Competitive Choice Theory and the Unresolved Doctrines of Classification and Unfair Discrimination in Business Reorganizations under the Bankruptcy Code

Business Lawyer

Volumn 55, Issue 1, 1999, Pages 1-79

  Brunstad Jr , G Eric ^a   Sigal, Mike ^b  

^a Bingham McCutchen LLP   (United States)

^b Simpson Thacher and Bartlett   (United States)

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EID: 0347039990     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (352)

1. See 11 U.S.C. § 1123 (1994) (prescribing the contents of a Chapter 11 plan); id. § 1129 (prescribing the rules governing confirmation of a plan); Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1423-24 n.28 (1999) (stating that " 'the Chapter 11 process relies on creditors and equity holders to engage in negotiations toward resolution of their interests' " (quoting G. Eric Brunstad, Jr., Mike Sigal & William H. Schorling, Review of the Proposals of the National Bankruptcy Review Commission Pertaining to Business Bankruptcies: Part I, 53 BUS. LAW. 1381, 1405-06 n.136 (1998)).
2. See 11 U.S.C. § 1123(b)(4) (providing that a Chapter 11 plan of reorganization may "provide for the sale of all or substantially all of the property of the [debtor's bankruptcy] estate, and the distribution of the proceeds among holders of claims or interests"). Significantly, the underlying goals of Chapter 11 are to salvage viable businesses and maximize the creditors' return. See LaSalle, 119 S. Ct. at 1421 (stating that the "two recognized policies underlying Chapter 11 [are] preserving going concerns and maximizing property available to satisfy creditors"). As stated in the Code's legislative history: The purpose of a business reorganization case, unlike a liquidation case, is to restructure a business's finances so that it may continue to operate . . . . The premise of a business reorganization is that assets that are used for production in the industry for which they were designed are more valuable than those same assets sold for scrap. H.R. REP. NO. 95-595, at 220 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6422; see also Toibb v. Radloff, 501 U.S. 157, 163 (1991) (recognizing "that Chapter 11 also embodies the general Code policy of maximizing the value of the bankruptcy estate"); NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527 (1984) (stating that "the policy of Chapter 11 is to permit successful rehabilitation of debtors"); United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983) (stating that "Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if 'sold for scrap' ") (quoting H.R. REP. NO. 95-595, at 220); Case v. Los Angeles Lumber Prods. Co., Ltd., 308 U.S. 106, 119-20 n.14 (1939) (stating that " '[t]he preservation of business enterprises must not be at the expense of creditors' " (citation omitted)). As explained by the U.S. Court of Appeals for the Fifth Circuit: "A principal goal of the reorganization provisions of the Bankruptcy Code is to benefit the creditors of the Chapter 11 debtor by preserving going-concern values and thereby enhancing the amounts recovered by all creditors." United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 373 (5th Cir. 1987) (en banc), aff'd, 484 U.S. 365 (1988). Significantly, the purpose of maximizing the value of the debtor's bankruptcy estate is not new to Chapter 11. For example, § 77B of the Act of 1898, 11 U.S.C. § 205 (1934) (repealed 1938), which permitted corporate reorganizations, was premised on the same purpose. See Los Angeles Lumber, 308 U.S. at 124 (stating that "[o]ne of the purposes of § 77B was to avoid the consequences to debtors and creditors of foreclosures, liquidations, and forced sales with their drastic deflationary effects"). Nevertheless § 1123(b)(4) of the Code recognizes that the liquidation of all or part of a debtor's assets is sometimes more efficient than the rehabilitation of the enterprise as a going concern. See Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738, 741 (1988) (observing that, in some cases, "[t]he firm's assets are worth more sold piece by piece than as a unit").
3. See 11 U.S.C. § 1123(a)(1) (providing in pertinent part that "[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . designate, subject to section 1122 of this title, classes of claims . . . and classes of interests"); id. § 1129 (premising various aspects of the plan confirmation process on the treatment of classes of claims and interests); Boston Post Rd. Ltd. Partnership v. Federal Deposit Ins. Corp. (In re Boston Post Rd. Ltd. Partnership), 21 F.3d 477, 480 (2d Cir. 1994) (observing that "[t]he voting structure set forth in the Bankruptcy Code for approval of a reorganization plan mandates that claims be placed in classes and that votes be counted on a class basis"); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1277 (5th Cir. 1991) (stating that "[p]roper classification is essential to ensure that creditors with claims of similar priority against the debtor's assets are treated similarly"). In general, a "claim" is defined for purposes of the Bankruptcy Code as a right to payment. See 11 U.S.C. § 101(5). In turn, the term "interest" refers to an equity interest in the debtor. See id. § 501(a) (providing that "[a] creditor or indenture trustee may file a proof of claim. An equity security holder may file a proof of interest").
4. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
5. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
6. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
7. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
8. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
9. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
10. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
11. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
12. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
13. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry-mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
14. This and other aspects of the Code's classification rules have attracted a significant body of scholarly commentary. See Brunstad, Sigal & Schorling, supra note 1, at 1421-32 (discussing various classification issues); see also John C. Anderson, Classification of Claims and Interests in Reorganization Cases Under the New Bankruptcy Code, 58 AM. BANKR. L.J. 99 (1984); William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197 (1984); David Gray Carlson, The Classification Veto in Single-Asset Cases under Bankruptcy Code Section 1129(a)(10), 44 S.C. L. REV. 565 (1993); Richard L. Epling, Separate Classification of Future Contingent and Unliquidated Claims in Chapter 11, 6 BANKR. DEV. J. 173 (1989); Bruce A. Markell, Clueless on Classification: Toward Removing Artificial Limits on Chapter 11 Claim Classification, 11 BANKR. DEV. J. 1 (1995); Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification of Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992); Scott E Norberg, Classification of Claims under Chapter 11 of the Bankruptcy Code: The Fallacy of Interest Based Classification, 69 AM. BANKR. L.J. 119 (1995); Louis S. Robin, Classification of Claims: An Examination of Disregarded Legislative History, 98 COM. L.J. 225 (1993); Linda J. Rusch, Gerry- mandering the Classification Issue in Chapter 11 Reorganizations, 63 U. COLO. L. REV. 163 (1992); Charles F. Vihon, Classification of Unsecured Claims: Squaring a Circle?, 55 AM. BANKR. L.J. 143 (1981). See generally Boston Post Rd., 21 F.3d at 481 (observing that the separate classification of similar claims remains an unresolved "hot topic").
15. See 11 U.S.C. § 1122(a); infra notes 95-97 and accompanying text (discussing § 1122(a)). For example, secured claims cannot be combined with unsecured claims. See In re Sullivan, 26 B.R. 677, 678 (Bankr. W.D.N.Y 1982) (holding that a secured municipal tax claim could not be classified together with an unsecured federal tax claim because the two were not substantially similar owing to their different payment priorities); see also Brady v. Andrew (In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1338 (9th Cir. 1985) (determining that claims secured by different collateral should be classified separately); Mokava Corp. v. Dolan, 147 F.2d 340, 344 (2d Cir. 1945) (stating that secured claims should be classified separately); In re Deep Rock Oil Corp., 113 F.2d 266, 268-69 (10th Cir. 1940) (observing that a claim (indebtedness) could not be classified together with an interest (equity)); Federal Home Loan Mortgage Corp. v. Bugg (In re Bugg), 172 B.R. 781, 784 (E.D Pa. 1994) (stating that secured claims with liens on different collateral should be classified separately); In re Holthoff, 58 B.R. 216, 219 (Bankr. E.D. Ark. 1985) (determining that claims secured by liens on the same property, but of different priorities, should be classified separately); infra notes 153-56 (discussing disagreements among the courts over the kinds of claims that are substantially similar in nature). Compare Brady, supra, with In re Palisades-on-the-Desplaines, 89 F.2d 214, 217 (7th Cir. 1937) (permitting the common classification of claims secured by different collateral). Section 1122(b) provides a narrow exception to the general rule set forth in § 1122(a), stating that "[a] plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience." 11 U.S.C. § 1122(b). See Oxford Life Ins. Co. v. Tucson Self-Storage, Inc. (In re Tucson Self-Storage, Inc.), 166 B.R. 892, 898 (B.A.P. 9th Cir. 1994) (discussing § 1122(b)); In re S & W Enters., 37 B.R. 153, 162 (Bankr. N.D. Ill. 1984) (same); In re Mastercraft Record Plating, Inc., 32 B.R. 106, 108 (Bankr. S.D.N.Y. 1983) (same).
16. See 11 U.S.C. § 1123(a)(4); In re AOV Indus., Inc., 792 F.2d 1140, 1152 (D.C. Cir. 1986) (holding that claimants within the same class must be treated equally under § 1123(a)(4)); infra notes 46, 99, and accompanying text (discussing § 1123(a)(4)). The sole statutory exception is if the holder of a particular claim consents to less favorable treatment. See 11 U.S.C. § 1123(a)(4).
17. See Hanson v. First Bank of South Dakota, N.A., 828 F.2d 1310, 1313 (8th Cir. 1987) (stating that § 1122(a) of the Code governing the classification of claims "does not prohibit the placement of substantially similar claims in different classes"); In re LaFayette Hotel Partnership, 227 B.R. 445, 449 (S.D.N.Y. 1998) (observing that "[a]lthough [§ 1122] explicitly prohibits the placement of dissimilar claims in the same class, it does not address the issue of whether similar claims must be placed in the same class"); Markell, supra note 4, at 2 (arguing that "any classification is proper so long as it does not combine claims that have different non-bankruptcy priorities, such as mixing secured and unsecured claims in one class").
18. 11 U.S.C. § 1129(b)(1); see infra notes 9, 89, and accompanying text (discussing the Code's non-exclusive "fair and equitable" requirement); infra notes 89, 168-99, and accompanying text (discussing the Code's "unfair discrimination" rule).
19. See 11 U.S.C. § 1129(b)(2) (enumerating examples of "fair and equitable" treatment); Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1417 (1999) (discussing the fair and equitable standard under § 1129 of the Code); Kansas City Terminal Ry. Co. v. Central Union Trust Co., 271 U.S. 445, 455 (1926) (discussing the absolute priority rule under the former Bankruptcy Act and stating that "to the extent of their debts creditors are entitled to priority over stockholders against all the property of an insolvent corporation"); Louisville Trust Co. v. Louisville, New Albany & Chicago Ry. Co., 174 U.S. 674, 684 (1899) (reciting "the familiar rule that the stockholder's interest in the property is subordinate to the rights of creditors; first of secured and then of unsecured creditors" and concluding that "any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation"); Arnold & Baker Farms v. United States, 85 F.3d 1415, 1420 (9th Cir. 1996) (discussing the fair and equitable standard under the Code); Federal Sav. & Loan Ins. Corp. v. D & F Constr., Inc. (In re D & F Constr., Inc.), 865 F.2d 673, 675 (5th Cir. 1989) (stating that "[s]ection 1129(b)(2) sets minimal standards [of fair and equitable treatment that] plans must meet. However, it is not to be interpreted as requiring that every plan not prohibited be approved"); In re May, 174 B.R. 832, 835-36 (Bankr. S.D. Ga. 1994) (discussing the fair and equitable standard); In re Rivers End Apartments, Ltd., 167 B.R. 470, 486 (Bankr. S.D. Ohio 1994) (listing explicit and implicit requirements of the fair and equitable standard); G. Eric Brunstad, Jr. & Mike Sigal, Competitive Choice Theory and the Broader Implications of the Supreme Court's Analysis in Bank of America v. 203 North LaSalle Street Partnership, 54 BUS. LAW. 1475, 1495-1502 (1999) (discussing the fair and equitable doctrine).
20. See In re Crosscreek Apartments, Ltd., 213 B.R. 521, 537 (Bankr. E.D. Tenn. 1997) (observing that "[u]nfortunately, the Bankruptcy Code does not specify any standard for determining the fairness of discrimination"); Brunstad & Sigal, supra note 9, at 1495 n.72 (observing that "[a]lthough the Code prohibits 'unfair discrimination' against a class that has voted to reject the plan, the Code does not define the phrase 'unfair discrimination,' and the standard remains notoriously unclear").
21. This and other aspects of the Code's unfair discrimination standard have likewise generated scholarly commentary. See Kenneth N. Klee, All You Ever Wanted To Know About Cram Down Under the New Bankruptcy Code, 53 AM. BANKR. L.J. 133, 142 (1979); Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227 (1998);
22. This and other aspects of the Code's unfair discrimination standard have likewise generated scholarly commentary. See Kenneth N. Klee, All You Ever Wanted To Know About Cram Down Under the New Bankruptcy Code, 53 AM. BANKR. L.J. 133, 142 (1979); Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227 (1998);
23. Denise R. Polivy, Unfair Discrimination in Chapter 11: A Comprehensive Compilation of Current Case Law, 72 AM. BANKR. L.J. 191 (1998).
24. See infra notes 142-58 and accompanying text (discussing the different approaches courts have taken toward the classification of claims); see also Brunstad, Sigal & Schorling, supra note 1, at 1423-26 (same).
25. See infra notes 190-99 and accompanying text (discussing the different approaches courts have taken on the question of unfair discrimination); Brunstad & Sigal, supra note 9, at 1495 n.72 (same); Polivy, supra note 11, at 199-207 (same).
26. See infra notes 190-99 and accompanying text (discussing the different approaches courts have taken on the question of unfair discrimination); Brunstad & Sigal, supra note 9, at 1495 n.72 (same); Polivy, supra note 11, at 199-207 (same).
27. Compare In re Creekside Landing, Ltd., 140 B.R. 713, 716 (Bankr. M.D. Tenn. 1992) (rejecting as unfairly discriminatory a plan that proposed to pay 20% of the unsecured deficiency claim of the Resolution Trust Corporation, 75% of general trade claims, and 40% of another creditor's unsecured claim), with Creekstone Apartments Assocs., L.P. v. Resolution Trust Corp. (In re Creekstone Apartments Assocs., L.P.), 168 B.R. 639, 644-45 (Bankr. M.D. Tenn. 1994) (concluding that plan did not discriminate unfairly that proposed to pay 10% of the unsecured deficiency claim of the Resolution Trust Corporation and 100% of the general unsecured claims of trade creditors). For a definition of the term "deficiency" claim, see infra note 239.
28. See Brunstad & Sigal, supra note 9, at 1480-85, 1532-37 (discussing the theory of competitive choice); see also infra notes 200-04 and accompanying text (same).
29. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1421 (1999).
30. See Brunstad & Sigal, supra note 9, at 1480.
31. See id.
32. See id. at 1480-81.
33. See infra notes 105-33 and accompanying text (discussing the historical development of the classification doctrine); infra notes 170-88 and accompanying text (discussing the his torical development of the unfair discrimination doctrine).
34. See infra notes 250-73 and accompanying text.
35. See infra notes 205-49 and accompanying text.
36. See Brunstad & Sigal, supra note 9, at 1522 (discussing the decision-making process in the case of financially healthy firms); infra notes 205-16 and accompanying text (same).
37. See Brunstad & Sigal, supra note 9, at 1520-23.
38. For example, nonbankruptcy laws typically prescribe rules governing voting procedures in the corporate context, and prevent "vote buying." See infra notes 211-14 and accompanying text (discussing these rules); see also Brunstad & Sigal, supra note 9, at 1522-23 (discussing certain rules governing the behavior of corporate managers).
39. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor-creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
40. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
41. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
42. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
43. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
44. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
45. Although certain Chapter 11 rules fix the disposition of certain claims (e.g., administrative claims and, to a certain extent, secured claims), the Code also gives a plan proponent broad latitude to propose many different kinds of treatment for unsecured claims in a context in which the debtor typically lacks the wherewithal to pay all claims in full. See 11 U.S.C. § 1123(b)(5) (permitting the modification of nonbankruptcy rights pursuant to a plan). As explained by the Supreme Court, "[t]he especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned - to change, modify or impair the obligations of their contracts." Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 530 (1936); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) (stating that "bankruptcy courts, as courts of equity, have broad authority to modify creditor- debtor relationships"); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (Brennan, J., plurality opinion) (observing that "the restructuring of debtor- creditor relations . . . is at the core of the federal bankruptcy power"). For a discussion of the ability of the Chapter 11 process to significantly redistribute value among creditors and equity holders, see Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 446-55 (1992); Baird & Jackson, supra note 2, at 747-60; Julian R. Franks & Walter N. Torous, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. FIN. 747, 749 (1989) (analyzing a sampling of bankruptcies to determine deviations from absolute priority); Lynn M. LoPucki & William C. Whitford, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125, 127-58 (1990); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1034-47 (1987); Jarold B. Warner, Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims, 4 J. FIN. ECON. 239, 242-43 (1977); Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285, 291-92 (1990).
46. See supra note 9 (discussing the absolute priority rule); infra note 220 (discussing the rights of creditors to receive payment on their claims).
47. See THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 167-69 (1986) (observing that the unsecured creditors of an insolvent firm are its residual claimants); Douglas G. Baird, A World Without Bankruptcy, 50 LAW & CONTEMP. PROBS. 173, 182(1987) (explaining that "residual claimants" are those that "stand[] at the end of the line," receiving payment only after everyone else with a prior claim to the firm's assets have been paid).
48. See THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 167-69 (1986) (observing that the unsecured creditors of an insolvent firm are its residual claimants); Douglas G. Baird, A World Without Bankruptcy, 50 LAW & CONTEMP. PROBS. 173, 182(1987) (explaining that "residual claimants" are those that "stand[] at the end of the line," receiving payment only after everyone else with a prior claim to the firm's assets have been paid).
49. See infra notes 235, 294-95, and accompanying text (discussing the incentives of the secured creditors of an insolvent debtor).
50. See infra notes 219-24 and accompanying text (discussing the incentives of the equity holders of an insolvent debtor).
51. American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 148 (1940).
52. See infra notes 263-67 and accompanying text.
53. See infra notes 212-13 and accompanying text.
54. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1423-24 n.28 (1999) (quoting Brunstad, Sigal & Schorling, supra note 1, at 1406-07 n. 136). As we explained in a previous article: [T]he voting rules of chapter 11 represent a stark departure from the requirements of Chapter X of the Bankruptcy Act. To a large degree, the highly rigid structure of Chapter X, and the often dominant role afforded the Securities and Exchange Commission (SEC), were predicated upon the conviction that reorganization cases were primarily administrative problems of business and finance suitable for governmental intervention on behalf of the public interest. See Jerome Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U. L.Q. Rev. 317, 317 (1941) ("[R]eorganization is only in its superficial aspects litigation inter partis and that fundamentally it is an administrative problem of business and finance."). This approach, however, was rejected in formulating the Bankruptcy Code. See 124 Cong. Rec. H11, 101 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S17,417-18 (daily ed. Oct. 6, 1978) ("Chapter X was designed to impose rigid and formalized procedures upon the reorganization of corporations and, although designed to protect public creditors, has often worked to the detriment of such creditors."). Instead, Congress adopted the view that creditors and equity security holders are very often better judges of the debtor's economic viability and their own economic self- interest than courts, trustees, or the SEC. Hence, in contrast to Chapter X, Chapter 11 represents something more of a private model of reorganization. Consistent with this new approach, the Chapter 11 process relies on creditors and equity holders to engage in negotiations toward resolution of their interests, either directly or through their representatives. See The Roslyn Sav. Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir. 1983). Consistent with the principle of self-determination, the preferences of creditors may be overturned only to the extent they can be shown to be objectively unreasonable. Brunstad, Sigal & Schorling, supra note 1, at 1405 n. 136.
55. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1423-24 n.28 (1999) (quoting Brunstad, Sigal & Schorling, supra note 1, at 1406- 07 n. 136). As we explained in a previous article: [T]he voting rules of chapter 11 represent a stark departure from the requirements of Chapter X of the Bankruptcy Act. To a large degree, the highly rigid structure of Chapter X, and the often dominant role afforded the Securities and Exchange Commission (SEC), were predicated upon the conviction that reorganization cases were primarily administrative problems of business and finance suitable for governmental intervention on behalf of the public interest. See Jerome Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U. L.Q. Rev. 317, 317 (1941) ("[R]eorganization is only in its superficial aspects litigation inter partis and that fundamentally it is an administrative problem of business and finance."). This approach, however, was rejected in formulating the Bankruptcy Code. See 124 Cong. Rec. H11, 101 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S17,417-18 (daily ed. Oct. 6, 1978) ("Chapter X was designed to impose rigid and formalized procedures upon the reorganization of corporations and, although designed to protect public creditors, has often worked to the detriment of such creditors."). Instead, Congress adopted the view that creditors and equity security holders are very often better judges of the debtor's economic viability and their own economic self-interest than courts, trustees, or the SEC. Hence, in contrast to Chapter X, Chapter 11 represents something more of a private model of reorganization. Consistent with this new approach, the Chapter 11 process relies on creditors and equity holders to engage in negotiations toward resolution of their interests, either directly or through their representatives. See The Roslyn Sav. Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir. 1983). Consistent with the principle of self-determination, the preferences of creditors may be overturned only to the extent they can be shown to be objectively unreasonable. Brunstad, Sigal & Schorling, supra note 1, at 1405 n. 136.
56. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1423-24 n.28 (1999) (quoting Brunstad, Sigal & Schorling, supra note 1, at 1406- 07 n. 136). As we explained in a previous article: [T]he voting rules of chapter 11 represent a stark departure from the requirements of Chapter X of the Bankruptcy Act. To a large degree, the highly rigid structure of Chapter X, and the often dominant role afforded the Securities and Exchange Commission (SEC), were predicated upon the conviction that reorganization cases were primarily administrative problems of business and finance suitable for governmental intervention on behalf of the public interest. See Jerome Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U. L.Q. Rev. 317, 317 (1941) ("[R]eorganization is only in its superficial aspects litigation inter partis and that fundamentally it is an administrative problem of business and finance."). This approach, however, was rejected in formulating the Bankruptcy Code. See 124 Cong. Rec. H11, 101 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S17,417-18 (daily ed. Oct. 6, 1978) ("Chapter X was designed to impose rigid and formalized procedures upon the reorganization of corporations and, although designed to protect public creditors, has often worked to the detriment of such creditors."). Instead, Congress adopted the view that creditors and equity security holders are very often better judges of the debtor's economic viability and their own economic self- interest than courts, trustees, or the SEC. Hence, in contrast to Chapter X, Chapter 11 represents something more of a private model of reorganization. Consistent with this new approach, the Chapter 11 process relies on creditors and equity holders to engage in negotiations toward resolution of their interests, either directly or through their representatives. See The Roslyn Sav. Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir. 1983). Consistent with the principle of self-determination, the preferences of
57. See infra notes 76-92 and accompanying text (discussing the voting process in Chapter 11 cases).
58. See 11 U.S.C. § 1129(b)(2)(A) (providing for the cram down of a class of secured claims); supra note 9 (discussing the "fair and equitable" standard); infra notes 83-92 (discussing the cram down process); infra note 253 (reciting § 1129(b)(2)(A)); see also Jack Friedman, What Courts Do to Secured Creditors in Chapter 11 Cram-down, 14 CARDOZO L. REV. 1495 (1993) (discussing the cram down of secured creditors in Chapter 11 cases).
59. See infra notes 235, 294-95 (discussing the incentives of the secured creditors of insolvent debtors).
60. See 11 U.S.C. § 1129(b)(2)(C) (providing for the cram down of a class of equity interests); infra notes 83-92 and accompanying text (discussing the cram down process); infra note 256 (reciting the text of § 1129(b)(2)(C)); see also In re Koelbl, 751 F.2d 137, 140 (2d Cir. 1984) (stating that "the 'fair and equitable' requirement [of § 1129(b)(2) of the Bankruptcy Code, which includes the absolute priority rule] does not look toward protection of [equity] interests, but rather toward protection of dissenting creditor interests, absent the value of the ongoing business being large enough to support protection of the [equity]"); Union Trust Co. v. Wagner (In re Central Funding Corp.), 75 F.2d 256, 259 (2d Cir. 1935). The Wagner court stated that [i]n common parlance that term [reorganization] is not limited to cases where the rights of all persons interested in a corporation, whether lienors, general creditors, or stock-holders, are made to survive under some new corporate arrangement. Not infrequently the rights of some of these classes have become so worthless that they deserve and receive no recognition in the reorganization. Id.
61. See supra note 38; Elizabeth Warren, Bankruptcy Policymaking In an Imperfect World, 92 MICH. L. REV. 336, 359 (1993). As one commentator has explained: Owners bear the primary costs of business failure. Residual owners of the business have the least protected status in bankruptcy. This situation mirrors the principle outside bankruptcy that those who take the largest gains if the business succeeds also assume the risk of loss if the business fails. Accordingly, the Code permits the owner to retain ownership of the postbankruptcy business only if the creditors collectively consent or the business is able to pay all the creditors in full. Id.; see also Brunstad & Sigal, supra note 9, at 1498 n.84 (discussing this issue); supra note 9 (discussing the absolute priority rule).
62. See supra note 38; Elizabeth Warren, Bankruptcy Policymaking In an Imperfect World, 92 MICH. L. REV. 336, 359 (1993). As one commentator has explained: Owners bear the primary costs of business failure. Residual owners of the business have the least protected status in bankruptcy. This situation mirrors the principle outside bankruptcy that those who take the largest gains if the business succeeds also assume the risk of loss if the business fails. Accordingly, the Code permits the owner to retain ownership of the postbankruptcy business only if the creditors collectively consent or the business is able to pay all the creditors in full. Id.; see also Brunstad & Sigal, supra note 9, at 1498 n.84 (discussing this issue); supra note 9 (discussing the absolute priority rule).
63. See infra notes 219-24 (discussing the incentives of the equity holders of an insolvent firm).
64. See 11 U.S.C. § 1129(b)(2)(B) (providing for the cram down of a class of unsecured claims); infra notes 83-92 (discussing the cram down process); infra note 259 (reciting the text of § 1129(b)(2)(B)).
65. See infra notes 235-41 (discussing the potentially divergent risk preferences of an insolvent debtor's residual claimants).
66. In the reorganization context, the concept of "gerrymandering" refers to the manipulation of the classification process to create a special class of assenting claims in order to obtain confirmation of a Chapter 11 plan over the dissenting vote of other classes. The term traces its origins to a manipulative Massachusetts redistricting scheme that created a congressional district with the appearance of a salamander. As described by one commentator, the term refers to "the unsavory practice of subdividing voters to produce a preconceived political result." Carlson, supra note 4, at 566; see also infra note 92 and the accompanying text (citing cases discussing the concept of "gerrymandering" in bankruptcy).
67. See supra note 43 (defining the concept of "gerrymandering"); infra note 92 (citing cases discussing gerrymandering); infra notes 274-78 (discussing our general classification rule).
68. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 544 (1946) (recognizing that a creditor "who was receiving preferred treatment under a plan by reason of his underwriting or otherwise would normally have to be put in a different class when it came to voting on the plan").
69. See infra note 99 and accompanying text (discussing § 1123(a)(4)). Section 1123(a)(4) directs that all claimants within the same class receive the same treatment, unless the disfavored claimants in the class expressly consent otherwise. Because residual claims must be classified somewhere, and because § 1123(a)(4) specifies that all claimants within a class must be treated the same (absent consent), application of §1123(a)(4) in the context of a residual claim that is to receive enhanced treatment means that the residual claim receiving the enhanced treatment may not be placed in the same class with other residual claims that are to receive less favorable treatment (unless the other members of the class consent).
70. See infra notes 279-86 and accompanying text (discussing the first exception to the general rule of classification).
71. See 11 U.S.C. § 510(a) (providing that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law"); In re Chateaugay Corp., 1993 WL 563068, at * 4-5 (Bankr. S.D.N.Y. 1993) (requiring the separate classification of subordinated claims); David Gray Carlson, A Theory of Contractual Debt Subordination and Lien Priority, 38 VAND. L. REV. 975, 978 (1985) (discussing subordination); see also infra notes 168-69 and accompanying text (discussing example in the Code's legislative history of the proper treatment of subordinated claims).
72. See infra notes 287-89 and accompanying text (discussing the second exception to the general rule of classification); infra note 289 (discussing the need to enforce subordination principles in the classification process in order to avoid creating "perverse incentives").
73. See supra note 43 (defining the term "gerrymandering"); infra note 92 and accompanying text (citing cases discussing the concept of gerrymandering). The best indication of the absence of gerrymandering, of course, would be if the relevant classes of residual claimants all voted in the same way. For example, suppose that the plan divided all residual claimants into two classes, one consisting of tort claimants, and the other consisting of all other residual claims. If the two classes both voted to accept the plan, it would be difficult to sustain a claim of gerrymandering. On the other hand, if one class voted to accept the plan, but the other did not, close scrutiny of the classification scheme would be warranted, requiring a compelling demonstration that the separate classification of similar claims rests on legitimate grounds, and not simply to engineer a favorable vote. See infra note 291 and accompanying text. At the outset, it is also important to reiterate that the rules that we identify and develop in this article are interrelated, and are likewise interrelated with other rules that govern the Chapter 11 process as a whole, and, thus, must be taken as a total package. For example, the classification scheme that we discuss would not be feasible without the companion unfair discrimination standard addressed below because both operate in tandem to achieve the larger goals of the Chapter 11 process.
74. See infra notes 290-91 and accompanying text (discussing the third exception to the general rule of classification).
75. See American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 146 (1940) (explaining the bankruptcy court's power to enforce the "separate classification of claimants" as an appropriate means to ensure "protection of investors against an inside few or of one class of investors from the encroachments of another") (citing First Nat'l Bank v. Poland Union, 109 F.2d 54, 55 (2d Cir. 1940)); see also Kaufman County Levee Improvement Dist. v. Mitchell, 116 F.2d 959 (5th Cir. 1941) (concluding in a municipal bankruptcy case that bondholders owning land in the debtor's district that stood to gain from the appreciation of the property upon the successful implementation of the plan could be classified separately from other bondholders).
76. See supra note 52 and accompanying text.
77. See Thomas J. Andre, A Preliminary Inquiry into the Utility of Vote Buying in the Market for Corporate Control, 63 S. CAL. L. REV. 533, 541-42 (1990) (observing that "the greater the convergence between ownership and control[, i.e., owners exercising control], the greater the incentive for those in control to maximize the value of the firm. Conversely, the failure to align control and ownership meant that those in control of the firm are less likely to vigorously promote its welfare."); infra notes 292-99 and accompanying text (discussing the fourth exception to the general rule of classification).
78. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541 (1946) (recognizing that the doctrine of unfair discrimination exists in part to ensure equality of distribution among similarly situated claimants); Avon Park, 311 U.S. at 147 (same).
79. See infra notes 303-04 and accompanying text (discussing this conception of the unfair discrimination doctrine).
80. For reasons of practical necessity, there may be some modest degree of elasticity in the concept of equivalence, but not much.
81. See infra note 304 and accompanying text (discussing this first aspect of the unfair discrimination doctrine).
82. See infra note 168 and accompanying text (reciting example in the legislative history applying the Code's unfair discrimination doctrine in the context of the treatment of subordinated claims).
83. See infra notes 305-06 and accompanying text (discussing this second aspect of the unfair discrimination doctrine).
84. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541-42 (1946) (recognizing that a claimant that supplies a special contribution may receive enhanced treatment that is "reasonably equivalent to [the] contribution").
85. See infra notes 307-09 and accompanying text (discussing this third aspect of the unfair discrimination doctrine).
86. See Friedman, supra note 36, at 1502-04, 1542-43 (discussing application of the unfair discrimination doctrine in the context of the treatment of different classes of secured claims).
87. See infra notes 72-199 and accompanying text.
88. See infra notes 200-49 and accompanying text.
89. See infra notes 250-309 and accompanying text.
90. See text following infra note 309.
91. See Brunstad & Sigal, supra note 9, at 1485-86 n.37.
92. See id. at 1485.
93. See id. at 1486.
94. See id. at 1487-88 n.43.
95. See infra notes 105-33 (discussing the historical development of the Code's classification doctrine); infra notes 170-88 (discussing the historical development of the Code's unfair discrimination standard).
96. See infra notes 76-92 and accompanying text.
97. See infra notes 105-33 and accompanying text.
98. See infra notes 170-88 and accompanying text.
99. A Chapter 11 plan cannot become effective until it is approved, or "confirmed," by the bankruptcy court. See 11 U.S.C. § 1129 (1994) (prescribing the standards for confirmation of a Chapter 11 plan); id. § 1141 (prescribing the effects of confirmation).
100. See 11 U.S.C. § 1129(a)(1) (providing that "[t]he court shall confirm a plan only if . . . [t]he plan complies with applicable provisions of this title"); Resorts Int'l, Inc. v. Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995) (stating that "[t]he bankruptcy court lacks the power to confirm plans of reorganization which do not comply with applicable provisions of the Bankruptcy Code").
101. See 11 U.S.C. § 1123(a)(1) (providing in pertinent part that "[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . designate, subject to section 1122 of this title, classes of claims . . . and classes of interests"); see also supra note 3 (defining the terms "claim" and "interest"). In general, a plan proponent's ability to classify claims also presents opportunities for artful manipulation. See supra note 43 (defining the concept of "gerrymandering"); infra note 92 (citing cases discussing the problem of "gerrymandering").
102. See 11 U.S.C. § 1123(a)(2) (providing that "a plan shall . . . specify any class of claims or interests that is not impaired under the plan"); In re Eagle-Pitcher Indus., Inc., 203 B.R. 256, 271 (S.D. Ohio 1996) (reciting the rule that "a plan must specify any class of claims or interests that is not impaired").
103. See 11 U.S.C. § 1124. Section 1124 provides that a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan . . . (1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or (2) notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default . . . (A) cures any such default . . . ; (B) reinstates the maturity of such claim or interest as such maturity existed before such default; (C) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder; and (D) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest. Id.; see Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1416 n.14 (1999) ("Claims are unimpaired if they retain all of their prepetition legal, equitable, and contractual rights against the debtor."); Windsor on the River Assocs., Ltd. v. Balcor Real Estate Fin., Inc. (In re Windsor on the River Assocs., Ltd.), 7 E3d 127, 130 (8th Cir. 1993) (stating that "any alteration of a creditor's rights, no matter how minor, constitutes 'impairment' "); In re L & J Anaheim Assocs., 995 F.2d 940, 943 (9th Cir. 1993) (discussing the concept of impairment); Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24, 28 (2d Cir. 1982) (observing that "§ 1124(1) declares that any change in legal, equitable or contractual rights creates impairment").
104. See 11 U.S.C. § 1126(a) (providing that "[t]he holder of a claim or interest allowed under § 502 of this title may accept or reject a plan"); Taddeo, 685 F.2d at 28 (observing that "[t]hose parties with 'impaired' claims or interests can vote"). Pursuant to § 1126(f), the holders of claims or interests that are not impaired are deemed to have voted to accept the plan because they are assured that their nonbankruptcy rights will be honored in full. See 11 U.S.C. § 1126(f) "Notwithstanding any other provision of this section, a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required."); Barakat v. Life Ins. Co. (In re Barakat), 99 F.3d 1520, 1527 (9th Cir. 1996) (stating the rule that "[a] class that is not impaired is 'conclusively presumed to have accepted the plan' "). Conversely, the holders of claims or interests that are to receive nothing under the plan are deemed conclusively to have rejected it. See 11 U.S.C. § 1126(g) ("Notwithstanding any other provision of this section, a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests."); In re Waterways Barge Partnership, 104 B.R. 776, 783 (Bankr. N.D. Miss. 1989) (stating that a class that is to receive nothing under the plan "is conclusively deemed not to have accepted the plan, and the class is to be treated as a dissenting class for purposes of confirmation").
105. See 11 U.S.C. § 1126(c) (providing in pertinent part that "[a] class of claims has accepted a plan if such plan has been accepted by creditors that hold at least two-thirds in amount and more than one-half in number of allowed claims of such class held by creditors . . . that have accepted or rejected such plan"); In re MCorp Fin., Inc., 137 B.R. 219, 233 (Bankr. S.D. Tex. 1992) (restating the rule that "[a]cceptance by a class is acceptance by the holders of 2/3rds in dollar amount and a majority in number of claims of that class"). A similar rule governs the acceptance or rejection of a plan by a class of interests. See 11 U.S.C. § 1126(d) (providing in pertinent part that "[a] class of interests has accepted a plan if such plan has been accepted by holders of such interests . . . that hold at least two-third in amount of the allowed interests of such class held by holders of such interests . . . that have accepted or rejected such plan"); In re MAP 1978 Drilling Partnership, 95 B.R. 432, 434-35 (Bankr. N.D. Tex. 1989) (discussing voting under § 1126(d)).
106. See 11 U.S.C. § 1129(a)(8) (providing that a plan may be confirmed if, "[w]ith respect to each class of claims or interests . . . (A) such class has accepted the plan; or (B) such class is not impaired under the plan"); Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1415-16 (1999) (discussing § 1128(a)(8)); see also supra note 80 (discussing impairment).
107. See LaSalle, 119 S. Ct. at 1423-24 n.28; Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207 (1988) (stating that "[t]he Court of Appeals may well have believed that petitioners or other unsecured creditors would be better off if respondents' reorganization plan was confirmed. But that determination is for creditors to make . . . and courts applying the Code must effectuate their decision."); Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 504 (4th Cir. 1992) (same); Brunstad, Sigal & Schorling, supra note 1, at 1405-06 n.136 (quoted in LaSalle, 119 S. Ct. at 1423-24 n.28); see also supra note 34 and accompanying text.
108. See supra notes 1, 34 (discussing the bargaining process in Chapter 11 cases).
109. See 11 U.S.C. § 1129(b); LaSalle, 119 S. Ct. at 1415-16 (explaining the cram down rule); Klee, supra note 11 (same).
110. 298 U.S. 513 (1936).
111. Id. at 541 (Cardozo, J., dissenting); see also Mason v. Paradise Irrigation Dist, 326 U.S. 536, 544-45 (1946) (noting that the purpose of the municipal reorganization statute permitting majority rule was to bind recalcitrant minority creditors to the reorganization plan in order to avoid "making it worthwhile for them to lie back until they got their price").
112. 11 U.S.C. § 1129(b)(1). More specifically, § 1129(b)(1) provides in pertinent part that if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. Id.; see supra note 9 (discussing the fair and equitable requirement); infra notes 253-59 (reciting certain of the requirements of the "fair and equitable" standard); infra notes 168, 183-99, 304-09 (discussing the doctrine of "unfair discrimination").
113. See 11 U.S.C. § 1129(a)(10) (requiring as a condition of confirmation that "[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider"). As explained previously, a claim is deemed to be "impaired" unless the plan leaves unaltered the nonbankruptcy rights associated with the claim. See supra note 80 and accompanying text (discussing impairment).
114. Among other things, the apparent purpose of § 1129(a)(10) was to solve a perceived deficiency in Chapter XII of the former Bankruptcy Act of 1898 permitting the confirmation of a plan without the consent of at least one class of impaired claims. See In re Marietta Cobb Apartments, 3 Bankr. Ct. Dec. (CCR) 720 (Bankr. S.D.N.Y. 1977); see also Great Nat'l Life Ins. Co. v. Pine Gate Assocs. (In re Pine Gate Assocs.), 2 Bankr. Ct. Dec. (CCR) 1478, 1488-89 (Bankr. N.D. Ga. 1976) (permitting cram down of nonrecourse claim and limiting claim to value of collateral, thus permitting any subsequent appreciation in value to benefit debtor). Even though Chapter XII did not explicitly require that any impaired creditors vote in favor of the plan, courts sometimes required it nonetheless. See Herweg v. Neuses (In re Herweg), 119 F.2d 941 (7th Cir. 1941). One commentator has suggested that § 1129(a)(10) derives in part from this judicial gloss, see Carlson, supra note 4, at 578, and likewise in response to Pine Gate. See id. at 579-80; see also infra notes 91, 104, and accompanying text (discussing real property arrangements under Chapter XII). 92. As explained by one court: Section 1129(a)(10) operates as a statutory gate keeper barring access to cram down where there is absent even one impaired class accepting the plan . . . . The policy underlying Section 1129(a)(10) is that before embarking upon the tortuous path of cram down and compelling the target of cram down to shoulder the risks of error necessarily associated with a forced confirmation, there must be some other properly classified group that is also hurt and nonetheless favors the plan. In re 266 Washington Assocs., 141 B.R. 275, 287 (Bankr. E.D.N.Y 1992), aff'd, 147 B.R. 827 (E.D.N.Y. 1992). Consistent with the purpose of § 1129(a)(10), courts have concluded that a party may not "gerrymander" the classification scheme solely to create an impaired, assenting class in order to cram down other classes. See In re Ambanc La Mesa Ltd. Partnership, 115 F.3d 650, 656-57 (9th Cir. 1997) (stating that "separate classification for the purpose of securing an impaired consenting class under § 1129(a)(10) is improper"); Boston Post Rd. Ltd. Partnership v. Federal Deposit Ins. Corp. (In re Boston Post Rd. Ltd. Partnership), 21 F.3d 477, 483 (2d Cir. 1994) (holding that the "separate classification of unsecured claims solely to create an impaired assenting class will not be permitted"); Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 502 (4th Cir. 1992) (finding that "[t]he classification [scheme at issue] is clearly for the purpose of manipulating voting and it may not stand"); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1279 (5th Cir. 1991) (stating that "thou shalt not classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan"). But see In re D & W Realty Corp., 156 B.R. 140, 143 n.8 (Bankr. S.D.N.Y. 1993) (stating that "[t]he concept of 'gerrymandering' is a nebulous one in part because of the difficulty of determining what is an improper [classification] purpose"), rev'd on other grounds, 165 B.R. 127 (S.D.N.Y 1994).
115. As one commentator wrote over three centuries ago: Equity is A Roguish thing, for Law [we] have [to] measure[,] know what to trust to[]. Equity is according to [the] conscience of him [who] is Chancellor, and as [that] is larger or narrower, so[] is equity [.] Tis all one as if they should make [the] Standard for [the] measure [what] we[] call A foot, to be [the] Chancellor's foot; what an uncertain measure would this be; One Chancellor ha's a long foot[,] another A short foot[, and] a third an indifferent foot; tis [the] same thing in [the] Chancellor's Conscience. JOHN SELDEN, "Equity," TABLE-TALK (1689), reprinted in TABLE TALK OF JOHN SELDEN 43 (Frederick Pollock ed., 1927).
116. As one commentator wrote over three centuries ago: Equity is A Roguish thing, for Law [we] have [to] measure[,] know what to trust to[]. Equity is according to [the] conscience of him [who] is Chancellor, and as [that] is larger or narrower, so[] is equity [.] Tis all one as if they should make [the] Standard for [the] measure [what] we[] call A foot, to be [the] Chancellor's foot; what an uncertain measure would this be; One Chancellor ha's a long foot[,] another A short foot[, and] a third an indifferent foot; tis [the] same thing in [the] Chancellor's Conscience. JOHN SELDEN, "Equity," TABLE-TALK (1689), reprinted in TABLE TALK OF JOHN SELDEN 43 (Frederick Pollock ed., 1927).
117. See infra notes 189-99 and accompanying text (discussing the different unfair discrimination tests adopted by the courts); see also Mason v. Paradise Irrigation Dist., 326 U.S. 536, 542-43 (1946) (discussing the concept of unfair discrimination under the former Bankruptcy Act).
118. 11 U.S.C. § 1122 (1994); see infra notes 95-98 (discussing this provision); infra notes 153-56 (discussing disagreement among the courts over the "substantially similar" standard).
119. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278-79 (5th Cir. 1991); see also John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir. 1993) (recognizing limits on classification doctrine); Lumber Exch. Bldg. Ltd. Partnership v. Mutual Life Ins. Co. of New York (In re Lumber Exch. Bldg. Ltd. Partnership), 968 F.2d 647, 650 (8th Cir. 1992) (same); Bryson Properties, XVIII, 961 F.2d at 502 (same); Olympia & York Florida Equity Corp. v. Bank of New York (In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. 1990) (stating that " 'there must be some limit on a debtor's power to classify creditors . . . . The potential for abuse would be significant otherwise.' ") (citations omitted).
120. 11 U.S.C. § 1122(a).
121. Id. § 1122(b). This exception authorizes the creation of so-called "convenience classes" to permit the efficient disposition of small claims. See In re General Teamsters, Warehousemen & Helpers Union, 225 B.R. 719, 735 (Bankr. N.D. Cal. 1998) (discussing "convenience class" consisting of claims of $1000 or less); see also infra note 5 (citing additional cases discussing § 1122(b)).
122. 11 U.S.C. § 1123(a)(4).
123. See infra note 7 and accompanying text. As one court has noted however, classification procedure under § 1122(a) cannot be wholly permissive, because such an interpretation would render superfluous § 1122(b). As indicated previously, § 1122(b) provides for the creation of a "convenience classes." See supra note 98 and accompanying text. If § 1122(a) were wholly permissive, § 1122(b) would not be necessary because a plan proponent could simply create convenience classes without § 1122(b). See Greystone III Joint Venture, 995 F.2d at 1278.
124. H.R. REP. NO. 95-595, at 406 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6362; see also S. REP. NO. 95-989, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5904 (same).
125. See Bankruptcy Act § 306(3), 11 U.S.C. § 706 (repealed 1978) (providing that corporations were eligible for relief under Chapter XI); Bankruptcy Act § 106(5), 11 U.S.C. § 506 (repealed 1978) (providing that Chapter X was applicable only to corporations).
126. General Stores Corp. v. Shlensky, 350 U.S. 462, 466 (1956); see also SEC v. United States Realty & Improvement Co., 310 U.S. 434, 446-53 (1940) (discussing differences between Chapter X and Chapter XI). See generally Bankruptcy Act § 306(3), 11 U.S.C. § 706 (repealed 1978) (providing further that an individual or partnership engaged in business could be eligible for relief under Chapter XI).
127. See Bankruptcy Act § 406(6), 11 U.S.C. § 806 (repealed 1978).
128. Bankruptcy Act § 197, 11 U.S.C. § 597 (repealed 1978); see also Gerald K. Smith, Classification of Claims Under Chapter 11, NORTON BANKR. L. ADVISER, Nov. 1983, at 7 (discussing classification procedures under the Act).
129. See In re Palasades-on-the-Desplaines, 89 F.2d 214, 217 (7th Cir. 1937); In re Sixty-Seven Wall Street Restaurant Corp., 23 F. Supp. 672, 673 (S.D.N.Y. 1938).
130. Scherk v. Newton, 152 F.2d 747, 750 (10th Cir. 1945).
131. In re Los Angeles Land & Invs., Ltd., 282 F. Sup. 448, 453-54 (D. Haw. 1968), aff'd, 447 F.2d 1366 (9th Cir. 1971).
132. See In re United Rys. & Elec. Co., 11 F. Supp. 717, 723 (D. Md. 1935) (permitting the separate classification of unsecured damage claims and other unsecured claims); see also Thomas C. Given & Linda J. Philipps, Equality in the Eye of the Beholder - Classification of Claims and Interests in Chapter 11 Reorganizations, 43 OHIO ST. L.J. 735, 755-56 (1982) (analyzing the classification case law under the Bankruptcy Act).
133. Bankruptcy Act § 351, 11 U.S.C. § 751 (repealed 1978).
134. Bankruptcy Act § 357(1), 11 U.S.C. § 757(1) (repealed 1978) (emphasis added).
135. See, e.g., In re KDI Corp., 477 F.2d 726 (6th Cir. 1973); Western Mesa Oil Corp. v. Edlou Co., 143 F.2d 843 (9th Cir. 1944).
136. In re Hudson-Ross, Inc., 175 F. Supp. 111, 112 (N.D. Ill. 1959); see also Charles F. Vihon, Classification of Unsecured Claims: Squaring of a Circle?, 55 AM. BANKR. L.J. 143, 173 (1981) (concluding that equitable considerations dominated the courts' approach to the classification of claims under the Bankruptcy Act).
137. See American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 147 (1940) (discussing the concept of equality of distribution in the context of voting procedures under the Bankruptcy Act); THOMAS FINLETTER, THE LAW OF BANKRUPTCY REORGANIZATION 467 (1939) (observing that "it must be emphasized that the principle that all those who have same legal claim may insist upon being included within the same class has only one purpose, namely to preserve the right of such claimants to substantial equality of treatment in the reorganization").
138. William Blair, Classification of Unsecured Claims in Chapter 11 Reorganization, 58 AM. BANKR. L.J. 197, 216 (1984).
139. 311 U.S. 138 (1940).
140. Id. at 146 (citing First Nat'l Bank v. Poland Union, 109 F.2d 54, 55 (2d Cir. 1940)); see also Kaufman County Levee Improvement Dist. v. Mitchell, 116 F.2d 959 (5th Cir. 1941) (concluding in a municipal bankruptcy case that bondholders owning land in the debtor's district that stood to gain from the appreciation of the property upon the successful implementation of the plan would be classified separately from other bondholders).
141. Avon Park, 311 U.S. at 146.
142. Id. (citing Pepper v. Litton, 308 U.S. 295, 308 (1939)).
143. Id. at 148 (emphasis added).
144. See supra note 31 and accompanying text.
145. See infra notes 141-45, 205-17, 250-62, and accompanying text.
146. Bank of Am. Nat'l Trust and Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1413, 1420 (1999).
147. 326 U.S. 536 (1946).
148. Bankruptcy Act of 1898 § 83(b), 11 U.S.C. § 403(b) (1937) (redesignated and amended in 1976 as 11 U.S.C. § 88(b)) (repealed 1978).
149. Mason v. Paradise Irrigation Dist., 326 U.S. 536, 543-44 (1946) (citing § 403(b)).
150. Id. at 544.
151. See supra note 46 and accompanying text (reciting the provisions of § 1123(a)(4)); supra note 99 (discussing § 1123(a)(4)).
152. Mason, 326 U.S. at 544.
153. Id.
154. See id. at 541-42.
155. Id. at 545 (quoting H.R. REP. NO. 75-517, at 3).
156. Id.
157. As indicated in the Code's legislative history, neither Chapter X nor Chapter XI was thought to serve adequately the needs of creditors, or of business reorganizations generally. For example, as explained in the House Report accompanying the Code: Chapter X has become an unworkable procedure, and Chapter XI is inadequate to fill the void. Chapter X needs to be made more flexible, both in terms of procedure and financial standards for confirmation. Chapter XI needs to be expanded to permit adjustment of secured debt and equity, and needs to have added certain public protections not now found in Chapter XI. H.R. REP. NO. 95-595, at 223 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6183.
158. See id. at 224 (remarking that the proposed Chapter 11 "adopts much of the flexibility of Chapter XI . . . , and incorporates the essence of the public protection features of current Chapter X").
159. H.R. REP. NO. 95-595, at 406, reprinted in 1978 U.S.C.C.A.N. 5963, 6362; see also S. REP. NO. 95-989, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5904 (same).
160. 282 F. Supp. 448 (D. Haw. 1968), aff'd, 447 F.2d 1366 (9th Cir. 1971).
161. Id. at 453-54.
162. Cf. Cohen v. De La Cruz, 523 U.S. 213, 221 (1998) (stating that the Court " 'will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure' "); Midlantic Nat'l Bank v. New Jersey Dep't of Environmental Protection, 474 U.S. 494, 501 (1985) (stating in a bankruptcy case that "[t]he normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific").
163. See American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 147 (1940).
164. See id. at 145-46. Although Avon Park and Mason both involved municipal debt adjustment proceedings under Chapter IX, it is significant that, in Avon Park, the Court stated that it had granted the petition for a writ of certiorari "in view of the importance of the problems in the administration of the composition and reorganization provisions of the Act," not simply arrangements in Chapter IX cases. Id. at 141. Similarly, in its discussion of the Act's classification and unfair discrimination doctrines, the Court likewise drew on general principles of reorganization law, not simply those developed in the municipal bankruptcy context. See id. at 144-48; Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541-46 (1946). These observations support the conclusion that the Court's analysis has relevance beyond municipal debt adjustment proceedings.
165. Granada Wines, Inc. v. New England Teamsters & Trucking Indus. Pension Fund, 748 F.2d 42, 46 (1st Cir. 1984) (quoting Los Angeles Land & Invs., Ltd., 282 F. Supp. at 454); see also In re AOV Indus., Inc., 792 F.2d 1140, 1150-51 (D.G. Cir. 1986) ("[T]he focus of classification is the legal character of the claim as it relates to the assets of the debtor . . . . The existence of a third-party guarantor does not change the nature of a claim vis-a-vis the bankrupt estate and, therefore, is irrelevant to a determination of whether claims are 'substantially similar' for classification purposes."); J.P. Morgan & Co. v. Missouri Pac. R.R. Co., 85 F.2d 351, 352 (8th Cir. 1936) (observing that "the classification should in nowise depend upon the nature of the claimant or his interest in the sense of his bias or leanings, but only upon the nature of the claim"); In re Valrico Square Ltd. Partnership, 113 B.R. 794, 795 (Bankr. S.D. Fla. 1990) (stating that the "[s]eparate classification of similarly situated claims is violative of Section 1122(a)"); In re Mastercraft Record Plating, Inc., 32 B.R. 106, 108 (Bankr. S.D.N.Y. 1983); In re Pine Lake Village Apartment Co., 19 B.R. 819, 829 (Bankr. S.D.N.Y. 1982); In re S & W Enters., 37 B.R. 153, 158 (Bankr. N.D. Ill. 1984).
166. See Young v. Higbee Co., 324 U.S. 204, 210 (1945) (observing that "historically one of the prime purposes of bankruptcy law has been to bring about a ratable distribution among creditors of a bankrupt's assets"); see also Union Bank v. Wolas, 502 U.S. 151, 161 (1991) (noting continuing policy of equality of distribution under the Bankruptcy Code); Compass Inv. Group v. Maidman (In re Maidman), 668 F.2d 682, 685 (2d Cir. 1982) (same).
167. See supra note 34 and accompanying text (discussing principle of self-determination in the Chapter 11 process).
168. See Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 587 (6th Cir. 1986) (permitting separate classification of union's claim on the basis that "the Teamsters Committee has a different stake in the future viability of the reorganized company and has alternative means at its disposal for protecting its claim. The Teamsters Committee's claim is connected with the collective bargaining process."); Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters., Ltd., II (In re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1167 (5th Cir. 1993); see also Norberg, supra note 4, at 120 (observing that the U.S. Truck decision has been used "as authority for permitting indirect interests of a creditor to justify the separate classification of a claim, particularly a large unsecured claim, regardless of whether the claim was treated the same as other claims of a like nature").
169. See supra notes 120-23 and accompanying test (discussing the concept of eliciting sound business judgment in the plan confirmation process).
170. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 E2d 1274, 1278 (5th Cir. 1991) (seminal case prohibiting gerrymandering); see also In re Chateaugay Corp., 89 F.3d 942, 949 (2d Cir. 1996) (permitting the separate classification of similar claims for business reasons, and stating the rule that "[d]issimilar claims may not be classified together; similar claims may be classified separately only for a legitimate reason"); Boston Post Rd. Ltd. Partnership v. Federal Deposit Ins. Corp. (In re Boston Post Rd. Ltd. Partnership), 21 F.3d 477, 483 (2d Cir. 1994) ("This court . . . holds that separate classification of unsecured claims solely to create an impaired assenting class will not be permitted; the debtor must adduce credible proof of a legitimate reason for separate classification of similar claims."); Lumber Exch. Bldg. Ltd. Partnership v. Mut. Life Ins. Co. (In re Lumber Exch. Bldg. Ltd. Partnership), 968 F.2d 647, 650 (8th Cir. 1992) ("Since Lumber Exchange offers no legitimate reason for its separate classification of MONY's unsecured claim, we, like the bankruptcy court, conclude that separate classification was 'a thinly veiled attempt to manipulate the vote to assure acceptance of the plan by an impaired class and meet the requirements of 11 U.S.C. § 1129(a)(10).' This, of course, is improper."); Brikley v. Chase Manhattan Mortgage & Realty Trust (In re LeBlanc), 622 F.2d 872, 879 (5th Cir. 1980); One Times Square Assocs. Ltd. Partnership v. Banque Nationale de Paris (In re One Times Square Assocs. Ltd. Partnership), 165 B.R. 773, 777 (S.D.N.Y 1994), aff'd, 41 F.3d 1502 (2d Cir. 1994). A variation of the "business justification" approach is the "business necessity" test applied by the Ninth Circuit, which requires proof that, not only is the business need rational, but it is also necessary for the debtor to survive. See In re Ambanc La Mesa Ltd. Partnership, 115 F.3d 650, 657 (9th Cir. 1997); Barakat v. Life Ins. Co. (In re Barakat), 99 F.3d 1520, 1526 (9th Cir. 1996), cert. denied, 117 S. Ct. 1312 (1997).
171. On the other hand, in cases in which the separate classification of similar claims yields two or more classes that are slated to receive substantially the same treatment, the common implication is that, absent special considerations such as were present in Mason, the sole reason for the separate classification is to manipulate the vote, which is not a permissible "business justification." See Greystone III Joint Venture, 948 F.2d at 141.
172. See John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 159 (3d Cir. 1993) ("In a 'cram down' case, . . . each class must represent a voting interest that is sufficiently distinct and weighty to merit a separate voice in the decision whether the proposed reorganization should proceed."); Olympia & York Florida Equity Corp. v. Bank of New York (In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. 1990) ("If the plan unfairly creates too many or too few classes, if the classifications are designed to manipulate class voting, or if the classification scheme violates basic priority rights, the plan cannot be confirmed."); In re Jersey City Med. Ctr., 817 F.2d 1055, 1061 (3d Cir. 1987) (stating that "the authorities recognize that the classification of . . . claims or interests must be reasonable"). 150. See supra note 149.
173. Cf. Associates Commercial Corp. v. Rash, 117 S. Ct. 1879, 1886 n.5 (1997) (stating in the context of construing § 506(a) on the subject of valuations in bankruptcy cases, "we also reject a ruleless approach allowing use of different valuation standards based on the facts and circumstances of individual cases").
174. See In re City of Colorado Springs Spring Creek Gen. Improvement Dist., 187 B.R. 683, 687-89 (Bankr. D. Col. 1995); In re ZRM-Oklahoma Partnership, 156 B.R. 67, 70-71 (Bankr. WD. Okla. 1993); In re Atlanta West VI, 91 B.R. 620,
175. 11 U.S.C. § 1111(b); see also infra note 239 (providing a definition of the term "deficiency").
176. See Barakat v. Life Ins. Co. (In re Barakat), 99 F.3d 1520, 1526 (9th Cir. 1996), cert. denied, 117 S.Ct. 1312 (1997); Boston Post Rd. Ltd. Partnership v. Federal Deposit Ins. Corp. (In re Boston Post Rd. Ltd. Partnership), 21 F.3d 477, 483 (2d Cir. 1994) ("The purpose of the Section 1111 (b) election is to allow the undersecured creditor to weigh in its vote with the votes of the other unsecured creditors. Allowing the unsecured trade creditors to constitute their own class [in this case] would effectively nullify the option that Congress provided to undersecured creditors to vote their deficiency as unsecured debt."); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278-80 (5th Cir. 1991); Lumber Exch. Bldg. Ltd. Partnership v. Mut. Life Ins. Co. (In re Lumber Exch. Bldg. Ltd. Partnership), 968 F.2d 647, 649 (8th Cir. 1992) (concluding that "[h]ow the claims of MONY and the trade creditors achieved their status does not alter their current legal character and thus does not warrant separate classification"); In re 183 Lorraine St. Assocs., 198 B.R. 16, 27-28 (E.D.N.Y. 1996); In re D & W Realty Corp., 165 B.R. 127, 128 (S.D.N.Y 1994).
177. See In re Woodbrook Assocs., 19 F.3d 312, 319 (7th Cir. 1994) (stating that "at least where the debtor is a partnership comprised of a fully encumbered single asset, the legal rights of a § 1111 (b) claimant are substantially different from those of a general unsecured claimant"); In re Grandfather Mountain Ltd. Partnership, 207 B.R. 475, 483 (Bankr. M.D.N.C. 1996); In re SM 104 Ltd., 160 B.R. 202, 218-19 (Bankr. S.D. Fla. 1993); In re Bjolmes Realty Trust, 134 B.R. 1000, 1004 (Bankr. D. Mass. 1991).
178. Compare Granada Wines, Inc. v. New England Teamsters & Trucking Indus. Pension Fund, 748 F.2d 42, 47 (1st Cir. 1984) (concluding that these claims are substantially similar), with In re Mason & Dixon Lines, Inc., 63 B.R. 176, 181-82 (Bankr. M.D.N.C. 1986) (concluding that these claims are not substantially similar).
179. Compare Greystone III Joint Venture, 995 F.2d at 1279 n.5 (stating that the matter is a question of law); Woodbrook Assocs., 19 F.3d at 317 (same); Lumber Exch. Bldg. Ltd. Partnership, 968 F.2d at 649 (same); and Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 502 (4th Cir. 1992) (same), with Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 321, 327 (9th Cir. 1994) (concluding that it is a question of fact); Brady v. Andrew (In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1334 (9th Cir. 1985) (same).
180. Compare Lumber Exch. Bldg. Ltd. Partnership, 968 F.2d at 649 n.3 (stating "that the propriety of classification is a question of law subject to de novo review, while the factual findings upon which the bankruptcy court based its decision are reviewed for clear error"), with Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters., Ltd., II (In re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1167 (5th Cir. 1993) (stating that "we hold that the bankruptcy court was not clearly erroneous in separately classifying the city's unsecured claim"), and with Bustop Shelters of Louisville, Inc. v. Classic Homes, Inc., 914 F.2d 810, 813 (6th Cir. 1990) (concluding that the matter involves an abuse of discretion). See also Barakat, 99 F.3d at 1523 (the question of whether or not there are any limits on a plan proponent's ability to classify claims is a legal question that is reviewed de novo); Johnston, 21 F.3d at 327 (interpreting Greystone to suggest "that the clearly erroneous standard applies only where the issue is whether the bankruptcy court properly denied separate classification . . . while the issue of a bankruptcy court's approval of a separate classification 'is an issue of law, freely reviewable on appeal").
181. See supra note 8, 89, and accompanying text.
182. H.R. REP. NO. 95-595, at 41 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6373; see 11 U.S.C. § 1129(a)(7) (setting forth the best interest of creditor's test); In re Kane, 843 F.2d 636, 649 (2d Cir. 1988) (discussing the best interest of creditors test, which measures what an objecting creditor is to receive under the plan against what the creditor would receive in a Chapter 7 liquidation, and requires the former to be greater than the later in order for the court to confirm the plan).
183. 124 CONG. REG. 34,007 (daily ed. 1978) (comments of the sponsors in the Senate).
184. Id. at 34,006 (same).
185. See H.R. 8200, 95th Cong. (as reported by the House Committee on the Judiciary, Sept. 8, 1977), reprinted in WILLIAM M. COLLIER, COLLIER ON BANKRUPTCY, app. B, pt. 4- 987 to -988 (Lawrence P. King et al. eds., 15th ed. rev. 1999) [hereinafter COLLIER ON BANKRUPTCY].
186. See H.R. 8200, 95th Cong. (as reported by the House Committee on the Judiciary, Sept. 8, 1977), reprinted in WILLIAM M. COLLIER, COLLIER ON BANKRUPTCY, app. B, pt. 4-987 to -988 (Lawrence P. King et al. eds., 15th ed. rev. 1999) [hereinafter COLLIER ON BANKRUPTCY].
187. See H.R. 8200, 95th Cong. (as reported by the House Committee on the Judiciary, Sept. 8, 1977), reprinted in WILLIAM M. COLLIER, COLLIER ON BANKRUPTCY, app. B, pt. 4- 987 to -988 (Lawrence P. King et al. eds., 15th ed. rev. 1999) [hereinafter COLLIER ON BANKRUPTCY].
188. See id. § 1129(b)(2)(iv), reprinted in COLLIER ON BANKRUPTCY, supra note 163, app. B, at 4-988. Specifically, § 1129(b)(2)(iv) proposed that the court could confirm a plan over the dissenting vote of a class of claims if with respect to each class of unsecured claims . . . the plan does not discriminate unfairly against such class, and the holders of claims or interests of any class of claims or interests, as the case may be, that is junior to such class will not receive or retain under the plan on account of such junior claims or interests any property . . . . Id.
189. See H.R. 8200, § 1129(b)(1) (enacted Nov. 6, 1978), reprinted in COLLIER ON BANKRUPTCY, supra note 163, app. A, pt. 4-1 at 4-123.
190. See H.R. 8200, § 1129(b)(1) (enacted Nov. 6, 1978), reprinted in COLLIER ON BANKRUPTCY, supra note 163, app. A, pt. 4-1 at 4-123.
191. H.R. REP. NO. 95-595, at 417 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6373.
192. Among other things, this would violate the rule against treating independent provisions of a statutory scheme as mere surplusage. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278 (5th Cir. 1991) (observing the rule against interpreting statutory text as mere surplusage).
193. H.R. REP. NO. 95-595, at 416-17, reprinted in 1978 U.S.C.C.A.N. 5963, 6372-73.
194. See Klee, supra note 11, at 142.
195. See DOUGLAS G. BAIRD, THE ELEMENTS OF BANKRUPTCY 66 (rev. ed. 1993).
196. See supra note 2 (noting the role of reorganization procedure under § 77B of the former Bankruptcy Act).
197. Investment Registry, Ltd. v. Chicago & M.E.R. Co., 212 F. 594, 610 (7th Cir. 1913). One commentator has described one form of hold-out behavior under equity receivership practice as follows: The receiver [in an equity receivership] could not force a creditor to compromise her claim. Instead, a creditor could hold out against a consensual plan in order to obtain a greater recovery. Accordingly, while the principal creditors worked out some means to save the going concern of a firm, the lesser creditors soon learned the profit in protesting too much; such creditors were cashed out, so that the larger creditors - the ones who really stood to lose if the company were not reorganized - could proceed through compromise to reorganize the company. Carlson, supra note 4, at 572 (footnotes omitted).
198. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 547 (1946) (Frankfurter, J. dissenting) (observing that "[i]t must be remembered . . . that the mere failure of a class like that of ordinary creditors, e.g., those having no preferred position in the scheme for distribution, to accept a plan of composition does not prove that its resistance is improperly or unfairly recalcitrant").
199. See supra note 38 and accompanying text (observing that in some instances equity holders may be entitled to nothing); supra notes 168-69 and accompanying text (discussing the treatment of subordinated creditors).
200. See BAIRD, supra note 170, at 64-66 (discussing insolvent railroad cases).
201. See Act of March 3, 1933, ch. 204, § 77(g), 47 Stat. 1467, 1479.
202. See Act of June 7, 1934, ch. 424, § 77B, 48 Stat. 911, 912.
203. Id. § 77B(f)(1).
204. See Chandler Act of 1938, ch. 575, 52 Stat. 840.
205. S. REP. NO. 75-1916, at 35-36 (1938).
206. See supra notes 161-62 and accompanying text (reciting confusing statements regarding the unfair discrimination standard in the Code's legislative history).
207. See Swanson v. Barclay Park Corp. (In re Barclay Park Corp.), 90 F.2d 595 (2d Cir. 1937) (confusing the concept of unfair discrimination with the absolute priority rule underlying the fair and equitable doctrine); see also THOMAS FINLETTER, THE LAW OF BANKRUPTCY REORGANIZATION 461-72 (1939).
208. American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138 (1940); see supra notes 116-23 and accompanying text (discussing Avon Park).
209. Avon Park, 311 U.S. at 147-48 (citations omitted).
210. See supra note 168 and accompanying text (discussing example of treatment of subordinated debt).
211. Avon Park, 311 U.S. at 144 (citations omitted).
212. Mason v. Paradise Irrigation Dist., 326 U.S. 536 (1946); see supra notes 124-33 and accompanying text (discussing Mason).
213. Mason, 326 U.S. at 541-43.
214. Moreover, some even persist in confusing the unfair discrimination concept with the fair and equitable test. See United States v. TM Building Prods., Ltd., 231 B.R. 364, 371-72 (S.D. Fla. 1998) (analyzing as unfair discrimination argument under § 1129(b)(2)(A)(i)(II) setting forth portion of fair and equitable test applicable to secured claims); In re Freymiller Trucking, Inc., 190 B.R. 913, 916-17 (Bankr. WD. Okla. 1996); In re McCarty, 69 B.R. 377, 378 (Bankr. M.D. Fla. 1987).
215. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1364 (9th Cir. 1986); see also In re Martin, 66 B.R. 921, 929 (Bankr. D. Mont. 1986); Klee, supra note 11, at 142 (discussing unfair discrimination in the context of "classes whose legal rights are intertwined with those of the dissenting class"); Polivy, supra note 11, at 199-201 (discussing cases).
216. See Acequia, 787 F.2d at 1364.
217. In general, an example in the legislative history is not normally dispositive of the full range of a statutory provision where the statutory text provides no such limitation, and the exclusiveness of the example is not stated in the legislative materials. Further, the Supreme Court has never embraced such a limited reading of the doctrine in developing its contours under the former Bankruptcy Act and, presumably, if Congress had intended to redefine the doctrine in such a limited way, it would have indicated this purpose more directly. See Cohen v. De La Cruz, 523 U.S. 213, 221 (1998) (stating that the Court "will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure").
218. In re Greystone III Joint Venture, 102 B.R. 560, 571 n.16 (Bankr. W.D. Tex. 1989), aff'd, 127 B.R. 138 (W.D. Tex. 1990), rev'd on other grounds, 995 F.2d 1274 (5th Cir. 1992); Polivy, supra note 11, at 201 (discussing this approach).
219. See supra note 131 and accompanying text (discussing Mason).
220. See supra note 100 (citing case applying rule of statutory construction disfavoring redundant readings of statutory text to § 1122).
221. See supra notes 132-33 and accompanying text (discussing this point).
222. In re Aztec Co., 107 B.R. 585, 590 (Bankr. M.D. Tenn. 1989); see also Liberty Nat'l Enters. v. Ambanc La Mesa Ltd. Partnership (In re Ambanc La Mesa Ltd. Partnership), 115 F.3d 650, 656 (9th Cir. 1997), cert. denied, 118 S. Ct. 1039 (1998) (requiring that, in order not to constitute unfair discrimination, "(1) the [relevant] discrimination must be supported by a reasonable basis; (2) the debtor could not confirm or consummate the Plan without the discrimination; (3) the discrimination is proposed in good faith; and (4) the degree of the discrimination is directly related to the basis or rationale for the discrimination"); In re Jim Beck, Inc., 214 B.R. 305, 307 (W.D. Va. 1997) (applying four-part test).
223. Compare In re Creekside Landing, Ltd., 140 B.R. 713, 716 (Bankr. M.D. Tenn. 1992) (rejecting as unfairly discriminatory a plan that proposed to pay 20% of the unsecured deficiency claim of the Resolution Trust Corporation, 75% of general trade claims, and 40% of another creditor's unsecured claim), with Creekstone Apartments Assocs., L.P. v. Resolution Trust Corp. (In re Creekstone Apartments Assocs., L.P.), 168 B.R. 639, 644-45 (Bankr. M.D. Tenn. 1994) (concluding that plan did not discriminate unfairly that proposed to pay 10% of the unsecured deficiency claim of the Resolution Trust Corporation and 100% of the general unsecured claims of trade creditors).
224. See In re Salem Suede, Inc., 219 B.R. 922, 933-34 (Bankr. D. Mass. 1998) (requiring that "any discrimination must be supported by a legally acceptable rationale, and the extent of the discrimination must be necessary in light of the rationale"); In re Crosscreek Apartments, Ltd., 213 B.R. 521, 537-38 (Bankr. E.D. Tenn. 1997) ("Regardless of the particular test to which one ascribes, one thing is clear: at a minimum there must be a rational or legitimate basis for the discrimination and the discrimination must be necessary for the reorganization."); In re 203 North LaSalle Street Ltd. Partnership, 190 B.R. 567, 585-86 (Bankr. N.D. Ill. 1995) (applying the test that "[f]irst, any discrimination must be supported by a legally acceptable rationale . . . [; and s]econd, the extent of the discrimination must be necessary in light of the rationale"), aff'd, 195 B.R. 692 (N.D. Ill. 1996), aff'd, 126 F.3d 955 (7th Cir. 1997), rev'd on other grounds sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 119 S. Ct. 1411 (1999); Aetna Realty Investors, Inc. v. Monarch Beach Venture, Ltd. (In re Monarch Beach Venture, Ltd.), 166 B.R. 428, 437 (C.D. Cal. 1993) (stating that "the bankruptcy court must evaluate the [discrimination], and make findings and conclusions whether and in what manner there is a reasonable basis for any discrimination, and the importance to the plan of such discrimination"); see also In re Furlow, 70 B.R. 973, 977-78 (Bankr. E.D. Pa. 1987) (criticizing the four-part test and formulating a different test based on whether "the debtor is able to prove a reasonable basis for the degree of discrimination contemplated by the Plan").
225. See Brunstad & Sigal, supra note 9, at 1481-82.
226. See id. at 1538-53.
227. See id. at 1480.
228. See id. at 1480-82.
229. See id. at 1482-83, 1520-32.
230. See id. at 1521-22; see also supra note 23 (reciting this point).
231. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 HARV. L. REV. 1393, 1404 (1985) (stating that "[n]ot only the American law of contracts, but also much of American society in general, is structured around the premise that individuals should for the most part have the freedom to order their own affairs as they please, because rational, self-interested actors will tend to make decisions that maximize their own utility"); see also ANTHONY T. KRONMAN & RICHARD POSNER, THE ECONOMICS OF CONTRACT LAW 1-7 (1979) (arguing that bilateral exchange pursuant to voluntary agreements tends to transfer resources to their highest and best uses).
232. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 HARV. L. REV. 1393, 1404 (1985) (stating that "[n]ot only the American law of contracts, but also much of American society in general, is structured around the premise that individuals should for the most part have the freedom to order their own affairs as they please, because rational, self- interested actors will tend to make decisions that maximize their own utility"); see also ANTHONY T. KRONMAN & RICHARD POSNER, THE ECONOMICS OF CONTRACT LAW 1-7 (1979) (arguing that bilateral exchange pursuant to voluntary agreements tends to transfer resources to their highest and best uses).
233. More precisely, laws strive to prevent certain kinds of behaviors or choices that generate harmful effects. Ideally, of course, the costs of the relevant rules should be no greater than the costs of the effects that the rules seek to avoid. In many instances, however, the relevant costs may be quite difficult to ascertain. In any event, legal regulation should at least aim to reduce the sum of the costs of the relevant harmful effects and the costs of avoiding these effects. See GUIDO CALABRESI, THE COSTS OF A CCIDENTS: A LEGAL AND ECONOMIC ANALYSIS 26 (1970) ("I take it as axiomatic that the principal function of accident law is to reduce the sum of the costs of accidents and the costs of avoiding accidents.").
234. See infra note 215 and accompanying text.
235. See Brunstad & Sigal, supra note 9, at 1510-11, 1521 -23; infra note 212 (discussing an owners' incentives).
236. See Brunstad & Sigal, supra note 9, at 1480-81, 1521-22.
237. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
238. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
239. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
240. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
241. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
242. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3- 11 (1970) (discussing the evolution of the one share, one vote rule).
243. For example, most state laws provide that, as a general rule, shareholders are entitled to one vote for each share that he or she holds. See CAL. CORP. CODE § 700 (West 1990) (stating that "except as may be otherwise provided in the articles, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders"); DEL. CODE ANN. tit. 8, § 212 (1991) (stating that "[u]nless otherwise provided in the certificate of incorporation . . . each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder"); 805 ILL. COMP. STAT. 5/7.40 (West 1999) (stating that "each outstanding share, regardless of class, shall be entitled to one vote in each matter submitted to a vote at a meeting of shareholders"); MASS. GEN. LAWS ANN. ch. 156 § 32 (1999) (providing that "[s]tockholders entitled to vote shall . . . have one vote for each share of stock owned by them"); N.Y. BUS. CORP. LAW § 612 (McKinney 1999) (providing that "[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation"); TEX. BUS. CORP. ACT ANN. art. 2.29 (West 1999) (stating generally that "[e]ach outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders"). Under the laws of many states, the general rule is subject to variance. See Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (upholding a voting scheme at variance with the one share, one vote rule). A number of states, however, prohibit the issuance of common stock with unequal voting rights. See Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 712-14 (1987). Moreover, one commentator has suggested that, even in jurisdictions that permit variance of the one share, one vote rule, one reason why so few firms elect to take advantage of the opportunity to vary the rule is that doing so depresses the value of the shares, rendering the firm less able to raise capital. See id. at 711; see also id. at 717-18 (discussing the concept of "corporate democracy" as a policy underlying the federal securities laws); see also Andre, supra note 54, at 621 n. 374 (observing that "[m]arkets value voting rights" and citing studies showing that "the class with the higher voting rights consistently trades at a premium over the class with no or lower voting rights"). The same commentator has also concluded: "Nonvoting or disproportionate voting common stock is the corporate law equivalent to price-fixing. It is one of a comparatively few transactions that must be proscribed in order for a market system to operate effectively." Seligman, supra, at 721. Among other things, the commentator supports this conclusion with observations regarding how variance of the one share, one vote rule may depress managerial efficiency by decreasing managerial accountability. See id. at 721-23; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 74-76 (1991) (explaining the vote-buying prohibition as a means to prevent inefficient separation of ownership and control); Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See generally Andre, supra note 54, at 606-14 (discussing the adoption of Rule 19c-4 restricting vote-buying with respect to nationally listed companies, and observing the position of the SEC that while "dual class schemes were not 'per se inappropriate,' the disenfranchisement of existing stockholders was said to be 'inconsistent' with the Exchange Act"); David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of "One Share, One Vote," 55 CORNELL L. REV. 1, 3-11 (1970) (discussing the evolution of the one share, one vote rule).
244. See N. Y BUS. CORP. LAW § 609(e) (McKinney 1986) (providing the general rule that "[a] shareholder shall not sell his vote or issue a proxy to vote to any person for any sum of money or anything of value"); Schreiber v. Carney, 447 A.2d 17, 24, 25-26 (Del. Ch. 1982) (stating that "vote-buying is illegal per se if its object or purpose is to defraud or disenfranchise the other stockholders," but concluding that vote-buying should be a voidable rather than a void transaction "subject to a test for intrinsic fairness"); Macht v. Merchant's Mortgage & Credit Co., 194 A. 19, 22 (Del. Ch. 1937) ("[t]o allow voting rights that are bought to be exercised is against public policy, and would be in fraud of the other stockholders" (citation omitted)). As explained by one court, [t]he apparent rationale [underlying the prohibition against vote-buying] is that by requiring each stockholder to exercise his individual judgment as to all matters presented, "the security of the small stockholders is found in the natural disposition of each stockholder to promote the best interests of all, in order to promote his individual interests." . . . In essence, while self interest motivates a stockholder's vote, theoretically, it is also advancing the interests of the other stockholders. Thus, any agreement entered into for personal gain, whereby a stockholder separates his voting right from his property right was considered a fraud upon his community of interests. Schreiber, 447 A.2d at 24 (quoting Cone v. Russell, 21 A. 847, 849 (N.J. Ch. 1891)); see also Bostwick v. Chapman, 24 A. 32, 41 (Conn. 1890) (stating that "[i]t is the policy of our law that ownership of stock shall control the property and the management of the corporation, and this cannot be accomplished, and this good policy defeated, if stockholders are permitted to surrender all their discretion and will in the important matter of voting, and suffer themselves to be mere passive instruments in the hands of some agent who has no interest . . . in the general prosperity of the corporation"); Andre, supra note 54, at 545-51 (discussing developments in vote-buying cases). As the court also recognized, however, under modern corporations law, the policy is not strictly enforced in contexts in which fraud or disenfranchisement are not at issue. See Schreiber, 447 A.2d at 25-26.
245. See id. at 24.
246. See Hafer v. New York, L.E. & W.R.R. Co., 9 Ohio Dec. 470, 474 (1885). Specifically, the Hafer court stated that the law presumes that the pecuniary interest of a stockholder will be a motive to impel him to vote in such a manner as will promote the interests of the company. Such a motive is entirely lacking in one who is not a stockholder, and if such a person be empowered to vote for directors he may be subject to interests and motives other than such as would conduce to the welfare of the company. Id. 215. Cf. Bershad v. Curtis-Wright Corp., 535 A.2d 840, 845 (Del. 1987) (observing that "[s]tockholders in Delaware corporations have a right to control and vote their shares in their own interest. . . . It is not objectionable that their motives may be for personal profit, or determined by whim or caprice, so long as they violate no duty owed to other share-holders."); Moses v. Scott, 4 So. 742, 744 (Ala. 1888) (stating that "[e]ach member has the clear right to case his ballot as he pleases, wisely or unwisely, and no other stockholder can control his conduct, or gainsay his discretion").
247. See Andre, supra note 54, at 541-42 (observing the link between appropriate managerial behavior and ownership control).
248. See supra notes 76-92 and accompanying text (discussing the Code's voting and cram down provisions).
249. See supra note 26 and accompanying text.
250. Similarly, creditors reap the benefits of the managers' normal incentives to make prudent investment decisions, augmented at times by contractual constraints, such as covenants prohibiting certain kinds of activities or behaviors. See Clifford W. Smith & Jerold B. Warner, On Financial Contracting: An Analysis of Bond Covenants, 7 J. FIN. EGON. 117, 122-24 (1979) (discussing types of contractual bond covenants designed to limit risky behavior); see also Merton H. Miller, The Wealth Transfers of Bankruptcy: Some Illustrative Examples, 41 LAW & CONTEMP. PROBS. 39, 40 (1977) (explaining the use of restrictive covenants and monitoring to protect creditors "from risk-increasing change in the nature of a firm after their original bargain with it has been struck").
251. Similarly, creditors reap the benefits of the managers' normal incentives to make prudent investment decisions, augmented at times by contractual constraints, such as covenants prohibiting certain kinds of activities or behaviors. See Clifford W. Smith & Jerold B. Warner, On Financial Contracting: An Analysis of Bond Covenants, 7 J. FIN. EGON. 117, 122-24 (1979) (discussing types of contractual bond covenants designed to limit risky behavior); see also Merton H. Miller, The Wealth Transfers of Bankruptcy: Some Illustrative Examples, 41 LAW & CONTEMP. PROBS. 39, 40 (1977) (explaining the use of restrictive covenants and monitoring to protect creditors "from risk-increasing change in the nature of a firm after their original bargain with it has been struck").
252. See Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 188 (1902) (observing that creditors are entitled generally to payment from the debtor or the debtor's property); see also supra notes 9, 89; infra notes 253-59 and accompanying text (discussing the relative priority of senior claims over junior claims and equity interests, and the absolute priority rule's preservation of this hierarchical arrangement).
253. This reduction in value may be disproportionately felt among creditors. For example, secured creditors may suffer no harm if the value of their collateral remains stable, while unsecured creditors may suffer an erosion of their interests if the value of the debtor's unencumbered assets declines.
254. As one commentator has noted: If the firm's prospects are volatile, shareholders will want the managers to delay, in the hope of selling when the price is high. On average, however, delay will be costly. Equity claimants have reason to wait too long and to set unrealistic reservation prices, for their claims are worthless unless something unexpectedly good happens. Immediate sale at a realistic price wipes them out; debt claimants bear any erosion of value during a delay, yet have fixed claims and so do not realize the full gain if things turn out well. This is the standard conflict between debt and equity claims, and as usual is substantially aggravated during times of financial distress, when the equity claim is worth little. Frank E. Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411, 415 (1990).
255. See John Cassidy, Time Bomb, THE NEW YORKER, July 5, 1999, at 31 (paraphrasing "the oldest law in finance: that higher returns can be generated only at the cost of higher risk").
256. Summarizing an insolvent debtor's potential gain from delay, and the potential costs to creditors, one commentator has explained as follows: Faced with the prospect of no payout, equity favors delay for two reasons. First, delay allows the firm to operate longer while the firm is insolvent but prior to
257. Summarizing an insolvent debtor's potential gain from delay, and the potential costs to creditors, one commentator has explained as follows: Faced with the prospect of no payout, equity favors delay for two reasons. First, delay allows the firm to operate longer while the firm is insolvent but prior to final resolution of the bankruptcy, and thus prolongs the opportunity for a reversal of fortune large enough to return the firm to solvency and return equity investors to a stake in the firm. If equity can control the firm, moreover, it can increase the risk of the debtor's investments and thereby enhance this opportunity. However unlikely the reversal of fortune, and whatever the cost to creditors of the protraction - directly or from investment risk unjustified by expected returns - equity gains from prolongation of its option on the firm's value. Second, the costs of the protracted procedure itself provide equity with an advantage. Even without a realistic hope that the debtor will become solvent, equity can impose the costs of delay until it wrests an extracontractual settlement from senior claimants. Equity, if able, may hold the debtor hostage and allow it to deteriorate in order to extract ransom from the debtor's contractual owners, the creditors. Adler, supra note 26, at 448-49 (footnotes omitted); see also Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395, 404 (1983) (observing that "[w]hen the firm is in distress, the shareholders' residual claim goes under water, and they lose the appropriate incentives").
258. See Alexander v. Hillman, 296 U.S. 222, 240 (1935) (holding that the debtor's officers "are to be dealt with just as if they were technically trustees for creditors and stockholders"); Railroad Co. v. Howard, 74 U.S. (7 Wall) 392, 409-10 (1868) (stating that "[e]quity regards the property of a corporation as held in trust for the payment of the debts of the corporation" ahead of shareholders); New York Credit Men's Adjustment Bureau, Inc. v. Weiss, 110 N.E.2d 397, 398 (N.Y. 1953) (stating that "[i]f the corporation was insolvent at that time it is clear that defendants, as officers and directors thereof, were to be considered as though trustees of the property for the corporate creditor-beneficiaries").
259. See Federal Deposit Ins. Corp. v. Sea Pines Co., 692 F.2d 973, 976-77 (4th Cir. 1982) (observing that "when the corporation becomes insolvent, the fiduciary duty of the directors shifts from the stockholders to the creditors"); Davis v. Woolf, 147 F.2d 629, 633 (4th Cir. 1945) (noting that "[t]he law by the great weight of authority seems to be settled that when a corporation becomes insolvent, or in a failing condition, the officers and directors no longer represent the stockholders, but by the fact of insolvency, become trustees for the creditors") (internal citations omitted); Pay 'N Pak Stores, Inc. v. Court Square Capital, Ltd. (In re PNP Holdings Corp.), 141 F.3d 1178 (9th Cir. 1998) (unpublished opinion) (recognizing a shift in fiduciary duty to creditors once the debtor has become insolvent); Henderson v. Buchanan (In re Western World Funding, Inc.), 52 B.R. 743, 763 (Bankr. D. Nev. 1985) (stating that "[w]hen the corporation is insolvent these [fiduciary] duties [owed by the officers and directors to the corporation and shareholders] run to creditors"); Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613, at * 34 (Del. Ch., Dec. 30, 1991) (concluding that the directors of a solvent debtor "in the vicinity of insolvency" have duties to creditors, not just shareholders); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669, 706-710 (1993) (arguing that officers and directors of an insolvent corporation owe fiduciary duties to both the shareholders and the creditors of the corporation); see also Laura Lin, Shift of Fiduciary Duty Upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors, 46 VAND. L. REV. 1485, 1512-23 (1993) (reviewing the various court opinions in which corporate directors were held to owe creditors a fiduciary duty).
260. See Federal Deposit Ins. Corp. v. Sea Pines Co., 692 F.2d 973, 976-77 (4th Cir. 1982) (observing that "when the corporation becomes insolvent, the fiduciary duty of the directors shifts from the stockholders to the creditors"); Davis v. Woolf, 147 F.2d 629, 633 (4th Cir. 1945) (noting that "[t]he law by the great weight of authority seems to be settled that when a corporation becomes insolvent, or in a failing condition, the officers and directors no longer represent the stockholders, but by the fact of insolvency, become trustees for the creditors") (internal citations omitted); Pay 'N Pak Stores, Inc. v. Court Square Capital, Ltd. (In re PNP Holdings Corp.), 141 F.3d 1178 (9th Cir. 1998) (unpublished opinion) (recognizing a shift in fiduciary duty to creditors once the debtor has become insolvent); Henderson v. Buchanan (In re Western World Funding, Inc.), 52 B.R. 743, 763 (Bankr. D. Nev. 1985) (stating that "[w]hen the corporation is insolvent these [fiduciary] duties [owed by the officers and directors to the corporation and shareholders] run to creditors"); Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613, at * 34 (Del. Ch., Dec. 30, 1991) (concluding that the directors of a solvent debtor "in the vicinity of insolvency" have duties to creditors, not just shareholders); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669, 706-710 (1993) (arguing that officers and directors of an insolvent corporation owe fiduciary duties to both the shareholders and the creditors of the corporation); see also Laura Lin, Shift of Fiduciary Duty Upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors, 46 VAND. L. REV. 1485, 1512-23 (1993) (reviewing the various court opinions in which corporate directors were held to owe creditors a fiduciary duty).
261. See Manville Corp. v. Equity Sec. Holders Comm. (In re Johns-Manville Corp.), 801 F.2d 60, 69 (2d Cir. 1986) (holding that the equity holders of an insolvent company could hold a meeting to replace the corporate directors absent a finding that the equity holders intended to completely derail the debtor's reorganization); In re J.P. Linahan, Inc., Ill F.2d 590, 592 (2d Cir. 1940) (stating that "the right of the majority of stockholders to be represented by directors of their own choice and thus to control corporate policy is paramount and will not be disturbed unless a clear case of abuse is made out"); see also David A. Skeel, Jr., Rethinking the Line Between Corporate Law and Corporate Bankruptcy, 72 TEX. L. REV. 471, 507 (1994) (discussing the Manville decision).
262. In some cases, of course, equity holders may be ineffective in coordinating and promoting their interests (e.g., because they are too numerous and diffuse). See Jeffrey N. Gordon, Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 CAL. L. REV. 1, 39-55 (1988) (describing problems in coordinating shareholder voting, including voter apathy). See generally MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE 1-18 (1994) (outlining the development of the model of detached, fragmented ownership of U.S. firms). In other instances, however, they may quickly coalesce into a cohesive and organized force, and exert a strong influence on management decisions, particularly where the owners and managers of the firm are one and the same.
263. In some cases, of course, equity holders may be ineffective in coordinating and promoting their interests (e.g., because they are too numerous and diffuse). See Jeffrey N. Gordon, Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 CAL. L. REV. 1, 39-55 (1988) (describing problems in coordinating shareholder voting, including voter apathy). See generally MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE 1-18 (1994) (outlining the development of the model of detached, fragmented ownership of U.S. firms). In other instances, however, they may quickly coalesce into a cohesive and organized force, and exert a strong influence on management decisions, particularly where the owners and managers of the firm are one and the same.
264. In economic terms, the managers' choice to speculate with the firm's assets generates an "externality," or harmful effect, with respect to the firm's creditors. As Coase has explained: An externality is . . . usually defined as the effect of one person's decision on someone who is not a party to that decision. Thus, if A buys something from B, A's decision to buy affects B, but this effect is not considered to be an 'externality.' However, if A's transaction with B affects C, D, and E, who are not parties to the transaction, because, for example, it results in noise or smoke which impinge on C, D, and E, the effects on C, D, and E are termed "externalities." RONALD H. COASE, THE FIRM, THE MARKET AND THE LAW 24 (1988). Similarly, in economic terms, the difference between what the firm's assets could earn if employed in a more desirable way, and what they will earn if maintained in the less desirable use, is an example of a "rent." See id. at 163-70.
265. See 11 U.S.C. § 1101 (providing for a "debtor in possession" in a Chapter 11 case); id. § 1107 (prescribing the rights, powers and duties of a debtor in possession); id. § 1108 (authorizing the continued operation of the debtor's business); Hirsch v. Pennsylvania Textile Corp., Inc. (In re Centennial Textiles, Inc.), 227 B.R. 606, 612 (Bankr. S.D.N.Y. 1998) (stating that "[a] debtor in possession owes the same fiduciary duty as a trustee to the creditors and the estate"); Unofficial Comm. of Equity Holders v. McManigle (In re Penick Pharm. Inc.), 227 B.R. 229, 232 (Bankr. S.D.N.Y. 1998) (same). See generally Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352-53 (1985) (discussing the trustee's duties, including the duty to maximize the value of the debtor's bankruptcy estate).
266. In Chapter 11 cases, although the debtor typically remains in control of his or her assets as a "debtor in possession," the Code regulates the debtor in possession's activities. See 11 U.S.C. § 1101(1) (defining concept of "debtor in possession"); id. § 1107 (specifying some of the rights, powers, and duties of a debtor in possession in a Chapter 11 case). Similarly, a trustee may be appointed in a Chapter 11 case to replace the debtor in possession "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management." Id. § 1104(a)(1); see also id. § 1106 (specifying the duties of a trustee appointed in a Chapter 11 case). In addition, many of the debtor's decisions in the Chapter 11 context are subject to review by creditors, and approval by the bankruptcy court. See id. § 363 (providing for notice and a hearing on any proposed use, sale or lease of property other than in the ordinary course of business); id. § 364 (providing for notice and a hearing on certain proposals for the incurrence of postpetition debt); id. § 365 (providing for court approval of any decision to assume or reject an executory contract).
267. See supra notes 34, 76-92, and accompanying text.
268. See Brunstad & Sigal, supra note 9, at 1528 (observing that in the case of a solvent obligor that "creditors are only entitled to repayment of their claims, and, thus, their rights are typically capped by the amount of their debt").
269. Because their claims are individual in nature, the creditors of an insolvent firm have rights that are more complex as a group than those of any class of ordinary shareholders of a solvent firm. In general, ordinary shareholders receive pro rata dividends, and have no individual collection rights entitling them to liquidated sums of money at prescribed points in time. Creditors, on the other hand, have widely divergent payment rights, as well as individual collection entitlements. This diversity obviously complicates the handling of claims in the bankruptcy context. See infra notes 235-41 and accompanying text.
270. See generally George G. Triantis, A Theory of the Regulation of Debtor-In-Possession Financing, 46 VAND. L. REV. 901, 910-12 (1993) (arguing that certain creditors of an insolvent debtor, particularly those extending credit on a secured basis, may cause the debtor to under-invest through excessively risk adverse debt covenants).
271. It is also significant that a trade creditor's profit structure is often quite different from that of a secured lender. A secured lender may have a profit margin of one or two points. Trade creditor, however, may have as much as a 40-60% mark-up on their products (and sometimes more). Of course, the amount of margin in any particular case can vary a great deal. See generally Robert K. Rasmussen, Behavioral Economics, the Economic Analysis of Bankruptcy Law and the Pricing of Credit, 51 VAND. L. REV. 1679, 1693 (1998) (observing that financial intermediaries such as banks "tend to make investments [, i.e., loans] that have a capped upper limit on the potential return they will receive" in contrast to those who sell goods to a firm).
272. The trade creditor may have made a sizeable investment in one form or another in attracting and keeping the debtor as a client, such as by offering various discounts or up-front promotional benefits.
273. As one commentator has explained: [U]nder certain circumstances, the value-maximizing decision might be to discontinue a financially distressed business that is currently unprofitable, but that nonetheless is a viable economic entity in the longer term. In such a situation, promoting the interests of the firm's investors would presumably defeat the interests of the firm's employees in preserving their jobs. Financial distress creates a political arena, in which various constituencies of the firm pursue competing and often incommensurable aims. In financial distress, pursuing one set of aims typically frustrates other aims. Donald R. Korobkin, The Unwarranted Case Against Corporate Reorganization: A Reply to Bradley and Rosenzweig, 78 IOWA L. REV. 669, 732 (1993).
274. Like most commercial laws, bankruptcy law recognizes and provides a means to calculate a secured creditor's deficiency claim. Under the Code, to the extent that the amount of a secured creditor's claim is greater than the value of the collateral securing the claim, the secured creditor is left with an unsecured deficiency claim against the debtor's estate. See 11 U.S.C. § 506(a) (1994); Associates Commercial Corp. v. Rash, 117 S. Ct. 1879, 1884 (1997) (explaining that 11 U.S.C. § 506(a) "tells us that a secured creditor's claim is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral"); United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371-74 (1988) (explaining the operation of 11 U.S.C. § 506(a)). Deficiency claims are also commonly recognized in the foreclosure context under various state laws. See ARIZ. REV. STAT. ANN. §§ 33-727, -729, & -730 (West 1990); CONN. GEN. STAT. § 49-14 (1990); TEX. PROP. CODE ANN. § 51.003-.004 (West 1995).
275. See Barry E. Adler, Bankruptcy and Risk Allocation, 77 CORNELL L. REV. 439, 464-65 (1992) (observing that reorganizations are expensive in part due to the fact that claimants often suffer from a lack of perfect information).
276. In general, the Code does not affect a creditor's rights against third party guarantors who are not themselves in bankruptcy. See 11 U.S.C. § 524(e) (providing that "[e]xcept as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt"). A bankruptcy court may, however, without running afoul of § 524(e), issue a temporary injunction staying collection actions against third party guarantors if, among other things, the injunction is necessary to permit the debtor to reorganize successfully. See Regency Realty Assocs. v. Howard Fertilizer, Inc. (In re Regency Realty Assocs.), 179 B.R. 717, 719 (Bankr. M.D. Fla. 1995) ("[I]n a Chapter 11 reorganization case the Bankruptcy Court may use its power granted by § 105 to temporarily protect non-debtors by injunctive relief. The classic scenario which warrants such relief is an affirmative showing with competent proof that the non-debtors sought to be protected (1) have the financial wherewithal and (2) they are willing to contribute their credit, funds or properties to fund the plan of reorganization of the Debtor."); Chase Manhattan Bank v. Third Eighty-Ninth Assocs. (In re Third Eighty-Ninth Assocs.), 138 B.R. 144, 148 (S.D.N.Y. 1992) (upholding an injunction staying collection actions against one third-party guarantor because he was intimately involved with the debtor's management and necessary for a successful reorganization).
277. See John C. McCoid, II, Bankruptcy, Preferences, and Efficiency: an Expression of Doubt, 67 VA. L. REV. 249, 260 (1981) (observing that once the debtor becomes insolvent, "payment of one creditor necessarily prejudices others because there are insufficient assets to satisfy all"); see also Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97, 119 n.69 (1984) (observing that "[w]henever a firm is insolvent, defaults are inevitable, even if the firm has value as a going concern"). See generally Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713 (1985) (discussing preference law).
278. See John C. McCoid, II, Bankruptcy, Preferences, and Efficiency: an Expression of Doubt, 67 VA. L. REV. 249, 260 (1981) (observing that once the debtor becomes insolvent, "payment of one creditor necessarily prejudices others because there are insufficient assets to satisfy all"); see also Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97, 119 n.69 (1984) (observing that "[w]henever a firm is insolvent, defaults are inevitable, even if the firm has value as a going concern"). See generally Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713 (1985) (discussing preference law).
279. See John C. McCoid, II, Bankruptcy, Preferences, and Efficiency: an Expression of Doubt, 67 VA. L. REV. 249, 260 (1981) (observing that once the debtor becomes insolvent, "payment of one creditor necessarily prejudices others because there are insufficient assets to satisfy all"); see also Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97, 119 n.69 (1984) (observing that "[w]henever a firm is insolvent, defaults are inevitable, even if the firm has value as a going concern"). See generally Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713 (1985) (discussing preference law).
280. See supra notes 219-24 and accompanying text (discussing this problem).
281. See JACKSON, supra note 28, at 16 n.20 (observing that creditors are most likely to "attempt to collect their claims at roughly the same time" upon learning of a debtor's insolvency); Theodore Eisenberg, Bankruptcy in the Administrative State, 50 LAW & CONTEMP. PROBS. 3, 33 (1987) ("Bankruptcy sends a signal to everyone dealing with a bankrupt debtor: 'Get out now with as much as you can as fast as you can.' "); see also Thomas H. Jackson, Of Liquidation, Continuation, and Delay: An Analysis of Bankruptcy Policy and Nonbankruptcy Rules, 60 AM. BANKR. L.J. 399, 402-04 (1986) (explaining the concept of the "common pool" problem, in which individual creditors rush to grab assets of an insolvent debtor, arising "when individual creditors are unconstrained in their collection efforts against a pool of assets that is not large enough to pay each of them in full").
282. See JACKSON, supra note 28, at 16 n.20 (observing that creditors are most likely to "attempt to collect their claims at roughly the same time" upon learning of a debtor's insolvency); Theodore Eisenberg, Bankruptcy in the Administrative State, 50 LAW & CONTEMP. PROBS. 3, 33 (1987) ("Bankruptcy sends a signal to everyone dealing with a bankrupt debtor: 'Get out now with as much as you can as fast as you can.' "); see also Thomas H. Jackson, Of Liquidation, Continuation, and Delay: An Analysis of Bankruptcy Policy and Nonbankruptcy Rules, 60 AM. BANKR. L.J. 399, 402-04 (1986) (explaining the concept of the "common pool" problem, in which individual creditors rush to grab assets of an insolvent debtor, arising "when individual creditors are unconstrained in their collection efforts against a pool of assets that is not large enough to pay each of them in full").
283. See JACKSON, supra note 28, at 16 n.20 (observing that creditors are most likely to "attempt to collect their claims at roughly the same time" upon learning of a debtor's insolvency); Theodore Eisenberg, Bankruptcy in the Administrative State, 50 LAW & CONTEMP. PROBS. 3, 33 (1987) ("Bankruptcy sends a signal to everyone dealing with a bankrupt debtor: 'Get out now with as much as you can as fast as you can.' "); see also Thomas H. Jackson, Of Liquidation, Continuation, and Delay: An Analysis of Bankruptcy Policy and Nonbankruptcy Rules, 60 AM. BANKR. L.J. 399, 402-04 (1986) (explaining the concept of the "common pool" problem, in which individual creditors rush to grab assets of an insolvent debtor, arising "when individual creditors are unconstrained in their collection efforts against a pool of assets that is not large enough to pay each of them in full").
284. In economic terms, in the case of an insolvent debtor, a creditor's decision to enforce its collection rights against the debtor may generate an "externality" with respect to the debtor's other creditors. See supra note 229 (discussing the concept of an "externality").
285. As the Supreme Court has observed: [P]roperty that must be sold [through a quick liquidation procedure] is simply worth less. No one would pay as much to own such property as he would pay to own real estate that could be sold at leisure and pursuant to normal marketing techniques. And it is no more realistic to ignore that characteristic of the property (the fact that state foreclosure law permits the mortgagee to sell it at forced sale) than it is to ignore other price-affecting characteristics (such as the fact that state zoning law permits the owner of the neighboring lot to open a gas station). BFP v. Resolution Trust Corp., 511 U.S. 531, 539 (1994). Similarly, as Justice Souter has remarked: Buyers no doubt hope for bargains at foreclosure sales, but an investor with a million dollars in cash in his pocket might be ready to pay "as much" for a desired parcel of property on forced sale, at least if a rival, equally determined millionaire were to appear at the same auction. The principal reason such sales yield low prices is not so much that the properties become momentarily "worth less," . . . (on the contrary, foreclosure-sale purchasers receive a bundle of rights essentially similar to what they get when they buy on the market) or that foreclosing mortgagees are under the compulsion of state law to make no more than the most desultory efforts to encourage higher bidding, but rather that such free-spending millionaires are in short supply, and those who do exist are unlikely to read the fine print which fills the 'legal notice' columns of their morning newspaper. Id. at 551 n.2 (Souter, J., dissenting); see also Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 124 (1939) (stating that "[o]ne of the purposes of § 77B was to avoid the consequences to debtors and creditors of foreclosures, liquidations, and forced sales with their drastic deflationary effects").
286. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self- interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
287. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self-interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
288. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self- interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
289. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self- interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
290. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self- interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
291. See Charles W. Adams, An Economic Justification for Corporate Reorganizations, 20 HOFSTRA L. REV. 117, 129 (1991) (arguing that "[t]here are situations . . . in which an insolvent corporation is worth saving," and naming Texaco, Manville and A.H. Robbins as examples); DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS AND MATERIALS ON BANKRUPTCY 40 (2d ed. 1990) (noting that when secured creditors act in their own self- interest and exercise their rights to the collateral, the going concern value of the debtor may be destroyed); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992) (explaining that, in adopting the Code in 1978, "Congress believed that assets would be more highly valued if utilized in the industry for which they were designed, rather than scrapped"); Richard V. Butler & Scott M. Gilpatric, A Re-Examination of the Purposes and Goals of Bankruptcy, 2 AM. BANKR. INST. L. REV. 269, 272-73 (1994) (arguing that "if the creditors individually press their claims, the total value of the firm may decline because . . . the firm may have a greater value to its creditors as a going concern than [in] liquidation"); see also supra notes 1-2 and accompanying text (discussing the purpose of Chapter 11 reorganization). On the other hand, of course, efforts to reorganize debtors may do more harm than good in some instances. See Baird & Jackson, supra note 2, at 741 ("Some firms that cannot meet their obligations are not worth keeping intact as going concerns. These are the manufacturers that sell computers that no one will buy and the restaurants that serve food that no one will eat. The firm's assets are worth more sold piece by piece than as a unit."); William L. Cary, Liquidation of Corporations in Bankruptcy Reorganization, 60 HARV. L. REV. 173, 194 (1946) (observing that "[rehabilitation of the debtor, though it may be possible, it not always the best solution, either for the creditors and security holders or for the economy as a whole").
292. See 11 U.S.C. § 362(a) (1994) (providing for a stay of most debt collection activities against the debtor or the debtor's property upon the commencement of a bankruptcy case); Pintler Corp. v. Fidelity & Gas. Co. (In re Pintler Corp.), 124 F.3d 1310, 1313 (9th Cir. 1997) (holding that the purpose of the automatic stay is to "prevent[] dismemberment of the estate, ensure[] orderly liquidation, and grant[] the trustee time to familiarize himself with the various rights and interests involved and the property available for distribution") (alterations in original) (quoting In re Granite Partners, L.P., 194 B.R. 318, 336 (Bankr. S.D.N.Y. 1996)); Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir. 1984) (stating that the provisions of the automatic stay serve to "permit the debtor to organize his or her affairs without creditor harassment and to allow orderly resolution of all claims"); Job v. Calder (In re Calder), 907 F.2d 953, 956 (10th Cir. 1990) (stating that actions taken in violation of the automatic stay are generally void, although certain exceptions may be recognized).
293. See 11 U.S.C. §§ 547, 550 (providing for the avoidance and recovery of certain prebankruptcy payments that have the effect of preferring certain creditors over others); Union Bank v. Wolas, 502 U.S. 151, 161 (1991) (discussing the Code's preference provisions). In addition to the preference rules set out in the Code, at least one court has held that a trustee may also be entitled to recover preferences under applicable state law. See Perkins v. Petro Supply Co. (In re Rexplore Drilling, Inc.), 971 F.2d 1219, 1225 (6th Cir. 1992) (interpreting § 544 to permit a trustee to recover preferential payments under state preference provisions).
294. See Carlson, supra note 4, at 610 (arguing that "[a]s to the point that the Bankruptcy Code does not concern itself with why creditors vote the way they do, nothing could be further from the truth. . . . (T]he Bankruptcy Code is vitally concerned with the reasons creditors have for voting.").
295. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1424 n.28 (1999) (quoting Brunstad, Sigal & Schorling, supra note 4, at 1405-06 n. 136); see supra note 34 (elaborating on this point).
296. See supra notes 76-92 and accompanying text (discussing the voting procedures in Chapter 11 proceedings).
297. Section 1129(b)(2)(A), providing for the cram down of secured claims, provides as follows: (2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements: (A) With respect to a class of secured claims, the plan provides -(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property; (ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims. 11 U.S.C. § 1129(b)(2)(A); see Aetna Realty Investors, Inc. v. Monarch Beach Venture, Ltd. (In re Monarch Beach Venture, Ltd.), 166 B.R. 428, 433-34 (C.D. Cal. 1993) (discussing the requirements of § 1129(b)(2)(A) applicable to secured claims); supra note 36 and accompanying text (discussing the cram down of secured claims).
298. See In re Waste Conversion Techs., Inc., 205 B.R. 1004 (D. Conn. 1997) (discussing right of secured creditor to receive adequate protection in the bankruptcy proceeding to protect against the erosion of its secured interest, stating "there is no reason to divest the secured creditor of its interest, unless the adequate protection is 'a substitute of the most indubitable equivalence' ") (quoting In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935)); Friedman, supra note 36 (discussing the rights of secured creditors in the cram down context, and the protections afforded them, including the general right to the preservation of the value of their secured interests).
299. See supra note 235 and accompanying text.
300. Section 1129(b)(2)(C) providing for the cram down of secured claims, states: (2) For purposes of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements: (C) With respect to a class of interests -(i) the plan provides that each holder of an interest of such class receive or retain on account of such interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or (ii) the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property. 11 U.S.C. § 1129(b)(2)(C); see supra note 38 (discussing the cram down of interests).
301. See Koelbl v. Glessing (In re Koelbl), 751 F.2d 137, 140 (2d Cir. 1984) (observing that "[t]he 'fair and equitable' requirement [of § 1129(b)(2) of the Code, which includes the absolute priority rule] does not look toward protection of debtor interests, but rather toward protection of dissenting creditor interests, absent the value of the ongoing business being large enough to support protection of the debtors"); Scolnick v. Connecticut Tel. & Elec. Corp., 265 F.2d 133, 135 (2d Cir. 1959) (stating that "since there was not near enough money . . . to pay the general creditors in full, the [subordinated] debenture holders had no standing - they were in no way adversely affected by this plan"); Union Trust Co. v. Wagner (In re Central Funding Corp.), 75 F.2d 256, 259 (2d Cir. 1935) ("In common parlance that term [reorganization] is not limited to cases where the rights of all persons interested in a corporation, whether lienors, general creditors, or stockholders, are made to survive under some new corporate arrangement. Not infrequently the rights of some of these classes have become so worthless that they deserve and receive no recognition in the reorganization.").
302. See supra notes 38-40.
303. See 11 U.S.C. § 1129(b)(2)(B). Section 1129(b)(2)(B), dealing with unsecured claims, provides as follows: (2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements: (B) With respect to a class of unsecured claims -(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. Id. § 1129(b).
304. See supra notes 38-39 and accompanying text.
305. See supra note 220 and accompanying text.
306. See Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership, 119 S. Ct. 1411, 1420 (1999) (reciting these policies).
307. See Warren, supra note 39, at 348 (explaining that "[u]nder any system [of debt collection], both debtors and creditors can be counted on to press whatever advantages they may have"). Cf. Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions, 91 YALE L.J. 698, 718 (1982) (observing that "[e]xisting holders of control, no less than prospective purchasers, . . . have an incentive to put their hands in the til").
308. See Warren, supra note 39, at 348 (explaining that "[u]nder any system [of debt collection], both debtors and creditors can be counted on to press whatever advantages they may have"). Cf. Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions, 91 YALE L.J. 698, 718 (1982) (observing that "[e]xisting holders of control, no less than prospective purchasers, . . . have an incentive to put their hands in the til").
309. See supra notes 235-41 and accompanying text.
310. Of course, shareholders that do not approve of the firm's investment choices may also sell their shares. This possibility also exists in many bankruptcy cases, in which residual claimants are free to sell their claims in the secondary "distressed debt" market, if such a market exists for that particular case. See generally Chaim J. Fortgang & Thomas Moers Mayer, Trading Claims and Taking Control of Corporations in Chapter 11, 12 CARDOZO L. REV. 1 (1990) (discussing claims trading generally).
311. See Robert C. Clark, Vote Buying and Corporate Law, 29 CASE W. RES. L. REV. 776, 789-99 (1979) (observing that "self-dealing can occur at any time in a corporation's life . . . . If the explanation is that the rules against self-dealing . . . are not very effective, then the proper response is to make these rules stricter or to enforce them more rigorously").
312. See Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 586 (6th Cir. 1986) ("[T]here must be some limit on a debtor's power to classify creditors . . . . Unless there is some requirement of keeping similar claims together, nothing would stand in the way of a debtor seeking out a few impaired creditors (or even one such creditor) who will vote for the plan and placing them in their own class.").
313. American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 146 (1940); In re Lettick Typografic, 103 B.R. 32, 38 (Bankr. D. Conn. 1989) (stating that "[c]lasses must be carefully scrutinized to prevent manipulative classifications from eroding the Bankruptcy Code goal of affording similar treatment to similar claims"); see also supra note 43 (discussing the concept of "gerrymandering").
314. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541 (1946) (recognizing that the doctrine of unfair discrimination exists in part to ensure equality of distribution among similarly situated claimants); Avon Park, 311 U.S. at 147 (same).
315. Flynn v. Loewer Realty Co. (In re Loewer's Gambrinus Brewery Co.), 167 F.2d 318, 320 (2d Cir. 1948) (Hand, J., concurring). Equality of treatment among residual claimants is also a policy of the federal securities laws. See Andre, supra note 54, at 589 (discussing the rules under the Williams Act "requiring the bidder [in a tender offer] to afford equal treatment to each of the target's shareholders").
316. See In re Iowa R.R. Co. v. Union Pac. R.R. Co., 840 F.2d 535, 536 (7th Cir. 1988) (observing that creditors of the same rank all have an equivalent expectation of repayment on account of their valid claims).
317. See supra note 26 (discussing the ability of bankruptcy law to interfere with normal commercial relations).
318. See Brunstad & Sigal, supra note 9, at 1534-35; see also Butner v. United States, 440 U.S. 48, 55 (1979). As the Court stated in Butner. Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving "a windfall merely by reason of the happenstance of bankruptcy." Id. (quoting Lewis v. Manufacturers Nat'l Bank, 364 U.S. 603, 609 (1961)).
319. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1277 (5th Cir. 1991) (observing one of the purposes of § 1122 to be to ensure that "creditors with claims of similar priority against the debtor's assets are treated similarly"); In re Gibbs, 230 B.R. 471, 474 (Bankr. D. Conn. 1999) (stating that "[a] fundamental principle of [classification] is that similar claims must be classified together").
320. See supra note 43 (discussing the concept of "gerrymandering"); supra note 92 (citing cases proscribing gerrymandering).
321. See Warren, supra note 39, at 346-47 (explaining how "[t]he Bankruptcy Code reduces the costs of collection from a troubled debtor by collectivizing creditor activities").
322. Cf. In re Jartran, Inc., 44 B.R. 331, 397 (Bankr. N.D. Ill. 1984) (observing that "the purpose and intended goal of § 1122(b) is the reduction of administrative costs accomplished by reducing the number of claims to be dealt with post-petition").
323. See supra note 88 and accompanying text (discussing hold-out behavior in the plan confirmation process); supra note 263 (discussing tendencies of creditors and debtors to behave in self-interested ways).
324. Mason v. Paradise Irrigation Dist., 326 U.S. 536, 542 (1946).
325. Id. at 543. As the Court further explained: "Without the inducement new money could not be obtained." Id. at 542.
326. Id. at 544.
327. See supra note 46; see also supra note 99 (reciting text of § 1123(a)(4)).
328. See supra note 43 (discussing the concept of gerrymandering); supra note 92 (citing cases regarding gerrymandering).
329. See supra note 80 (discussing the concept of "impairment" and "unimpairment").
330. Cf. In re The Leslie Fay Cos., 207 B.R. 764, 792-93 (Bankr. S.D.N.Y. 1997) (holding that management's receipt of stock options under the plan did not discriminate unfairly against other shareholders who would not receive the same treatment where stock options were issued as part of management's ongoing employment services under stock option arrangement).
331. See American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 145-46 (1940) (recognizing the broad powers of the bankruptcy court to police the voting process).
332. See 11 U.S.C. § 510(a).
333. See supra note 168 and accompanying text.
334. Thus, the exception is necessary to avoid creating a "perverse incentive" for subordinated creditors to challenge the subordinated status that they bargained for outside the bankruptcy context. See Brunstad & Sigal, supra note 9, at 1524-25 n.206 (discussing the concept of a "perverse incentive").
335. See In re Crosscreek Apartments, Ltd., 213 B.R. 521, 538 (Bankr. E.D. Tenn. 1997) (observing that "trade creditors generally anticipate payment on a short-term basis, while a [secured] lender with a deficiency claim usually holds [a] long-term note and has no expectation of quick payment").
336. See In re Foxridge Ltd. Partnership, 238 B.R. 810, 818 (Bankr. WD. Mo. 1999) (observing that the separate classification of similar claims was not impermissible where, among other things, "[i]f all limited partners had been placed in the same class, their vote still would have been to accept the Plan"); see also Menard-Sandord v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 698 (4th Cir. 1989) (declining to decide whether the district court's voting procedure under § 1126 was proper "because, in view of the outcome of the vote, the challenged procedure was at most harmless error"); Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 647 (2d Cir. 1988) (same); cf.ITT v. Lam (In re Colorado Corp.), 531 F.2d 463, 470 (10th Cir. 1976) (denial of right to vote not harmless error where votes could have affected outcome).
337. American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 146 (1940) (citing First Nat'l Bank v. Poland Union, 109 F.2d 54, 55 (2d Cir. 1940); see also Kaufman County Levee Improvement Dist. No. 4 v. Mitchell, 116 F.2d 959 (5th Cir. 1941) (concluding in a municipal bankruptcy case that
338. 11 U.S.C. § 1129(a)(10) (1994). The term "insider" is defined in § 101(31) of the Code. See id. § 101(31) (defining an insider as, among other things, a "person in control of the debtor"); In re Hillside Park Apartments, L.P., 205 B.R. 177, 184 (Bankr. W.D. Mo. 1997) (discussing test to determine insider status of a party). As explained by one court, the reason for disregarding the vote of an insider is to preserve the integrity of the voting process, specifically the goal of eliciting independent business judgment: "[section 1129(a)(10)'s exclusion of insiders] recognizes that where a creditor is under the debtor's proverbial thumb due to the parties' affinity of interests, that creditor is less likely, perhaps even incapable, of casting a vote formed on an independent judgment of what will best serve his interests, much less those of his fellow class members." In re Gilbert, 104 B.R. 206, 210 (Bankr. W.D. Mo. 1989).
339. See Gilbert, 104 B.R. at 210 (stating that "[i]t is not difficult to envision . . . a secured creditor in a single asset case who, given the size and nature of its claim, could dominate virtually every aspect of the debtor's reorganization, particularly the treatment of junior lienholders").
340. H.R. REP. NO. 95-595, at 411 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6367 (emphasis added); see also Carlson, supra note 4, at 615 n.204 (discussing legislation history to § 1126(e)). Section 1126(e) provides: "On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title." 11 U.S.C. § 1126(e).
341. Cf. Heartland Fed. Sav. & Loan Ass'n v. Briscoe Enters., Ltd., II (In re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1167 (5th Cir. 1993) (permitting separate classification of city's claim given city's non-creditor interest in debtor); Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 586-87 (6th Cir. 1986) (permitting the separate classification and treatment of the union's claim because, unlike other creditors, the union had a non-creditor interest in the ongoing relationship between its members and the debtor).
342. See In re Woodbrook Assocs., 19 F.3d 312, 318-19 (7th Cir. 1994) (concluding that the separate classification of a secured creditor's nonrecourse deficiency claim is permissible under the Code); cf. Boston Post Rd. Ltd, Partnership v. Federal Deposit Ins. Corp. (In re Boston Post Rd. Ltd. Partnership), 21 F.3d 4-77, 483 (2d Cir. 1994) (concluding that a secured creditor's nonrecourse deficiency claim should be classified together with other unsecured claims); Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 502 (4th Cir. 1992) (same); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278 (5th Cir. 1991) (same).
343. See infra note 120 and accompanying text (quoting from Avon Park). 299. Cf. Carlson, supra note 4, at 567 n.7 (observing that "[t]he undersecured creditor in a single-asset case will tend to insist that its claim be classified with the others, in order to sabotage the plan").
344. As Justice Brandeis explained: "The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment. . . . [T] he Fifth Amendment commands that, however great the nation's need, private property shall not be thus taken even for a wholly public use without just compensation." Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 602 (1935); see also Dewsnup v. Timm, 502 U.S. 410, 410-19 (1992) (discussing Radford in the context of construing § 506(a) of the Bankruptcy Code and the treatment of secured claims); United States v. Security Indus. Bank, 459 U.S. 70, 74-79 (1982) (discussing Radford and application of the Fifth Amendment in the bankruptcy context).
345. See 11 U.S.C. § 363(e) (1994) (prescribing a secured party's right to demand adequate protection); id. § 361 (defining the concept of "adequate protection"); United States v. Whiting Pools, 462 U.S. 198, 204 (1983) (stating that, in order to provide adequate protection, "[a]t the secured creditor's insistence, the bankruptcy court must place such limits or conditions on the trustee's power to sell, use, or lease property as are necessary to protect the creditor"); In re Waste Conversion Techs., Inc., 205 B.R. 1004, 1007 (D. Conn. 1997) (explaining the concept of "adequate protection"). 302. See supra notes 9, 89, 253-59, and accompanying text (discussing the Code's fair and equitable standard).
346. Of course, although the separate classification of a secured party's deficiency claim may be appropriate in many instances, it is not necessarily required in every case. For example, if the secured party's deficiency claim is of such a size that the placement of the claim in the general class of residual claims would not be determinative of the outcome of the vote, there may be no reason for separate classification. In addition, if the parties arrive at a consensual resolution of the debtor's bankruptcy case, and that resolution combines residual claims into a single class (including the secured party's deficiency claim), a single class may be permissible.
347. See In re Sagewood Manor Assocs., Ltd. Partnership, 223 B.R. 756, 768 (Bankr. D. Nev. 1998) (explaining the concept of "present value"). As the court explained: Present value is a term which reflects the time value of money. The "present value analysis calculates the value of property or cash to be received in the future." . . . This "analysis assumes that the payments will be made as promised. Compensation for the risk that the promised payments will be made is taken into account when selecting the components of the analysis, such as the interest rates to be used." . . . A present value analysis has two steps. "First, the amounts to be paid must be calculated . . . . Second, the amounts promised to be paid in the future are reduced, or discounted, to current dollar values. This is done by selecting a rate at which an amount today could be invested to yield the promised amount when it is promised to be paid." Id. (citations omitted).
348. See supra notes 48, 168, and accompanying text (discussing the treatment of subordinated claims).
349. Cf. Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 848 (2d Cir. 1966) (Friendly, J., concurring) (stating that "[e] quality among creditors who have lawfully bargained for different treatment is not equity but its opposite").
350. Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541-42 (1946).
351. There may be instances, of course, in which the creditor's agreement to continue to do business with the debtor may be reasonably equivalent to some amount of enhanced treatment. Suppose, for example, that the creditor's claim represents significant development costs incurred in manufacturing a special product line for the debtor. Suppose further that sales of the product represent a significant source of future profit for the debtor, but the creditor cannot feasibly continue to do business with the debtor unless it receives enhanced treatment of its claim under the plan. In such a situation, the creditor might receive enhanced treatment in exchange for the risks associated with its continuing to do business with the debtor, and the benefits bestowed on the debtor and its other creditors.
352. See In re Georgetown Ltd. Partnership, 209 B.R. 763, 772 (Bankr. M.D. Ga. 1997) (stating that "[w]here, in order to successfully reorganize, it is necessary for a debtor to continue conducting business with certain unsecured creditors, a debtor is justified in separately classifying those creditors from other unsecured creditors"). In Georgetown the purported necessity did not appear to rise above mere convenience: The preferred creditors to be paid in full are "trade creditors with whom Debtors intend[] to have a continuing business relationship. It is reasonable to predict that no continuing business relationship between Debtors and [the disfavored creditor] is possible. By itself, this is a sufficient reason for the separate classifications." Id. at 772.