditors and shareholders are conclusively presumed to have accepted a plan.Section 1124 provides that a class of creditors is impaired under a plan unless the plan: (i) "leaves unaltered the legal, equitable, and contractual rights" to which each creditor in the class is entitled; or (ii) cures any defaults (with limited exceptions), reinstates the maturity and other terms of the obligation, and compensates each creditor in the class for resulting losses.Section 1124 originally included a third option, then section 1124(3), for rendering a claim unimpaired—by providing the claimant with cash equal to the allowed amount of its claim. In In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), the court ruled that, in light of this third option, and because sections 726(a)(5) and 1129(a)(7) of the Bankruptcy Code (described below) apply in a chapter 11 case only to impaired creditors, a solvent debtor's chapter 11 plan that paid unsecured claims in full in cash, but without postpetition interest, did not impair the claims. The perceived unfairness of New Valley led Congress to remove this option from section 1124 of the Bankruptcy Code in 1994. Since then, most courts considering the issue have held that, if an unsecured claim is paid in full in cash with postpetition interest at an appropriate rate, the claim is unimpaired under section 1124. See, e.g., In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 205–07 (3d Cir. 2003).Cram-Down Confirmation RequirementsIf a creditor class does not agree to impairment of the claims in the class under the plan and votes to reject it, the plan can be confirmed only under certain specified conditions. Among these "cram-down" conditions are requirements that: (i) each creditor in the class receive at least as much under the plan as it would receive in a chap

However, "cramdown" confirmation is possible in the absence of plan acceptance by impaired classes under section 1129(b)(1), which provides as follows:Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent under the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.11 U.S.C. § 1129(b)(1) (emphasis added).The Bankruptcy Code does not define "unfair discrimination."

of the Bankruptcy Code, unimpaired classes of creditors and interest holders are conclusively presumed to have accepted a plan. Section 1126(g) provides that classes of creditors or interest holders that receive or retain nothing under a plan are deemed not to have accepted the plan.Section 1124 provides that a class of creditors is impaired under a plan unless the plan: (i) "leaves unaltered the legal, equitable, and contractual rights" to which each creditor in the class is entitled; or (ii) cures any defaults (with limited exceptions), reinstates the maturity and other terms of the obligation, and compensates each creditor in the class for resulting losses.Section 1124 originally included a third option, then section 1124(3), for rendering a claim unimpaired—by providing the claimant with cash equal to the allowed amount of its claim. In In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), the court ruled that, in light of this third option, and because sections 726(a)(5) and 1129(a)(7) of the Bankruptcy Code (described below) are applicable in a chapter 11 case only to impaired creditors, a solvent debtor's chapter 11 plan that paid unsecured claims in full in cash, but without pendency interest, did not impair the claims. The perceived unfairness of New Valley led Congress to remove this option from section 1124 of the Bankruptcy Code in 1994. Since then, most courts considering the issue have held that, if an unsecured claim is paid in full in cash with pendency interest at an appropriate rate, the claim is unimpaired under section 1124. See, e.g., In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 205–07 (3d Cir. 2003).Section 1124(1) "define[s] impairment in the broadest possible terms," so that "any change in legal, equitable or contractual rights creates impairment." In re Taddeo, 685 F.2d 24, 28 (2d Cir. 1982); accord PPI, 324 F.3d at 202 ("If the debtor's Chapter 11 reorganization plan does not leave the creditor's rights entirely 'unaltered,' the creditor's claim will be labeled a

That provision, which allows for the so-called cramdown of a Chapter 11 plan over the objection of a non-consenting class of claims, provides:Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan [i.e., the only obstacle to confirmation is the absence of consent by each voting class], the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph [8] if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.11 U.S.C. §1129(a)(1) (emphasis added). Whether this provision, with its reference to Section 510(a), excuses strict compliance with subordination provisions in the context of a cramdown plan, was the issue — never before addressed by a circuit court and subject to only limited case law at any level — that lay at the heart of the dispute in Tribune.

Lothian Oil, 650 F.3d at 543-44; Fitness Holdings, 714 F.3d at 1148.Cram-Down Chapter 11 PlansIf a class of creditors or shareholders votes to reject a chapter 11 plan, it can be confirmed only if the plan satisfies the "cram-down" requirements of section 1129(b) of the Bankruptcy Code. Among those requirements are the mandates that, with respect to dissenting classes of creditors and shareholders: (i) the plan must be "fair and equitable"; and (ii) the plan must not "discriminate unfairly." 11 U.S.C. § 1129(b)(1).Fair and Equitable.Section 1129(b)(2)(B) of the Bankruptcy Code provides that a plan is "fair and equitable" with respect to a dissenting impaired class of unsecured claims if the creditors in the class receive or retain property of a value equal to the allowed amount of their claims or, failing that, in cases not involving an individual debtor, if no creditor or equity holder of lesser priority receives or retains any distribution under the plan "on account of" its junior claim or interest.

A DIP is granted the same ability to obtain credit or financing in accordance with section 1107(a) of the Bankruptcy Code.Cram-Down of Secured Claims in BankruptcySection 1129(a) of the Bankruptcy Code requires, among other things, that for a chapter 11 plan to be confirmable, each class of claims or interests must either accept the plan or not be impaired. See 11 U.S.C. § 1129(a)(8). However, confirmation is possible in the absence of acceptance by impaired classes under section 1129(b) if all of the other plan requirements are satisfied and the plan "does not discriminate unfairly" and is "fair and equitable" with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.With respect to a dissenting class of secured claims, section 1129(b)(2)(A) provides that a plan is "fair and equitable" if the plan provides for: (i) the secured claimants' retention of their liens and receipt of deferred cash payments equal to at least the value, as of the plan effective date, of their secured claims; (ii) the sale, subject to the creditor's right to "credit bid" its claim under section 363(k), of the collateral free and clear of all liens, with attachment of the creditor's lien to the sale proceeds and treatment of the lien under option (i) or (iii); or (iii) the realization by the secured creditors of the "indubitable equivalent" of