Wednesday, March 20, 2013

Artificial Impairment of Voting Classes

In order for a Chapter 11 plan to be confirmed, it must meet the requirements of 11 U.S.C. §1129(a), including the requirement that at least one impaired class vote in favor of the plan.  11 U.S.C. §1129(a)(10).  A class is impaired unless the plan leaves all of its legal equitable and contractual rights unaltered.  11 U.S.C. §1124(1).  Recently, the Fifth Circuit Court of Appeals had the opportunity to consider whether a plan could be confirmed where the one impaired class was “artificially” impaired.

In Village at Camp Bowie I, L.P. there was substantial equity in the property, meaning the secured creditor was fully secured.  Knowing that the secured creditor was going to vote against the plan, the debtor placed the unsecured creditors, thirty-eight trade creditors owed $59,398 in a class, which class was deliberately impaired by the debtor, by providing that they would receive full payment not on the effective date, but instead three months later.