CHAPTER 11 PLAN CONFIRMATION

G. Best Interests of Creditors

A condition of confirming any plan is that each holder of a claim receive as much as the holder would receive in the event of liquidation under Chapter 7. Section 1129(a)(7)(A) requires that each holder of a claim or interest either accept the plan or else receive or retain "property of a value, as of the effective date of the plan, that is not less than the amount that such holder would . . . receive or retain if the debtor were liquidated under chapter 7 . . . on such date." In more simple terms, the holder of the claim must receive the present value of the liquidation value of its claim. This is the "best interests of creditors" standard which is derived from the standard of confirmation under Chapters XI and XII of the Bankruptcy Act. Act §§ 366(2) and 472(2). The 1984 amendments to Code § 1129(a)(7) clarified that the best interests test applies only to impaired claims and interests.

In determining whether the Chapter 7 liquidation amount for comparison, the court must consider the applicable Chapter 7 rules of distribution, as well as the liquidation costs. This includes not only the priority rules of § 726, but also the special rules for recoveries against general partners, § 723, and the tax lien subordination rules of § 724. If the debtor has contingent claims against third parties, expert testimony may be necessary to determine their liquidation value.

One of the consequences of the liquidation analysis is that if the estate is solvent, unless unimpaired under § 1124, unsecured creditors are to receive postpetition interest at the legal rate before the debtor receives any distribution. This is so even though such interest is not allowable under § 502(b)(2) (which disallows interest that is unmatured as of the date of the petition), since the holders of such claims would be entitled to postpetition interest in the event of chapter 7 liquidation, pursuant to § 726(a)(5).

Until 1994 even a solvent debtor could avoid paying interest on unsecured claims by paying the full allowed amount of the claims in cash on the effective date. Prior to the Bankruptcy Reform Act of 1994, § 1124(3) provided that payment of the allowed amount of