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this has been rejected by several courts as impermissible "gerrymandering,"65 the Seventh Circuit has upheld it.66
The Code requires that each class of claims or interests either accept the plan or be unimpaired under the plan. § 1129(a)(8). However, the significant exception is § 1129(b), which permits confirmation notwithstanding rejection by an impaired class, known colloquially as "cram down." Thus the only real significance to § 1129(a)(8) is to make clear that the absolute priority rule and unfair discrimination prohibition of § 1129(b) do not apply to classes that are either unimpaired or accept the plan. The treatment of dissenting classes is dealt with below in Parts IV and V.
Until 1994, satisfaction of 1129(a)(8) by treating a class as unimpaired was generally not problematical if there was sufficient cash to make a full cash payment on the effective date of the plan. This was one method of nonimpairment as defined in § 1124(3), until it was repealed by the Bankruptcy Reform Act of 1994.67
The other two alternatives have generated more controversy. Generally, the courts have held that any default can be cured pursuant to § 1124(2),68 with the result that any consequences of default can be avoided, such as payment of a higher default rate of interest.69
65
See In re Greystone III Joint Venture, 102 B.R. 560, 569-70 (Bankr. W.D. Tex. 1989)(approving separate classification of Code-created deficiency claim and trade debts), rev'd, 948 F.2d 134 (5th Cir. 1991).
66 In re 203 N. LaSalle Street Partnership, 126 F.3d 955 (7th Cir. 1997), rev'd on other grounds, 119 S. Ct. 1411 (1999)(Under the plan, trade debts were to be paid in full, without interest, whereas the deficiency claim would be paid only 16%. This was found to be "fair discrimination," however, because the secured claim was nonrecourse and therefore would have received nothing in a chapter 7 liquidation. The Seventh Circuit affirmed the bankruptcy court's approval of this discrimination as "narrowly tailored to meet the requirements of the 'best interest' test," apparently applying the "clear error" standard of review for factual findings.).
67 In re Willow Creek Apartments, Ltd., 1996 Bankr LEXIS 1888 (Bankr. M.D. N.C. 1996)(pre-1994 Reform Act, plan amendment rendering all classes unimpaired could be confirmed without amended disclosure statement because no solicitation required of unimpaired classes). After the 1994 Reform Act, however, even claims paid in full are impaired. In re Atlanta-Stewart Partners, 193 B.R. 79 (Bankr. N.D. Ga. 1996). But see Solow v. PPI Ent., Inc. (In re PPI Ent., Inc.), 324 F.3d 197, 207 (3d Cir. 2003)(the repeal of § 1124(3) "does not reflect a sweeping intent by Congress to give impaired status to creditors more freely outside the postpetition interest context).
68
But see In re Deseno, 17 F.3d 642 (3d Cir. 1994)(default in mortgage cannot be cured after foreclosure judgment rendered, but judgment can be modified under a plan).
69 Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070 (9th Cir. 2002); In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988); In re Southeast Co.,
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