## Facts

- Greystone III Joint Venture owned an office building in Austin, Texas, and financed it with an $8.8 million nonrecourse loan from Phoenix Mutual Life Insurance Co. secured by a first lien.
- After Greystone missed four payments and Phoenix scheduled foreclosure, Greystone filed for Chapter 11.
- At filing, Greystone owed Phoenix about $9.325 million; the bankruptcy court valued the building at about $5.825 million, leaving Phoenix a secured claim to that value and an unsecured deficiency claim of about $3.5 million.
- Other creditors included trade creditors (about $10,000) and taxing authorities (about $145,000); tenants held security deposits treated as a separate unsecured class.
- Greystone’s plan placed unsecured claims into separate classes, including a class consisting solely of Phoenix’s deficiency claim and separate classes for trade creditors and tenant deposits.
- The plan initially provided similar low initial recoveries for Phoenix and trade creditors (about 3–4 cents on the dollar), while also contemplating additional payments that would make trade creditors (and, by staged payments, tenants) effectively better off than Phoenix.
- The plan provided that Greystone’s partners would contribute $500,000 and retain 100% equity in the reorganized debtor despite Phoenix’s large unpaid deficiency.
- Phoenix objected, arguing the plan manipulated classification and voting and violated the absolute priority rule; at the confirmation hearing, Greystone orally modified the plan to withdraw certain post-confirmation payments to trade creditors and tenants.

## Issues

1. Whether substantially similar unsecured claims may be separately classified to obtain an accepting impaired class and satisfy 11 U.S.C. § 1129(a)(10).
2. Whether the tenant security-deposit class was genuinely impaired for voting purposes, or only nominally impaired to create an accepting impaired class.
3. Whether allowing existing equity to retain ownership based on a $500,000 contribution while a dissenting unsecured deficiency claim is not paid in full violates the absolute priority rule, and whether a “new value” exception applies.

## Decision

- The Fifth Circuit reversed the confirmation order and the district court’s affirmance and remanded.
- The court held the plan improperly classified substantially similar unsecured claims in separate classes to manipulate the acceptance vote required by § 1129(a)(10).
- The court held the tenant security-deposit holders were not properly treated as an impaired accepting class under the modified plan.
- The court held the plan violated the absolute priority rule and declined to recognize a non-statutory “new value exception” on these facts.

## Legal Principles

- Substantially similar claims may not be separately classified under 11 U.S.C. § 1122 when the principal purpose is to engineer an accepting impaired class for cramdown under § 1129(a)(10); classification must rest on legitimate business or economic reasons.
- Courts may disregard nominal or “artificial” impairment used to manufacture an impaired accepting class under § 1129(a)(10).
- Under 11 U.S.C. § 1129(b)(2)(B), a cramdown plan cannot permit junior interests (existing equity) to retain property when a dissenting class of unsecured creditors is not paid in full.
- In this circuit and on these facts, a debtor cannot avoid the absolute priority rule by invoking a judicially created “new value exception” to justify old equity’s retention of ownership.

## Conclusion

The Fifth Circuit rejected confirmation of a single-asset real estate debtor’s Chapter 11 plan because it used separate classification and questionable impairment to secure the vote needed for cramdown and because it let existing owners retain equity despite a large unpaid unsecured deficiency, contrary to the absolute priority rule.


Matter of Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991)