In re SM 104 Ltd.

SM 104 Limited (SM) (debtor) owned and operated an office complex. EquiVest, Inc. held a first mortgage on the complex securing a debt of $5.5 million. In June 1992, SM filed for Chapter 11 bankruptcy. At the time, the complex’s value was $2.27 million. Under 11 U.S.C. § 1111(b), EquiVest had an unsecured deficiency claim for $3.23 million (i.e., the difference between the complex’s value and the amount of EquiVest’s debt). SM proposed a reorganization plan that divided creditors’ claims into classes. EquiVest’s unsecured deficiency claim was placed in Class 3, and claims from other general unsecured creditors, totaling $175,000, were placed in Class 5. Class 5 was an impaired class. When the creditors voted on SM’s proposed plan, EquiVest voted to reject the plan, but Class 5 voted to accept. EquiVest objected to SM’s plan, arguing that EquiVest’s unsecured deficiency claim should have been classified with the other general unsecured creditors’ claims and that SM had improperly classified EquiVest’s claim separately to manipulate voting on plan confirmation. Specifically, under 11 U.S.C. § 1129(a)(10), in order to confirm a plan over the objections of a class of creditors, at least one class of impaired claims must vote to accept the plan. If SM had placed EquiVest’s claim in the same class as the Class 5 creditors’ claims, the relative size of EquiVest’s claim compared to the other claims meant that EquiVest’s vote to reject the plan would have been treated as a vote to reject by the entire class. Accordingly, there would have been no impaired class to accept the plan, and the plan could not have been confirmed. In considering EquiVest’s argument, the bankruptcy court analyzed whether a reorganization plan could classify a § 1111(b) claim separately from other general unsecured claims.