CONFIRMING A CHAPTER 11 PLAN

classification issue, it must necessarily be considered, at least in connection with the "business reasons" rationale for separate classification of similar claims.

Probably the leading example of "fair" discrimination under the Code is Chateaugay,²⁰³ discussed above, where the Second Circuit held it fair to give priority treatment to worker's compensation claims held by workers, in order to preserve labor peace, but nonpriority treatment to identical claims held by the insurance company that had paid and was subrogated to such claims in other states. Another leading example is the Seventh Circuit's holding in 203 N. LaSalle.²⁰⁴ Under that 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" because the secured claim was nonrecourse and therefore nothing would have been paid on the deficiency claim 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.²⁰⁵ It did not expressly mention that the bankruptcy court had applied a two-prong test for unfair discrimination Ð there must be a reasonable basis for the discrimination and it must be necessary for the reorganization Ð rather than the four-prong test that some courts have adopted from chapter 13 cases.²⁰⁶

The unfair discrimination analysis has been applied when there is separate classification of unsecured claims that have the same rights against the debtor.²⁰⁷ Where the

²⁰³ In re Chateaugay Corp., 89 F.3d 942 (2d Cir. 1996).

²⁰⁴ In re 203 N. LaSalle Street Partnership, 126 F.3d 955 (7^th Cir. 1997), rev'd on other grounds sub nom. Bank of America National Trust and Savings Assoc. v. 203 North LaSalle Street Partnership, 119

S. Ct. 1411 (1999)
²⁰⁵ 126 F.3d at 969.
²⁰⁶ In re 203 N. LaSalle Street Partnership, 190 B.R. 567 (Bankr. N.D. Ill 1995); cf. In re Jim Beck

Inc., 214 B.R. 305 (W.D. Va. 1997)(adopting four-prong test first proposed in In re Aztec Co., 107

B.R. 585, 592 (Bankr. M.D. Tenn. 1989)).

See In re AOV Industries, Inc., 792 F.2d 1140 (D.C. Cir. 1986)(unfair discrimination to require one creditor to release guarantor for less consideration than received by other creditors of the same class); In re U.S. Truck Co., 800 F.2d 581 (6th Cir. 1986)(Teamsters' claim for rejection of collective bargaining agreement may be classified separately for voting purposes, due to the ongoing employer-employee relationship with the debtor, where all unsecured claims receive the same treatment); In re Granada Wines, 748 F.2d 42 (1^st Cir. 1984)(unsecured pension fund claim must be treated like general unsecured claims to avoid unfair discrimination); In re Pine Lake Village Apartment Co., 19 B.R. 819 (Bankr. S.D.N.Y. 1982)(mortgage deficiency claims must be treated like trade claims). For the origin and purposes of the unfair discrimination provision in the Code, see section I. A. 3, "Significance of Unfair Discrimination Provision," supra.

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