## Facts

- Mohammad Samih Barakat filed a Chapter 11 case after the Life Insurance Company of Virginia (LICV) began foreclosure proceedings against an apartment complex securing LICV’s note.
- Barakat proposed a reorganization plan that classified claims into multiple classes, including LICV’s secured claim, LICV’s unsecured deficiency claim, general unsecured claims, certain trade creditors, and tenant security-deposit claims.
- The plan placed LICV’s large unsecured deficiency claim in a separate class from other general unsecured creditors.
- The plan also separated some trade creditors into their own class based on Barakat’s asserted need to continue doing business with them.
- The plan treated tenant security-deposit claims as an impaired class even though the plan left those claimants’ substantive rights essentially unchanged.
- The bankruptcy court denied confirmation, finding improper classification and improper impairment; the district court affirmed.

## Issues

1. Whether a Chapter 11 debtor may separately classify an undersecured creditor’s unsecured deficiency claim from other general unsecured claims when the claims are substantially similar.
2. Whether tenant security-deposit claims were “impaired” when the plan did not materially alter their legal, equitable, or contractual rights.
3. Whether the plan satisfied 11 U.S.C. § 1129(a)(10)’s requirement of acceptance by at least one impaired, non-insider class.

## Decision

- The Ninth Circuit affirmed the denial of confirmation.
- The court held that LICV’s unsecured deficiency claim could not be separately classified from other substantially similar unsecured claims absent a legitimate business or economic justification.
- The court held that the tenant security-deposit class was not truly impaired because the plan did not change those creditors’ substantive rights.
- Without a valid impaired, non-insider accepting class, the plan failed § 1129(a)(10) and therefore could not be confirmed.

## Legal Principles

- Under 11 U.S.C. § 1122(a), substantially similar claims generally must be classified together; separate classification of similar unsecured claims is improper when used to manipulate voting to obtain a consenting impaired class.
- The fact that an unsecured deficiency claim arises by operation of 11 U.S.C. § 1111(b) does not, by itself, make it dissimilar from other general unsecured claims for classification purposes.
- “Impairment” under 11 U.S.C. § 1124 is substantive: a class is impaired only if the plan alters the holders’ legal, equitable, or contractual rights; nominal or illusory changes do not create impairment.
- A debtor seeking cramdown under § 1129(b) must first satisfy § 1129(a)(10) by obtaining acceptance from at least one genuinely impaired, non-insider class.

## Conclusion

The Ninth Circuit affirmed denial of confirmation because the plan improperly isolated a major creditor’s unsecured deficiency claim to affect voting and improperly labeled an essentially unchanged class as impaired, leaving no qualifying impaired accepting class under § 1129(a)(10).


Barakat v. Life Ins. Co. of Va. (In re Barakat), 99 F.3d 1520 (9th Cir. 1996)