11 U.S.C. Section 1123 - Contents of Chapter 11 Plan

What Is Section 1123?

Section 1123 is the architectural blueprint for every Chapter 11 plan. Subsection (a) lists the seven mandatory provisions every plan must contain; subsection (b) lists the eight permissive provisions a plan may contain; subsection (c) addresses individual debtors' interests in property; and subsection (d) addresses the calculation of cure amounts. Together these subsections define what a plan is permitted to do and what it is required to do before the court can reach the confirmation standards of Section 1129.

Mandatory Provisions: Section 1123(a)

Section 1123(a) requires every Chapter 11 plan to do seven things:

1. (a)(1): Designate, subject to Section 1122, classes of claims and interests other than priority claims of the kinds specified in Sections 507(a)(2), (a)(3), and (a)(8).
2. (a)(2): Specify any class of claims or interests not impaired under the plan.
3. (a)(3): Specify the treatment of any class of claims or interests that is impaired.
4. (a)(4): Provide the same treatment for each claim or interest in a particular class unless the claim or interest holder agrees to less-favorable treatment.
5. (a)(5): Provide adequate means for the plan's implementation (the "means-of-execution" requirement), enumerated with thirteen non-exclusive examples ranging from retention of property by the debtor, sale of property, merger, modification of the debtor's charter, satisfaction of liens, and many other operational tools.
6. (a)(6): Provide for the inclusion in the charter of the debtor (if a corporation) of a prohibition on issuance of non-voting equity securities and an appropriate distribution of voting power among classes.
7. (a)(7): Contain only provisions consistent with the interests of creditors and equity security holders and with public policy with respect to selection of officers, directors, or trustees.
8. (a)(8): For individual debtor cases, provide for payment to creditors of all or such portion of the debtor's earnings as is necessary for plan execution.

A plan that fails any of these requirements cannot be confirmed regardless of voting results or fair-and-equitable analysis.

Permissive Provisions: Section 1123(b)

Section 1123(b) lists provisions a plan "may" include. These are tools available to the plan proponent but not required:

• (b)(1): Impair or leave unimpaired any class of claims, secured or unsecured, or interests.
• (b)(2): Subject to Section 365, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease not previously rejected.
• (b)(3): Provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or the retention and enforcement by the debtor, by the trustee, or by a representative of the estate of any such claim or interest.
• (b)(4): Provide for the sale of all or substantially all of the property of the estate and the distribution of the proceeds.
• (b)(5): Modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.
• (b)(6): Include any other appropriate provision not inconsistent with the applicable provisions of the Code.

Subsection (b)(3)'s retention of estate claims is the statutory basis for the "litigation trust" and "creditor trust" structures common in larger Chapter 11 reorganizations.

Section 1123(c) and (d): Individual Debtors and Cure Amounts

Section 1123(c) addresses individual Chapter 11 debtors and prohibits plan provisions that propose to use exempt property for plan funding without the debtor's consent (consistent with the exemption regime of Section 522).

Section 1123(d) was added by BAPCPA in 2005 and provides that if a plan proposes to cure a default, the amount required to be cured shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law. This provision overruled cases that had held cure amounts could be calculated without reference to contractual default-rate interest or attorneys' fees, and it had the practical effect of increasing cure costs in many cases.

Section 1123(b)(5) and the Anti-Modification Carve-Out

Subsection (b)(5) is the Chapter 11 analog to the Chapter 13 anti-modification rule of Section 1322(b)(2). A Chapter 11 plan generally may modify the rights of secured creditors, but it may not modify a claim secured only by a security interest in real property that is the debtor's principal residence.

This makes Chapter 11 a less attractive vehicle than Chapter 13 for individual debtors trying to strip down a mortgage. The U.S. Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), interpreted the parallel Chapter 13 provision and its reasoning has been extended to Section 1123(b)(5).

Major Doctrinal Cases

• Nobelman v. American Savings Bank, 508 U.S. 324 (1993) - Anti-modification rule precludes strip-down of wholly-undersecured residential mortgage; reasoning applied to Section 1123(b)(5).
• In re American Capital Equipment, LLC, 688 F.3d 145 (3d Cir. 2012) - Discussed the patent-unconfirmability inquiry under Section 1129 in light of plan-content defects.
• In re Tribune Company, 464 B.R. 126 (Bankr. D. Del. 2011) - Analyzed third-party releases as permissive plan provisions under Section 1123(b)(6).
• In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000) - Limited third-party releases of non-debtors under Section 1123(b)(6).
• In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992) - Approved litigation-trust mechanism under Section 1123(b)(3)(B).
• In re Lazy Days' RV Center, Inc., 724 F.3d 418 (3d Cir. 2013) - Cure amount under Section 1123(d) includes contractual default-rate interest.

Related Bankruptcy Code Sections

• Section 1121 - Who may file a plan
• Section 1122 - Classification of claims
• Section 1125 - Disclosure statement requirements
• Section 1126 - Acceptance of plan
• Section 1129 - Confirmation of plan
• Section 1141 - Effect of confirmation

For deeper coverage of specific 1123 issues, see the primers at section-1123-plan-contents/.