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may similar claims be treated differently? The first two of these are § 1122 issues, the third implicates primarily the accepting class requirement of § 1129(a)(10), and the fourth arises under the unfair discrimination standard of § 1129(b). After discussion of the historical origins of the applicable provisions, the first of these issues is addressed in part III(C), the second and third in part III(D), and the fourth in Parts III(F) and IV(C), below.
Under the Bankruptcy Act, classification was important only for two purposes:
(1) establishing the priority of claims for treatment, and (2) determining whether a class accepted the plan or confirmation had to proceed by cram down with respect to that class. As will be seen in the next section, there was no accepting class requirement.
The principal purpose of classification was to implement the absolute priority rule, to ensure that senior creditors received full value before junior creditors could participate.104 This meant that claims of differing priority could not be classified together,105 but did not necessarily mean that claims of equal priority could not be classified separately as long as they received the treatment to which their priority entitled them.
Acceptance of the plan by class vote was also a factor affecting classification, but not in the same way it is today. In particular, the type of gerrymandering creditors complain of today was not an issue because a creditor would only be benefited by being placed in its own class, since it then could control the vote of its class. On the other hand, there could be a concern for the opposite kind of gerrymandering, if creditors favorable to the reorganization were classified for the purpose of outvoting the objectors.106 Therefore while priority was the principal factor governing classification (for purposes of application of the absolute priority rule), it was not alone determinative and other factors could be considered where appropriate.
For example, questions arose whether separate classes, with identical treatment, would be appropriate if some creditors also owned stock and their acceptance of a plan might be influenced by its treatment of stockholders. Such a concern would be raised on behalf of the
104
6 COLLIER ON BANKRUPTCY ¦ 9.10, at 1597 (14th ed. 1978).
105
Id.; Kyser v. MacAdam, 117 F.2d 232, 237 (2d Cir. 1941)(chapter XII).
106 See, e.g., In re 455 CPW Assocs., 1999 U.S. Dist. LEXIS 13306 (S.D.N.Y. 1999)(rejecting mechanics lienholder's objection to being classified together with bank's deficiency claim under bank's plan, because that permitted bank's vote of its deficiency claim to out-vote the mechanics lienholder).
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