Bankruptcy courts are regularly faced with concerns over fairness and equity. One of these concerns is ensuring that no claimant receives more than its allowed claim. Typically, overpayment occurs when a junior creditor is paid before a senior creditor has been paid in full. However, courts have found that the “fair and equitable” provision of section 1129(b) applies to senior creditors as well. In these cases, courts have found a plan of reorganization to violate section 1129 when such plan would cause a senior creditor to be paid a premium over its allowed claim. Under such circumstances, a plan of reorganization will not be confirmed.
Part I of this paper discusses plan confirmation under section 1129, including the requirements for a plan of reorganization, how a plan may still be confirmed over the objection of dissenting classes through the cramdown power, and the “fair and equitable” principle. Part II analyzes the legal standards some courts apply in determining whether a plan is fair and equitable, specifically when the plan has overpaid senior creditors. The memo concludes by recognizing that a plan of reorganization may be objected to when a senior creditor has been paid more than its allowed claim, and by squaring this conclusion with the basic notions of fairness and equity embodied in the bankruptcy process.