Section 1129(a)(10) of the Bankruptcy Code — requiring acceptance of a proposed plan from at least one impaired voting class — can often pose a unique challenge for single asset real estate debtors. Indeed, finding an impaired accepting class may be the lynchpin for success in run of the mill single-asset bankruptcies, where debtors have a single large secured creditor and only a few small unsecured trade creditors. In such cases, if consensual restructuring of the secured creditor’s claim is not possible, one option available for a debtor may be to seek cramdown over the secured creditor’s objection by strategically, or “artificially,” impairing minor creditors. Whether such artificial impairment is permissible remains an open question, but the majority view is that § 1129(a)(10) does not distinguish between artificial and economically driven impairment. Nevertheless, while technically satisfying the requirement of § 1129(a)(10), plans that rely upon strategic impairment may face heightened scrutiny under § 1129(a)(3)’s good faith requirements. This article examines the challenges of utilizing strategic impairment to create an accepting class of impaired creditors.

Editor’s Note: The following article, “The Diocesan Dilemma: How an Asset Dispute in a Diocesan Bankruptcy Created a Crucial Question in Modern Bankruptcy Law,” won the prize for third place in the Ninth Annual ABI Bankruptcy Law Student Writing Competition. Mr. Fehr is a recent graduate of UC Davis School of Law and will begin working with the U.S. Trustee Program this fall. 

Since 2004, thirteen Catholic dioceses have filed for bankruptcy protection. Although several dioceses filed before 2004, filings since then have been driven by mounting sexual abuse claims against the dioceses. In response to these filings, claimants are assembling formidable unsecured creditors’ committees. For the most part, these diocesan bankruptcies have resulted in settlements. However, adversary proceedings have drawn out several of these bankruptcies. The ownership of church assets has led to many disputes over what belongs to the entities being sued and what belongs to other separate organizations. Therefore, while the bankruptcy process has helped these religious organizations with protection from impending liabilities, it has also provided sexual abuse claimants with a venue to build substantial creditors’ committees and challenge the availability of assets.

Profs. Richard M. Hynes (University of Virginia; Charlottesville, Va.), Anne Lawton (Lansing, Mich.) and Margaret Howard (Washington & Lee Law School; Lexington, Va.) recently published an article in the ABI Law Review on a groundbreaking study of chapter 11 cases for individual debtors. The report profiles a typical individual who seeks protection and relief under chapter 11. The profile looks like this:

Entrepreneurship: A “very large proportion” of them “operated businesses as their primary occupation.” High Wealth: They “are wealthier than the average American” and “are more likely to own real property.” High Income: Their incomes “are much higher than that of the typical American household.” For example, (1) half of the 2013 sample “reported combined monthly income of $8,624 or more, which annualizes to a figure in excess of $100,000”; (2) approximately 36 percent are “in the top 20% of household incomes nationally,” and (3) “14% had annual incomes in excess of ... $225,333 in 2013, which placed them among the top 5% of American households nationally.”

In the recent case of Calita Elston Robinson, the U.S. Bankruptcy Court for the Northern District of Georgia addressed the issue of what the “interest at the legal rate” means under § 726(a)(5) of the Bankruptcy Code. In particular, the court addressed the issue of whether the appropriate interest rate for unsecured creditors in a solvent bankruptcy case should be at the federal judgment rate or the particular rate specified in the creditor’s contract with the debtor (i.e., the contract rate).

Recognizing a split of authority, the Robinson court first examined the two leading cases that have espoused the opposing views. The Robinson court noted that In re Cardelucci is the leading case interpreting § 726(a)(5) to require that interest be paid at the federal judgment rate. In Cardelucci, the U.S. Court of Appeals for the Ninth Circuit opined that § 726(a)(5) of the Bankruptcy Code requires interest to be paid at the federal judgment rate for the following reasons: