Barakat v. Life Insurance Co. of Virginia (In re Barakat)

Mohammad Barakat (debtor) filed a Chapter 11 bankruptcy petition. Barakat filed a proposed reorganization plan that, among other things, classified general unsecured creditors’ claims separately from an unsecured mortgage-deficiency claim held by the Life Insurance Company of Virginia (LICV) (creditor). The bankruptcy court denied confirmation of Barakat’s plan, finding that the separate classification of LICV’s claim was improper because Barakat had no business or economic justification to classify the claim separately. The bankruptcy court believed that Barakat had classified LICV’s claim separately because LICV held the largest unsecured claim and because, based on the class-voting structure, LICV would have had to vote to accept the plan for the plan to be confirmed. By separating LICV into its own class, Barakat could ensure that an impaired class of unsecured creditors besides LICV existed that could vote to accept the plan, allowing the plan to be confirmed even if LICV objected. Barakat appealed the bankruptcy court’s denial of confirmation, asserting that LICV’s claim had not been separately classified just to manipulate the voting on the plan. Rather, Barakat claimed that separate classification was justified because LICV’s claim was not substantially similar to the other unsecured claims, in that LICV’s mortgage-deficiency claim had arisen by operation of law under 11 U.S.C. § 1111(b). That section allows undersecured creditors to opt to have the amount of their deficiency treated as unsecured debt.