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TITLE 11–BANKRUPTCY

CHAPTER 11– REORGANIZATION

Sub Chapter II – The Plan

Sec. 1124. Impairment of claims or interests

   Except as provided in section 1123(a)(4) of this title, 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 that occurred before or after the 
        commencement of the case under this title, other than a default 
        of a kind specified in section 365(b)(2) of this title;
            (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 on such contractual provision or such applicable law; 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.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2633; Pub. L. 98-353, title III, 
Sec. 508, July 10, 1984, 98 Stat. 385; Pub. L. 103-394, title II, 
Sec. 213(d), Oct. 22, 1994, 108 Stat. 4126.)


                      Historical and Revision Notes

                         legislative statements

    Section 1124 of the House amendment is derived from a similar 
provision in the House bill and Senate amendment. The section defines 
the new concept of ``impairment'' of claims or interests; the concept 
differs significantly from the concept of ``materially and adversely 
affected'' under the Bankruptcy Act [former title 11]. Section 1124(3) 
of the House amendment provides that a holder of a claim or interest is 
not impaired, if the plan provides that the holder will receive the 
allowed amount of the holder's claim, or in the case of an interest with 
a fixed liquidation preference or redemption price, the greater of such 
price. This adopts the position contained in the House bill and rejects 
the contrary standard contained in the Senate amendment.
    Section 1124(3) of the House amendment rejects a provision contained 
in section 1124(3)(B)(iii) of the House bill which would have considered 
a class of interest not to be impaired by virtue of the fact that the 
plan provided cash or property for the value of the holder's interest in 
the debtor.
    The effect of the House amendment is to permit an interest not to be 
impaired only if the interest has a fixed liquidation preference or 
redemption price. Therefore, a class of interests such as common stock, 
must either accept a plan under section 1129(a)(8), or the plan must 
satisfy the requirements of section 1129(b)(2)(C) in order for a plan to 
be confirmed.
    A compromise reflected in section 1124(2)(C) of the House amendment 
indicates that a class of claims is not impaired under the circumstances 
of section 1124(2) if damages are paid to rectify reasonable reliance 
engaged in by the holder of a claim or interest arising from the 
prepetition breach of a contractual provision, such as an ipso facto or 
bankruptcy clause, or law. Where the rights of third parties are 
concerned, such as in the case of lease premises which have been 
rerented to a third party, it is not intended that there will be 
adequate damages to compensate the third party.


                        senate report no. 95-989

    The basic concept underlying this section is not new. It rests 
essentially on Section 107 of Chapter X ([former] 11 U.S.C. 507), which 
states that creditors or stockholders or any class thereof ``shall be 
deemed to be `affected' by a plan only if their or its interest shall be 
materially and adversely affected thereby.''
    This section is designated to indicate when contractual rights of 
creditors or interest holders are not materially affected. It specifies 
three ways in which the plan may leave a claim or interest unimpaired.
    First, the plan may propose not to alter the legal, equitable, or 
contractual rights to which the claim or interest entitled its holder.
    Second, a claim or interest is unimpaired by curing the effect of a 
default and reinstating the original terms of an obligation when 
maturity was brought on or accelerated by the default. The intervention 
of bankruptcy and the defaults represent a temporary crisis which the 
plan of reorganization is intended to clear away. The holder of a claim 
or interest who under the plan is restored to his original position, 
when others receive less or get nothing at all, is fortunate indeed and 
has no cause to complain. Curing of the default and the assumption of 
the debt in accordance with its terms is an important reorganization 
technique for dealing with a particular class of claims, especially 
secured claims.
    Third, a claim or interest is unimpaired if the plan provides for 
their payment in cash. In the case of a debt liability, the cash payment 
is for the allowed amount of the claim, which does not include a 
redemption premium. If it is an equity security with a fixed liquidation 
preference, such as a preferred stock, the allowed amount is such 
liquidation preference, with no redemption premium. With respect to any 
other equity security, such as a common stock, cash payment must be 
equal to the ``value of such holder's interest in the debtor.''
    Section 1124 does not include payment ``in property'' other than 
cash. Except for a rare case, claims or interests are not by their terms 
payable in property, but a plan may so provide and those affected 
thereby may accept or reject the proposed plan. They may not be forced 
to accept a plan declaring the holders' claims or interests to be 
``unimpaired.''


                         house report no. 95-595

    This section is new. It is designed to indicate when contractual 
rights of creditors or interest holders are not materially affected. The 
section specifies three ways in which the plan may leave a claim or 
interest unimpaired.
    First, the plan may propose not to alter the legal, equitable, or 
contractual rights to which the claim or interest entitled its holder.
    Second, the plan is permitted to reinstate a claim or interest and 
thus leave it unimpaired. Reinstatement consists of curing any default 
(other than a default under an ipso facto or bankruptcy clause) and 
reinstatement of the maturity of the claim or interest. Further, the 
plan may not otherwise alter any legal, equitable, or contractual right 
to which the claim or interest entitles its holder.
    Third, the plan may leave a claim or interest unimpaired by paying 
its amount in full other than in securities of the debtor, an affiliate 
of the debtor participating in a joint plan, or a successor to the 
debtor. These securities are excluded because determination of their 
value would require a valuation of the business being reorganized. Use 
of them to pay a creditor or equity security holder without his consent 
may be done only under section 1129(b) and only after a valuation of the 
debtor. Under this paragraph, the plan must pay the allowed amount of 
the claim in full, in cash or other property, or, in the case of an 
equity security, must pay the greatest of any fixed liquidation 
preference to which the terms of the equity security entitle its holder, 
any fixed price at which the debtor, under the terms of the equity 
security may redeem such equity security, and the value, as of the 
effective date of the plan, of the holder's interest in the debtor. The 
value of the holder's interest need not be determined precisely by 
valuing the debtor's business if such value is clearly below redemption 
or liquidation preference values. If such value would require a full-
scale valuation of the business, then such interest should be treated as 
impaired. But, if the debtor corporation is clearly insolvent, then the 
value of the common stock holder's interest in the debtor is zero, and 
offering them nothing under the plan of reorganization will not impair 
their rights.
    ``Value, as of the effective date of the plan,'' as used in 
paragraph (3) and in proposed 11 U.S.C. 1179(a)(7)(B), 1129(a)(9), 
1129(b), 1172(2), 1325(a)(4), 1325(a)(5)(B), and 1328(b), indicates that 
the promised payment under the plan must be discounted to present value 
as of the effective date of the plan. The discounting should be based 
only on the unpaid balance of the amount due under the plan, until that 
amount, including interest, is paid in full.


                               Amendments

    1994--Par. (3). Pub. L. 103-394 struck out par. (3) which read as 
follows: ``provides that, on the effective date of the plan, the holder 
of such claim or interest receives, on account of such claim or 
interest, cash equal to--
        ``(A) with respect to a claim, the allowed amount of such claim; 
    or
        ``(B) with respect to an interest, if applicable, the greater 
    of--
            ``(i) any fixed liquidation preference to which the terms of 
        any security representing such interest entitle the holder of 
        such interest; or
            ``(ii) any fixed price at which the debtor, under the terms 
        of such security, may redeem such security from such holder.''
    1984--Par. (2)(A). Pub. L. 98-353, Sec. 508(1), amended subpar. (A) 
generally. Prior to amendment, subpar. (A) read as follows: ``cures any 
such default, other than a default of a kind specified in section 
365(b)(2) of this title, that occurred before or after the commencement 
of the case under this title;''.
    Par. (3)(B)(i). Pub. L. 98-353, Sec. 508(2), substituted ``or'' for 
``and''.


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in section 901 of this title.



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