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The Ninth Circuit has held that impairment requires nothing more than altered rights even if the alteration enhances the rights. In L & J Anaheim, a secured creditor confirmed a liquidating plan in a single asset case using its own vote as the sole accepting impaired class. On appeal, the debtor argued that the secured creditor's position was actually improved under the plan, and that improvement could not be "impairment."
The Court reasoned that although at "first blush" improvement as impairment might seem nonsensical, the plain language of § 1124 states that a claim is impaired unless its rights are left unaltered and the section contains no suggestion that only "alterations of a particular kind or degree can constitute impairment." The secured creditor's claim was impaired under the plan because the plan replaced its state law foreclosure rights with a bankruptcy court auction of its collateral.
Lower courts have generally followed Anaheim, although the Second Circuit balked at the logical extension that a claim paid more than its present value could be deemed impaired. Following Anaheim, the Ninth Circuit Bankruptcy Appellate Panel held that a class of unsecured claims to be paid in full with interest 30 days after the effective date was an impaired class. Other courts continue to reject satisfaction of 1129(a)(10) by classes whose
impairment was deemed artificial.
After the 1994 Reform Act eliminated § 1124(3), a claim paid in full in cash on the effective date is nevertheless deemed impaired. This should eliminate the "artificial impairment" argument, but it still appears. The First Circuit Bankruptcy Appellate Panel held that impairment of trade creditors when they arguably could have been paid in full did not constitute impermissible "artificial impairment." The Seventh Circuit rejected the artificial impairment argument in 203 N. LaSalle. Although the debtor had sufficient funds on hand at confirmation to pay all trade debt in full, they were to be paid over time and without any
