## Facts

- SM 104 Limited filed a Chapter 11 case as owner/operator of a commercial office complex.
- EquiVest, Inc. held a first mortgage securing approximately $5.5 million.
- The court valued the office complex at about $2.27 million, leaving EquiVest undersecured.
- Under 11 U.S.C. § 1111(b), EquiVest held (1) a secured claim equal to collateral value (about $2.27 million) and (2) an unsecured deficiency claim for the balance (about $3.23 million).
- The plan placed EquiVest’s secured claim in Class 2, EquiVest’s § 1111(b) deficiency claim alone in Class 3, and other general unsecured claims (about $175,000 total) in Class 5.
- EquiVest voted to reject the plan in Class 3; Class 5 voted to accept.
- EquiVest objected to confirmation, arguing the separate classification of its deficiency claim was improper and designed to obtain an impaired accepting class.

## Issues

1. Whether a § 1111(b) unsecured deficiency claim may be separately classified from other general unsecured claims under § 1122 when the practical effect is to obtain an impaired accepting class under § 1129(a)(10).
2. Whether separating a large deficiency claim from other unsecured claims solely to secure plan acceptance constitutes impermissible vote manipulation that bars confirmation.

## Decision

- The court denied confirmation of the plan.
- It held EquiVest’s § 1111(b) deficiency claim was substantially similar to other general unsecured claims and, absent a valid non-voting reason, had to be classified with them.
- It found the plan’s separate classification was arranged to produce an impaired accepting class and therefore violated § 1122.
- With proper classification, the unsecured class would have rejected the plan, so the plan failed § 1129(a)(10)’s requirement of acceptance by at least one impaired class.

## Legal Principles

- Under § 1122(a), substantially similar claims generally must be placed in the same class; separate classification requires a legitimate business or legal justification unrelated to voting outcomes.
- A § 1111(b) unsecured deficiency claim is, for classification purposes, an unsecured claim of the same priority and general legal character as other general unsecured claims.
- A debtor may not separately classify similar unsecured claims to manufacture an impaired accepting class for purposes of § 1129(a)(10); such gerrymandering defeats confirmation.

## Conclusion

The court refused to confirm a Chapter 11 plan that isolated an undersecured lender’s § 1111(b) deficiency claim from other unsecured creditors without a valid justification, concluding the structure was designed to manipulate voting and could not satisfy the classification and impaired-acceptance requirements for confirmation.


In re SM 104 Ltd., 160 B.R. 202 (Bankr. S.D. Fla. 1993)