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claims.60 Unfortunately, the change was not limited in its application to solvent debtors, so now even if an insolvent debtor pays the full allowed amount of unsecured claims in cash on the effective date such claims are still impaired, and therefore their votes must be solicited.
A problem can arise when there is an undersecured, nonrecourse claim, which under Chapter 11 is required to be allowed as if it had recourse pursuant to § 1111(b). If the deficiency claim must be classified with general unsecured claims and provided the same treatment, and there is insufficient value in the estate to pay all unsecured claims in full, any value given to the recourse deficiency claim would reduce the amount the general unsecured claims would receive below what they would get on liquidation under Chapter 7, where the nonrecourse claim is not deemed recourse and therefore is not allowed.
The best interests test also requires consideration of the amount that could be recovered from general partners pursuant to § 729(a).61 Chapter 11's modification of the "jingle rule" creates an accounting conundrum when there are multiple general partners.62
Since property recovered by use of the avoiding powers becomes property of the estate under § 541(a)(3) (4), applicable in both chapters 7 and 11, the best interests test should include the value of such property,63 but at least one court has held to the contrary.64
The Code does not provide a solution to these problems, nor does the legislative history indicate they were considered. One solution is separate classification and differing treatment to take into account how the claims would be treated under chapter 7. Although
60
In re New Valley Corp., 168 B.R. 73 (Bankr. D. N.J. 1994); see House Report on Reform Act § 213, 140 Cong. Rec. H. 10764 (hereafter "1994 House Report").
61
Id. at 61. HR Rep No. 95-595, 95th Cong, 1st Sess 200, 412-13 (1977); see also Rosenberg, "Partnership Reorganization Under the Bankruptcy Reform Act: Filling in the Interstices," 56 N.Y.U.
L. REV. 1173, 1191, 1193 (1981).
62
The trustee must first seek recovery from general partners not in bankruptcy but the balance of the deficiency is a claim in the estate of each general partner who is in bankruptcy and shares equally with other general claims. The jingle rule has been expressly abolished in part; the partnership trustee shares on an equal footing with the individual creditors of a partnership debtor in a Chapter 7 case. § 723(c). Kennedy, "Partnerships and Partners Under the Bankruptcy Code: Claims and Distributions," 40 WASH & LEE L REV 55, 56-63 (1983). But if you hypothesize a chapter 7 liquidation as to each general partner where the jingle rule does not apply, it conflicts with the application of the jingle rule in Chapter 11.
63 In re Sierra-Cal, 210 B.R. 168 (Bankr. E.D. Cal. 1997) (best interests test must include analysis of what claims of creditors who received avoidable transfers would be disallowed in the hypothetical chapter 7 case).
64 In re Brennan, 208 B.R. 448 (Bankr. S.D. Ill. 1997)(Best interests test (under § 1325(a)(4)) need not include amounts recovered by trustee's use of strong arm powers to avoid a lien.).
13
