## Facts

- Three related debtors (Mastercraft Record Plating, Inc.; Longwear Stamper Corp.; Raleigh Records, Inc.) filed Chapter 11 petitions in 1980 and proceeded slowly toward confirmation.
- In April 1982, the debtors filed a consolidated reorganization plan; in June 1982, the bankruptcy court approved the disclosure statement and solicitation of votes began.
- Keel Manufacturing, Inc., a major creditor, held an arbitration award later reduced to a New York state-court judgment (affirmed on appeal) for roughly $264,838.60 against Mastercraft and Raleigh (among others).
- After disclosure approval, Keel sought to vacate the disclosure order, proposed a competing plan, and filed motions aimed at stopping confirmation of the debtors’ plan.
- The debtors opposed Keel’s motions and filed countermotions; the unsecured creditors’ committee sought, among other relief, disallowance of Keel’s claim and confirmation of the debtors’ plan.
- The debtors’ plan created three unsecured-claim classes: (1) claims under $20,000, (2) claims over $20,000, and (3) disputed claims (apparently including Keel and another disputed creditor); the under/over classes received identical treatment.
- The plan did not state the treatment for the disputed-claims class and did not classify stockholders.

## Issues

1. Whether the previously approved Chapter 11 disclosure statement was inadequate or improperly approved such that the approval order should be vacated.
2. Whether the plan’s classification and stated treatment of claims and equity complied with Chapter 11 requirements, including 11 U.S.C. § 1122.
3. Whether the bankruptcy court could disallow Keel’s claim by looking behind an arbitration award and state-court judgment despite res judicata concerns.

## Decision

- The court denied Keel’s effort to undo disclosure approval, holding the disclosure statement was adequate and properly approved.
- The court found the plan materially defective due to misclassification of unsecured claims, omission of treatment for the disputed-claims class, and failure to classify stockholders.
- The court disallowed Keel’s claim, concluding the judgment could not support an allowed claim against the debtor estates because the debtors were not actually liable on the underlying obligation.

## Legal Principles

- Adequacy of a disclosure statement under 11 U.S.C. § 1125 is distinct from whether a plan is confirmable; a court may approve disclosure yet find the plan substantively deficient.
- Under 11 U.S.C. § 1122, separate classification of unsecured claims must have a legitimate basis; dividing unsecured claims by size while providing identical treatment can constitute improper classification.
- A Chapter 11 plan must specify treatment for each class and must classify equity interests; failing to do so is a serious confirmation defect.
- In limited circumstances, a bankruptcy court may use its equitable authority in claim allowance to look behind a judgment and disallow a judgment-based claim notwithstanding preclusion arguments.

## Conclusion

The bankruptcy court upheld approval of the disclosure statement but determined the proposed plan could not proceed toward confirmation because it improperly classified claims, omitted treatment for a disputed class, and failed to classify equity; it also disallowed a creditor’s judgment-based claim after scrutinizing the underlying liability.


In re Mastercraft Record Plating, Inc., 32 B.R. 106 (Bankr. S.D.N.Y. 1983)