5th Circuit: Regardless
of Motives, Impairment
Is Still Impairment
BY MICHAEL M. PARKER, PARTNER, FULBRIGHT & JAWORSKI, L.L.P.
In William Shakespeare’s Romeo & Juliet, the heroine famously argues that names do not matter, only what
things are. “What’s in a name? That
which we call a rose by any other name
would smell as sweet,” Juliet reflected.
Romeo & Juliet, Act II, Scene II. In
Western Real Estate Equities, L.L.C. v.
Village at Camp Bowie I, L.P., (In re
Village at Camp Bowie, L.P.) (Case No.
12-10271), the 5th U.S. Circuit Court of
Appeals agreed that all that matters is
what things are, not what they are called.
approach, §1129(a)( 10) 1 only recognizes
impairment driven by economic need. 2
Subsequently, the 9th U.S. Circuit Court
of Appeals disagreed, finding that
nothing in §1124 explicitly prohibited
the artificial impairment of claims to
cram down a plan of reorganization.
Matter of L&J Anaheim Associates,
995 F.2d 940, 943 (9th Cir. 1993).
Employing a statutory analysis of
“impairment,” the 5th Circuit dispensed
with arguments about artificial versus
economic impairment and affirmed a
Bankruptcy Court’s order finding that
impairment of a claim—regardless of
the motivation behind the impairment—
is still impairment. In short, the 5th
Circuit concluded that nothing in
the U.S. Bankruptcy Code prohibits
artificial impairment of a claim in
bankruptcy to achieve a legitimate and
honest reorganizational purpose.
The 9th Circuit explicitly left open the
possibility that artificial impairment
might offend a plan proponent’s duty
of good faith under §1129(a)( 3).
After concluding that two of its
prior decisions3 that were critical of
artificial impairment of claims were
not precedential, the 5th Circuit
sided with the 9th Circuit. 4
Bankruptcy courts and at least two
circuit courts are divided on the subject
of artificial impairment of claims.
The 5th Circuit’s opinion adds weight
to the debate and to any request for
the U.S. Supreme Court to decide
the issue dividing the circuits.
The 8th U.S. Circuit Court of Appeals,
the first circuit court to address the issue,
concluded that artificial impairment
impairment) was prohibited. Matter of
Windsor on the River Associates, Ltd., 7
F.3d 127, 132 (8th Cir. 1993). The Windsor
To circumvent a
in the past have
unsecured claim. This
allow a debtor to obtain an
impaired, unsecured class of
trade creditors whose plan
approval was essential to the
cram down process. The 5th
Circuit and substantial other
authority have limited, if
not eliminated, the ability
of a debtor to gerrymander
classes of creditors under
the code solely for the
purpose of obtaining
classes of creditors.
Matter of Greystone III
Joint Venture, 995 F.2d
1274, 1277-81 (5th Circ.
1991) (similar claims must
be treated similarly).
Unlike a consensual plan of
reorganization, a cram down plan
seeks court approval of a plan over the
objection of at least one impaired class
of creditors. To confirm a cram down
plan of reorganization, a bankruptcy
debtor must obtain the consent of at least
one “impaired” class of its creditors.
Even when a debtor can
to create an impaired,
consenting class of
creditors to vote for
In single-asset real estate bankruptcies
with an underwater debtor (collateral
value not sufficient to cover debt
obligations), which are prevalent,
achieving the approval of an impaired,
consenting class of creditors can be
difficult. A debtor’s secured lender
typically holds an unsecured claim (the
undersecured portion of its secured
claim) that dwarfs the size of other
unsecured creditors in the case. Thus,
the lender controls not only the (probably
impaired) secured class of creditors,