the court shall confirm a plan if all of the following requirements are met:
1. 1129(a)(7), Best Interest Test: need to show that unsecured creditors will get as least under Ch. 11 what they would get under Ch. 7.
a. If only asset is encumbered, then UC’s get nothing, so if plan gives them something, then the best interest test is passed.
b. In determining best interest, always look to see if there are any avoidable preferences that would put unsecureds in a better position by adding to the estate. Ex. UCs w/ 1.25 mil in debts would get nothing under Ch. 7 and are getting 50 cents on the dollar in Ch. 11—so best interest test is passed. But, if there is a 750k avoidable preference, that means that in Ch. 7, UC’s would get 60 cents on the dollar. Given that, the best interest test is failed. Note that no one actually has to do the avoiding—dealing w/ what would happen hypothetically.
c. This test must be done for each creditor. They must either approve or if they don’t approve, they have to at least be getting the best interest.
d. Most arg that best interest test is based on how much you will get under the plan, not including collateral effects like tax issues. Ex. Creditor might argue that he wants liquidation b/c that will allow him to deduct for loss now, instead of deducting loss over time w/ Ch. 11. Better to deduct now than later, so best interest test not met. But, if we don’t consider collateral effects like this, then this argument fails.
e. Present value requirement: liquidation now, will give you more value than the same amount paid over time through the plan. So, you have to get present value through the plan on amount that you would get in liquidation in order to solve this test—this is indicated under the statute in §1129(a)(7)(A)(ii). This doesn’t mean that creditor gets PV on whole claim—only on amount he would get in liquidation. May get this w/ a flat amount plus interest, or a flat amount that takes the interest into account. The rate is supposed to be the market rate.
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