Classification Of Claims And Interests In Chapter 11 Bankruptcy Cases

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The classification of claims and interests in a Chapter 11 bankruptcy case is governed by Section 1122 of the Bankruptcy Code. The ability of a plan proponent to group certain claims in certain categories is a powerful tool in the confirmation process, since it can have a direct effect on the voting and objection process.

While claims and interests are supposed to be “substantially similar” to each other in theory, in practice this standard can present many complexities. Must all claims of the same type be placed in the same class? When can substantially similar claims be placed in separate classes? Should legal, or factual, standards be controlling?

Plan are also required to provide the same treatment for each claim or interest within each class, unless the holder agrees to different treatment of its claim or interest. Being able to treat different creditors may in some cases be related to the ability to classify them differently. As a general rule stated above, claims and interests within a class must be “substantially similar” to each other. This does not mean—and the Code does not address this issue—that all substantially similar claims must be placed in the same class. In Re Dow Corning Corp., 280 F.3d 648, 661 (6th Cir. 2002).

Courts generally do not require this. However, a plan proponent in this situation must present a reasonable justification for such separately classifying claims that are substantially similar. In Re Armstrong World Industries Inc., 348 B.R. 136 159 (Bankr. D. Del. 2006).

Claims and interests are inherently different, and cannot be lumped together in the same class. A “claim” is defined in Section 101 of the Code. “Interest” is not defined in the Code, but it amounts to a proprietary right, such as common stock or some other equity interest. As a general rule, classification should be based on the legal nature of the claim or interest. The claims do not need to be precisely the same. In fact, a plan proponent can choose to create other classes of claims based on reasonable distinctions between claims.

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A plan must classify Section 507(a) priority claims other than administrative expense claims, involuntary gap claims, and unsecured tax and customs duties claims (i.e., Sections 507(a)(2), (a)(3), and (a)(8)). Priority claims should be separately classed because such claims are normally very similar in nature. Regarding secured claims, the analysis will generally revolve around: the nature of the collateral, priority, and the agreements among creditors regarding subordination, if any.

Administrative convenience classes are an issue of some note. Section 1122(b) permits a plan proponent to designate a separate class for unsecured claims that happen to be less than a specified dollar amount, provided that a court approves this as being reasonable and necessary. Section 1122(b) does not forbid the creation of more than one convenience class. As long as such a scheme is reasonable and necessary, it is permitted.

One interesting issue is whether an unsecured deficiency claim created by Section 1111(b) should be classified with other unsecured claims. A majority of courts has held that an unsecured deficiency claim created under Section 1111(b) cannot be classified separately from other unsecured claims. There is a minority view that holds differently, for reasons that are not altogether convincing.

Whether claims are “substantially similar” is normally reviewed under the “clearly erroneous” standard. The court will look at the reasons behind the classification and make sure that such reasons comport with the primary functions of the Bankruptcy Code. The Federal Rules of Bankruptcy Procedure here provide some guidance on the matter. Rule 3013 states that on motion, the Court may determine the appropriate classification of a claim.

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  1. Pingback: With Guarantor, Separate Classification Of Unsecured Claim In Chapter 11 Plan Was Allowed | Bankruptcy And Criminal Defense Information In The Kansas City Area

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