Academic journal article Texas International Law Journal

Classification and Treatment of Foreign Claims in U.S. Bankruptcy Proceedings

Academic journal article Texas International Law Journal

Classification and Treatment of Foreign Claims in U.S. Bankruptcy Proceedings

Article excerpt

SUMMARY

I. INTRODUCTION

This paper will generally discuss the issue of proper classification of bankruptcy claims in the formulation of a Chapter 11 plan of reorganization, with particular emphasis on the classification and treatment of foreign product liability claims. Of course, bankruptcy courts in the United States, like other federal courts, do not have jurisdiction over foreign claimants unless those claimants submit themselves to the jurisdiction of the court. While these jurisdictional questions are beyond the scope of this paper, we will assume that the foreign claimants have submitted themselves to the jurisdiction of the United States bankruptcy court by filing a proof of claim in the bankruptcy case.

II. RULES REGARDING PROPER CLASSIFICATION OF CLAIMS

A. In General

Section 1122 of the Bankruptcy Code governs classification of claims and provides as follows:

(1) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.

(2) 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.1

B. Why Separate Claims into Classes?

1. Needed for a Confirmable Plan

Section 1129(a)(1) of the Bankruptcy Code provides that the court may confirm a plan only if the plan complies with the applicable provisions of Chapter 11. Section 1123(a) generally provides that the plan shall

(1) designate, subject to section 1122 . . . , classes of claims, other than claims of a kind specified in section 507(a)(1), 507(a)(2), or 507(a)(8) . . . , and classes of interests;

(2) specify any class of claims or interests that is not impaired under the plan;

(3) specify the treatment of any class of claims or interests that is impaired under the plan; [and]

(4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment....2

2. Underlying Purposes

Classification of claims serves two purposes under the Bankruptcy Code: providing for the treatment of claims under the plan3 and providing a mechanism to determine if the vote was sufficient to allow confirmation of the plan.4

a. Treatment of Claims Under the Plan

In order for a plan to be confirmable, the plan must accord each claim or interest within a class the same treatment, unless a creditor or interest holder agrees to less favorable treatment.5 Thus, the decision to classify a claim or interest within a particular class will affect the distributions received by that creditor or interest holder.

b. Voting to Determine Whether a Plan Can Be Confirmed

Similarly, how claims are classified may affect the outcome of voting on a plan. Unless the "cramdown" provisions of section 1129(b) are triggered, a plan must satisfy the thirteen requirements set forth in section 1129(a) to be confirmed. Among such requirements are section 1129(a)(8), requiring that each impaired class approve the plan, and section 1129(a)(10), requiring the approval of at least one class of impaired, non-insider creditors.

Proper classification of claims ensures that in the balloting on a plan, junior claim holders do not deny senior claim holders their senior rights under the absolute priority rule, and that senior claim holders do not take more than their entitlement. The Bankruptcy Code generally requires separate classes for secured claims, unsecured claims, and equity security holders because they have different state law rights with respect to the debtor's assets and different priorities with respect to each other. If the Bankruptcy Code did not require separate classification of dissimilar claims, a majority of claim holders might vote to deprive the minority of their rights in violation of the absolute priority rule. …

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