Court Opinion

ID: 9686595
Source: CourtListenerOpinion
Date Created: 2023-08-24 15:57:21.586922+00
Date Added: 2024-06-11T18:18:20.684651
License: Public Domain

HUGHES, Bankruptcy Judge,
concurring:
I fully concur in part II and I concur in Part I’s result. I write separately because I believe the panel’s construction of 11 U.S.C. § 1322(a)(3) and § 1322(b)(1) is erroneous.
Under the plan, an insurance company and a supplier would be paid 100% on their claims. All other unsecured creditors would be paid 50%. The debtor’s justification for different treatment of the 100% class is that he needs their services to remain in business. The court held that the classification was rational and that the plan “does not discriminate unfairly against creditors in designated classes.”
The majority reads the controlling statutes as permitting discrimination among creditors of the same class so long as it is not unfair but concludes that the debtor has failed to satisfy even this burden. I would hold that the classification is impermissible under 11 U.S.C. § 1322(b)(1) and violates 11 U.S.C. § 1322(a)(3) in that the plan does not provide the same treatment to all claims of the same legal nature. I would not reach the unfair discrimination question.
A.
Classification of unsecured creditors was not permitted under the predecessor to Chapter 13. Section 646 of the Bankruptcy Act governed plans under former Chapter XIII. While the plan could provide for secured creditors “severally,” it required that unsecured creditors be provided for “generally.” See, § 646(1), (2) of the Bankruptcy Act as amended. This was read to mean that all unsecured creditors were entitled to equal treatment. Collier on Bankruptcy, 14th Ed. Vol. 10, ¶ 28.02.
Chapter 13 departs from that standard. The relevant provisions are:
Section 1322(b)(1):
“[Subject to subsection (a) and (c) of this section, the plan may] designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated,”;
Section 1122(a):
“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 claims or interest is substantially similar to the other claims or interests of such class.”
*515Section 1122(b):
“A plan may designate a separate class of claims consistent 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.”
Section 1322(a)(3):
“[The plan shall], if the plan classifies claims, provide the same treatment for each claim within a particular class.”
B.
The sole authority for classification of unsecured creditors in Chapter 13 is contained in the following portion of § 1322(b)(1): “[The plan may] designate a class or classes of unsecured creditors as provided in § 1122... ” (Emphasis supplied). Neither the prohibition of unfair discrimination in § 1322(b)(1) nor the limitation contained in § 1322(a)(3) permit classification of unsecured claims. Those provisions impose additional limitations on unsecured claims classification.
The basic limitation, found in § 1122(a), is that claims may be placed in a particular class only if they are substantially similar to other claims of such class. Several courts that have examined this provision under the Code have construed substantial similarity to mean the legal nature of the respective claims. In re McKenzie, 4 B.R. 88 (Bkrtcy.W.D.N.Y., 1980, Creahan, B. J.); In re Iacovoni, 2 B.R. 256 (Bkrtcy.D.Utah, 1980, Mabey, B. J.); In re Montano, 4 B.R. 535 (Bkrtcy.D.D.C.1980, Whelan, B. J.); In re Barnes, 7 B.C.D. 961 (D.D.C.1981).
This is understandable in light of the legislative notes, which state that § 1122 “codifies current ease law surrounding the classification of claims... It requires classification based on the nature of the claims ... classified...” H.R.No.95-595, 95th Cong. 1st Sess. (1977) 406; S.R.No.95-989, 95th Cong. 2nd Sess (1978) 118, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6362.
The case law existing at the time of enactment stemmed from Chapters X and XI of the former Act; in general, these cases looked to “the legal character or the quality of the claim as it relates to the assets of the debtor.” In re Los Angeles Land and Investments, Ltd., 447 F.2d 1366 (9th Cir. 1971); Scherk v. Newton, 152 F.2d 747 (10th Cir. 1945); In re Palisades-On-The-Despiaines, 89 F.2d 214 (7th Cir. 1937).
An example of permissible classification of unsecured claims under the Act involved claims subordinated by contract to others. Bartle v. Markson, 314 F.2d 303 (2nd Cir. 1963).
C.
An exception to the rule limiting classification to claims of the same legal nature is found in § 1122(b). This section permits the debtor to place all creditors whose claims do not exceed a specified court approved amount in one class for purposes of administrative convenience. Case law under the Act permitted this type of classification of smaller claims for convenience of both the parties and the court. See Brockett v. Winkle Terra Cotta Co., 81 F.2d 949, 952 (C.A.8, 1936), In re Realty Associates Security Corp., 53 F.Supp. 1010, 1011 (E.D. N.Y., 1943).
D.
Section 1122(a) is not a model of statutory clarity. In itself, the subsection seems to permit unlimited classification of unsecured claims so long as all claims in each class are “substantially similar to other claims ... of such class.” Read with subsection (b), however, subsection (a) is seen as a prohibition on establishing separate classes of claims whose legal nature or character are not substantially similar. Subsection (b) is expressly excluded from the limitations of subsection (a) [“except as provided in subsection (b) ... ”]. Since it permits designation of a separate class based on the size of the claim, it follows that subsection (a) is not authority for such classification even though small claims would seem to qualify as “substantially similar” to one another. In order to give subsection (a) meaning in relationship to subsection (b), and consistent with the legislation notes cited above, I would hold that subsection (a) permits designation of a separate class of unsecured claims only when the separate class is composed of claims that are substantially dis*516similar in legal nature or character to the debtor’s other unsecured claims. In re McKenzie, supra; In re Iacovoni, supra; In re Montano, supra; In re Barnes, supra.
In short, claims of the same legal nature must be placed in the same class. Scherk v. Newton, supra; In re Palisades-On-The-Desplaines, supra.
E.
Further support for this construction of section 1122(a) as incorporated into section 1322(b)(1) is found in section 1322(a)(3), which requires “the same treatment for each claim within a particular class.”
Read superficially section 1322(a)(3) seems to require that all claims placed within a class designated by the plan receive the same treatment. So read, however, the requirement is without significance because any unequal treatment of claims is by definition classification.
Section 1322(a)(3) has significance, however, if “class” is read to describe the claim rather than the treatment. Thus, a plan that designates different treatment for different claims is acceptable under the § 1322(a)(3) standard only if all claims of the same legal nature or character are provided the same treatment.
F.
In construing § 1322(b)(1) as permitting classification of unsecured claims only when all claims within a particular class are of the same legal nature, I am not unmindful of the numerous decisions that support the majority by analyzing classification on the basis of unfair discrimination alone. See, e.g. In re Gay, 3 B.R. 336 (Bkrtcy.D.Colo., 1980, Keller, B. J.); In re Fizer, 1 B.R. 400 (Bkrtcy.S.D.Ohio, 1979, Sidman, B. J.); In re Utter, 3 B.R. 369 (Bkrtcy.W.D.N.Y., 1980, Hayes, B. J.) as well as cases cited by the majority.
However, in focusing on the element of unfair discrimination, these cases give no weight to § 1122. In my opinion, § 1322(b)(1) does not permit consideration of unfair discrimination until the requirements of § 1122 have been satisfied.
G.
Applying the standard of similar legal nature to the facts of this case, I conclude that the classification was impermissible. The legal character or quality of the claims entitled to full payment cannot be said to be substantially dissimilar to that of the other unsecured claims. Accordingly, the plan violates § 1322(a)(3), § 1322(b)(1) and § 1122(a) and the objection to confirmation on this ground should have been upheld.