In the recent decision of In re Village at Camp Bowie I, the U.S. Court of Appeals for the Fifth Circuit held that section 1129(a)(10) of the Bankruptcy Code does not prohibit Chapter 11 debtors from artificially impairing a class of creditors in order to secure confirmation of a non-consensual (i.e., "cramdown") plan. At the same time, however, the Fifth Circuit noted that artificial impairment could, under certain circumstances, violate a debtor’s duty under section 1129(a)(3) to propose a plan in good faith.1 In reaching its conclusion, the Fifth Circuit confirmed its prior view on the controversial issue of artificial impairment, an issue which has led to inconsistent rulings from various jurisdictions, and which is often at the core of confirmation litigation involving debtors and their major creditors in complex Chapter 11 practice.
Artificial Impairment
To confirm a Chapter 11 plan over the rejection of an impaired class (i.e., "cramdown"), a plan proponent must, among other things, obtain acceptance of the plan by at least one "impaired" class of claims.2 A class is "impaired" under a plan of reorganization for purposes of section 1129 of the Bankruptcy Code unless the plan "leaves unaltered the legal, equitable, and contractual rights" of the claim or interest holders in that class.3 The Bankruptcy Code, however, is silent as to what kind or degree of alteration is necessary to impair a class. Thus, some courts, including the Fifth Circuit in dicta (prior to the Camp Bowie decision), have found that any alteration of rights, whether discretionary or economically driven, is sufficient to create an impaired class for voting purposes.4
