United States: Section 1129(a)(10) And Artificial vs. Economic Impairment Of Claims

Last Updated: June 20 2013
Article by Peter C. Blain

In a very recent decision, the Fifth Circuit Court of Appeals considered the issue of whether an impaired class of creditors is truly "impaired" when the plan proponent has the economic ability to pay such creditors in full on the effective date but elects not to, thereby permitting the class to vote in favor of confirmation of the proponent's plan. This can be described as "artificial" vs. "economic" impairment.

A brief review of the relevant sections of the Bankruptcy Code helps to frame the issue. Section 1123(b) of the Bankruptcy Code provides that a plan of reorganization "[may] impair or leave unimpaired any class of claims." A claim is impaired if the claimant's legal, equitable or contractual rights are altered.1 Section 1129 of the Bankruptcy Code enumerates the requirements to confirm a chapter 11 plan, including § 1129(a)(10), which provides that if there is at least one class of claims impaired under the plan, in order for such plan to be confirmed, at least one impaired class must accept the plan. Accordingly, where a plan is going to impair a class of claims, it is important for the plan proponent to find at least one impaired class to vote in favor of the plan. The issue then becomes, to what extent can an impaired and accepting class be created by a plan proponent by temporarily delaying payments to creditors within that class?

In re Village at Camp Bowie I L.P.

In In re Village at Camp Bowie I L.P.,2 a mortgage-holder that was owed $32 million appealed the confirmation of a plan that provided for the payment in full, without interest, of a class comprised of 38 unsecured creditors owed $59,398. The plan contemplated that such payments would be made within three months of its effective date. All 38 unsecured creditors in that class voted to accept the plan, while the class controlled by the secured creditor's deficiency claim voted against confirmation. It was undisputed that the debtor had sufficient cash flow to pay the unsecured creditors in full at confirmation. The rejecting secured creditor asserted that the treatment of the unsecured creditors constituted "artificial" impairment violating § 1129(a)(10).

Confirming the plan, the bankruptcy court acknowledged that the unsecured creditors could have been left unimpaired. However, the court rejected the secured creditor's assertion that § 1129(a)(10) distinguishes between artificial and economic impairment. The secured creditor had also asserted that the impairment in the absence of economic necessity violated the requirement that the plan be proposed in good faith under § 1129(a)(3). The bankruptcy court rejected this argument also, concluding that artificial impairment did not amount to per se bad faith. The secured creditor appealed.

On appeal, the Fifth Circuit Court of Appeals began by reviewing the existing circuit court authority addressing the issue of artificial impairment. At one end of the spectrum was In re Windsor on the River Associates Ltd.3 In that case, a secured creditor, which was owed $9.8 million (approximately 99 percent of the claims in the case), appealed the confirmation of a plan that provided that the claims in a class of unsecured creditors, totaling approximately $13,000, would be paid in full 60 days after the effective date of the plan. Although the secured creditor acquired some of the claims in the class and voted against the plan, a sufficient number of the class members had voted to accept the plan before the claims were acquired such that the district court found that the class, which was impaired, was deemed to have accepted the plan.

On appeal, the Eighth Circuit Court of Appeals found that the claims of the unsecured creditors could have been paid on the effective date and were therefore "arbitrarily and artificially impaired."4 The court held that "a claim is not impaired [for purposes of § 1129(a)(10)] if the alteration of [the] rights in question arises solely from the debtor's exercise of discretion."5 The court concluded that § 1129(a)(10) recognizes impairment only to the extent that it is driven by economic need.6

The Fifth Circuit Court of Appeals also reviewed a Ninth Circuit opinion in In re L & J Anaheim Associates,7 which is at the other end of the spectrum. In that case, Kawasaki held a $13.2 million claim secured by a hotel, which was the debtor's only asset. When the debtor failed to propose a plan during the 120-day exclusivity period, as mandated by § 1121(b) of the Bankruptcy Code, Kawasaki proposed its own plan, which provided that the hotel would be sold at auction. The bankruptcy court ruled that Kawasaki was an impaired creditor and its vote accepting the plan met the requirements of § 1129(a)(10). Finding that the other requirements of § 1129 were also met, the court confirmed the plan.

On appeal, the debtor argued that Kawasaki's proposed treatment under the plan was an improvement of its pre-petition rights, so it was therefore unimpaired within the meaning of § 1129(a)(10). The Ninth Circuit ruled that "impairment" means that a creditor's legal, equitable or contractual rights are altered under the plan, and found that the plan changed Kawasaki's state law rights. However, the court found, no particular kind or degree of alteration is required under § 1124, regardless of whether the resulting impairment is discretionary or economically driven. Thus, any change in an accepting creditor's rights, even if the change is arguably an improvement, is sufficient for the purposes of § 1129(a)(10). The court cautioned, however, that while discretionary impairment will not offend § 1124, if the facts indicate abuse, the plan proponent could be found to have violated the good-faith requirement of § 1129(a)(3).8

After considering these two polar opposite decisions, the Fifth Circuit Court of Appeals expressly rejected In re Windsor on the River Associates Ltd. and adopted the Ninth Circuit's view in In re L&J Anaheim Associates that § 1129(a)(10) does not distinguish between discretionary and economically driven impairment.9 The court reasoned:

By shoehorning a motive inquiry and materiality requirement into § 1129(a)(10), Windsor warps the text of the Code, requiring a court to "deem" a claim unimpaired for the purposes of § 1129(a)(10) even though it plainly qualifies as impaired under § 1124. Windsor's motive inquiry is also inconsistent with § 1123(b)(1), which provides that a plan proponent "may impair or leave unimpaired any class of claims," and does not contain any indication that impairment must be driven by economic motives.10

Like the Ninth Circuit in In re L&J Anaheim Associates, however, the Fifth Circuit concluded its decision with an acknowledgment that § 1129(a)(10) must be scrutinized in light of the good-faith requirements of § 1129(a)(3).11 Plan proponents that literally comply with § 1129(a)(10), the court warned, do not "enjoy a free pass from scrutiny under § 1129(a)(3)."12 The court went on to say that in the case at bar, the unsecured creditor class was comprised of independent third parties who extended ordinary course pre-petition trade debt to the debtor. However, an inference of bad faith might arise if a proponent creates an impaired accepting class out of whole cloth, particularly if the class members are parties related to the proponent, or there is evidence that the lending transaction is a sham.13


With the In re Village at Camp Bowie I L.P. decision, the Fifth Circuit Court of Appeals has joined the Ninth Circuit in determining that any impairment is sufficient for purposes of § 1129(a)(10) of the Bankruptcy Code. However, there is still a circuit split, with the Eighth Circuit in In re Windsor on the River Associates Ltd. ruling that only economic impairment is allowed. In addition, even in the Fifth and Ninth Circuits, literal compliance with § 1129(a)(10) does not exempt a plan proponent from satisfying the court that a plan is proposed in good faith, as required by § 1129(a)(3).

Originally published by ABI Committee News


1. 11 U.S.C. § 1124.

2. Western Real Estate Equities L.L.C. v. Village at Camp Bowie I L.P. (In the Matter of Village at Camp Bowie I L.P.), 710 F.3d 239 (5th Cir. 2013).

3. Windsor on the River Associates Ltd. v. Balcor Real Estate Finance Inc. (In re Windsor on the River Associates Ltd.), 7 F.3d 127 (8th Cir. 1993).

4. Id. at 132.

5. Id.

6. Id. at 132-33.

7. L & J Anaheim Associates v. Kawasaki Leasing International Inc. (In re L & J Anaheim Associates), 995 F.2d 940 (9th Cir. 1993).

8. Id. at 943.

9. In re Village at Camp Bowie I L.P., 710 F.3d at 245.

10. Id. at 245-46.

11. Id. at 247-48.

12. Id. at 248.

13. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Peter C. Blain
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions