                                                                FILED
                                                                 FEB 06 2015
 1                         NOT FOR PUBLICATION
                                                          SUSAN M. SPRAUL, CLERK
 2                                                             U.S. BKCY. APP. PANEL
                                                               OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )        BAP No. AK-14-1122-JuKiKu
                                   )
 6   MARLOW MANOR DOWNTOWN, LLC,   )        Bk. No. 12-00421
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     MARLOW MANOR DOWNTOWN, LLC,   )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )        M E M O R A N D U M*
11                                 )
     WELLS FARGO BANK, AS SERVICING)
12   AGENT FOR ALASKA HOUSING      )
     FINANCE CORPORATION; CAG      )
13   DEVELOPMENT, LLC; ENVISION    )
     INVESTORS, LLC; RISING STAR   )
14   INVESTMENTS, LLC,             )
                                   )
15                  Appellees.     )
     ______________________________)
16
                    Argued and Submitted on January 22, 2015
17                          at Pasadena, California
18                          Filed - February 6, 2015
19               Appeal from the United States Bankruptcy Court
                           for the District of Alaska
20
             Honorable Herbert A. Ross, Bankruptcy Judge, Presiding
21                          _________________________
22   Appearances:     David Hollister Bundy argued for appellant Marlow
                      Manor Downtown, LLC; Gary C. Sleeper of Jermain
23                    Dunnagan & Owens PC argued for appellee Wells
                      Fargo Bank, as Servicing Agent for Alaska Housing
24                    Finance Corporation.
                           _________________________
25
26       *
          This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
   have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8024-1.

                                      -1-
 1   Before:    JURY, KIRSCHER, and KURTZ, Bankruptcy Judges.
 2        In the third amended plan (TAP) filed by chapter 111 debtor
 3   Marlow Manor Downtown, LLC, debtor classified the two unsecured
 4   deficiency claims of its lender, the Alaska Housing Financing
 5   Corporation (AHFC), in class 3 and 4 as secured and unimpaired
 6   and placed them in different classes from the general unsecured
 7   creditors.    Prior to plan confirmation, Wells Fargo Bank, as
 8   servicing agent for AHFC,2 filed a motion under Rule 30133
 9   (Rule 3013 Motion) seeking an order that debtor’s classification
10   of AHFC’s deficiency claims was improper on the grounds that
11   (1) the deficiency claims were unsecured and impaired and
12   substantially similar to the claims of the general unsecured
13   creditor class and (2) debtor failed to provide a business
14   justification or economic reason for the separate
15   classification.    Agreeing with AHFC, the bankruptcy court
16   entered an order granting the motion.    Debtor appeals from that
17   order.    Finding no error, we AFFIRM.
18
19
        1
          Unless otherwise indicated, all chapter and section
20 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
   “Rule” references are to the Federal Rules of Bankruptcy
21
   Procedure.
22      2
          Although Wells Fargo Bank, as servicer for AHFC, filed the
23 Rule 3013 Motion as well as other motions throughout this case,
   for convenience we refer to AHFC as the movant.
24
        3
          Rule 3013 entitled “Classification of Claims and
25 Interests” provides in relevant part:
26
         For the purposes of the plan and its acceptance, the
27       court may, on motion after hearing on notice as the
         court may direct, determine classes of creditors and
28       equity security holders pursuant to §§ 1122 . . . .

                                     -2-
 1                                  I.   FACTS
 2   A.       Prepetition Events4
 3            Debtor is an Alaska limited liability company formed in
 4   2002.      Debtor’s manager is Marc A. Marlow (Marlow) and its
 5   membership interests are owned by the Marlow Family Perpetual
 6   Trust (90%) and Marlow Manor Downtown TC, LLC, an Alaska limited
 7   liability company (10%).
 8            Debtor owns a portion of the McKinley Tower, a 14-story
 9   high rise located in downtown Anchorage which was built in 1952
10   for residential use.      At one point, the building was converted
11   to office space and leased to the State of Alaska.       A subsequent
12   owner began converting the building into a hotel before
13   defaulting and the lender foreclosed.       Another owner all but
14   abandoned the building before selling it to Marlow in 1998.
15            Marlow, a developer, planned on restoring the building to
16   residential use.      To that end, Marlow had the property legally
17   subdivided into a two unit condominium project.       Unit A, owned
18   by EGAE, LLC5 and an unidentified investor, was reconstructed as
19   100 studio and one bedroom apartments and was financed through
20   HUD’s 221 D 4 Urban Revitalization Program.       Unit B, owned by
21   debtor, was to be converted to a fifty-two unit senior assisted
22   living home and was financed by a $5.4 million construction loan
23   from Northrim Bank (Northrim).
24
25        4
          The underlying facts are undisputed. The facts were
26 mostly taken from the second amended disclosure statement and the
   bankruptcy court’s memorandum decisions entered October 9, 2013,
27 and March 24, 2014.
28        5
               EGAE, LLC is owned by the Marlow Family Perpetual Trust.

                                         -3-
 1        In 2007, AHFC refinanced the majority of Northrim’s loan
 2   through two long term loans in the total amount of $5.450
 3   million.    The first loan for $4.125 million was evidenced by a
 4   promissory note (First Note) and secured by a first deed of
 5   trust against Unit B and a security interest in the rents,
 6   equipment, inventory, security deposits, and other personal
 7   property.   The original terms called for interest at 7.375% per
 8   year in equal monthly payments of $28,490 over a 30-year term
 9   (or, to February 1, 2037).   The second loan for $1.325 million
10   was evidenced by a promissory note (Second Note) and was secured
11   by a second deed of trust against Unit B and a security interest
12   in the same personal property as the First Note.     The Second
13   Note bore interest at 1.5% per year in annual installments of
14   40% of “available cash flow,” as defined in the note, and due
15   and payable by February 1, 2037.      Marlow guaranteed both loans.
16   After the refinancing, Northrim was left with an unsecured loan
17   balance of $575,000.
18        Construction of Unit B into senior assisted living housing
19   began in 2005.   Marlow’s business plan depended on most of the
20   residents paying for their rent, meals and care through the
21   Medicaid program for lower income and disabled persons, using
22   federal and state funds administered by the State of Alaska.
23   Marlow thought he could collect $127 per resident per day which
24   was the reimbursement rate from Medicaid at the time.     After
25   food and care costs, Marlow expected that the excess income
26   would cover operating expenses and the debt service on the First
27   Note.
28        In May of 2007, the Alaska Department of Health and Social

                                     -4-
 1   Services reduced the Medicaid reimbursement rate to $99.37 per
 2   day, a $28 reduction from the rate on which the project had been
 3   budgeted.   With an anticipated thirty residents (out of fifty
 4   units) receiving Medicaid benefits, this translated to a
 5   reduction of almost $27,000 in monthly income, an amount almost
 6   equal to the required debt service.   Due to the decrease in
 7   benefits, it was no longer practical to use the project for
 8   assisted living.
 9        Marlow decided to convert the property from assisted living
10   units to residential rentals offered on the open market.
11   Although the market for apartment housing without kitchens would
12   be limited, Marlow thought that the rent would cover the
13   operating costs with an appreciable amount remaining for debt
14   service and a reserve for insurance and capital replacements.
15   The assisted living residents were relocated, and Marlow began
16   converting the property to market rate studio apartments.
17        Conversion costs were approximately $258,000 and it took
18   almost two years to stabilize the rent.   The only source of
19   funds to convert Unit B to market rentals was the income from
20   the property as units were rented, which meant that for a number
21   of months debtor made no loan payments to AHFC.
22        In April 2009, AHFC agreed to a loan modification.    Under
23   the First Note, the payment terms were modified to carve out a
24   $1 million principal portion and provide payment on two tracks.
25   On the approximately $3.125 million portion, payments were
26   reduced from $28,490 per month to $21,627 per month at 7.375%
27   annual interest, still in equal monthly payments, amortized to
28   fully pay off by February 1, 2037.    On the $1 million carve out,

                                    -5-
 1   interest remained at 7.375% annually, but payments were made
 2   based on 30% of “available cash flow” as redefined in the
 3   modification agreement.    Any unpaid balance was due on
 4   February 1, 2037.    The modification did not make the $1 million
 5   carve-out junior to the $3.125 million part of the first loan,
 6   but merely described two different criteria for payment.      The
 7   terms of the $1.325 million Second Note were modified to require
 8   an annual payment of 70% of “available cash flow,” as redefined
 9   in the modification agreement.    The interest remained at 1.5%
10   and a balloon payment was due on February 1, 2037.
11        In 2011 AHFC filed a state court lawsuit to impose a
12   receivership over the property.    Debtor agreed to the
13   appointment of a receiver.    The receiver began serving in April
14   2012 and has been collecting the rents and disbursing funds to
15   pay the operating expenses since then.
16        Early in 2012, AHFC declared debtor in default on the First
17   Note for lack of payments.    AHFC commenced a non-judicial
18   foreclosure against the property after workout discussions
19   between the parties did not succeed.
20   B.   Bankruptcy Events
21        Debtor filed its chapter 11 single asset real estate case
22   on July 9, 2012.    In Schedule D, debtor listed AHFC’s Second
23   Note as fully unsecured and the First Note as partially secured
24   by Unit B.   In Schedule F, debtor listed unsecured claims in the
25   amount of $1.5 million consisting of trade and other debt,
26   including the loan balance due Northrim in the amount of
27   $575,000 and management fees owed to NANA Management Services
28   (NANA) in the amount of $500,000.

                                      -6-
 1        Soon after the filing, AHFC moved for relief from stay.       At
 2   the preliminary hearing on its motion, AHFC agreed to waive the
 3   ninety-day time limit for debtor to file a plan under
 4   § 362(d)(3)(A).    The bankruptcy court extended the time for
 5   debtor to file its plan and disclosure statement.    On
 6   October 18, 2012, debtor filed its plan of reorganization.
 7        Meanwhile, the parties attended a mediation which resulted
 8   in a number of agreements.    The parties agreed, among other
 9   things, that the receiver would remain in place and continue to
10   disburse monies monthly to AHFC as set out in the receivership
11   order and in the cash collateral order entered by the bankruptcy
12   court.    The parties also agreed to continue the final hearing on
13   AHFC’s motion for relief from stay and the confirmation hearing,
14   both scheduled for November 7, 2012.
15        Debtor filed a first amended plan on March 30, 2013.       The
16   scheduled confirmation hearing for that plan was vacated to
17   allow debtor to file a second amended plan (SAP).
18        1.     The SAP
19        Debtor filed its SAP on July 7, 2013.    In that plan, debtor
20   placed AHFC’s various claims into classes 2, 3, and 4:
21        Class 2 - AHFC’s secured First Note claim.     As of the
22   petition date, AHFC’s First Note claim had an outstanding
23   balance of $4,391.545.20.    Debtor assigned a present value of
24   $2.7 million to the secured portion of AHFC’s First Note claim
25   and gave AHFC the option to elect to have its class 2 claim
26   treated as fully secured under § 1111(b).    This claim was
27   impaired.
28

                                     -7-
 1        Class 3 - AHFC’s unsecured deficiency First Note claim.      If
 2   AHFC did not elect to have its class 2 claim treated as fully
 3   secured under § 1111(b), debtor proposed making $10,000
 4   quarterly payments on the unsecured deficiency First Note claim
 5   beginning October 1, 2018, and continuing for five years until a
 6   total of $200,000 was paid.   The SAP stated that debtor would
 7   not be required to make further payments on this claim.    This
 8   class was impaired.
 9        Class 4 - AHFC’s unsecured deficiency Second Note claim.
10   As of the petition date, the outstanding balance owed on the
11   Second Note was $1.325 million.   Debtor proposed to pay this
12   unsecured deficiency claim in the amount of $250,000, without
13   interest, in quarterly installments of $10,000 beginning
14   October 1, 2023.   This claim was impaired.
15        Class 6 consisted of general unsecured claims.   The allowed
16   class 6 claims would share pro rata a $20,000 distribution on
17   the effective date of the plan and thereafter quarterly payments
18   of $10,000 commencing October 1, 2013, for a period of five
19   years, with the final payment made on July 1, 2018.
20        AHFC voted to reject the plan as did class 6 unsecured
21   creditors, Northrim and NANA, who controlled the class vote.      As
22   a result, debtor did not have an impaired class that accepted
23   the plan.   After the voting, a business associate of Marlow’s
24   purchased Northrim’s claim.   Debtor subsequently filed a motion
25   under Rule 3018 seeking to change Northrim’s vote on the SAP.
26        At the same time, AHFC filed an objection to confirmation
27   of the SAP arguing, among other things, that debtor’s placement
28   of AHFC’s class 4 unsecured deficiency Second Note claim in a

                                    -8-
 1   different class from the class 6 unsecured claims was improper.
 2   AHFC asserted that its Second Note unsecured claim was
 3   substantially similar to the general unsecured claims and that
 4   debtor had no business or economic justification for the
 5   separate classification.
 6        AHFC also filed a Rule 3013 Motion, seeking an order that
 7   the classification of AHFC’s unsecured deficiency Second Note
 8   claim in class 4 was improper on the same basis.   Debtor opposed
 9   the motion, arguing that AHFC’s unsecured debt in connection
10   with the Second Note was not substantially similar to the
11   general unsecured claims on the basis that the payment terms
12   under the Second Note distinguished the debt from the debt owed
13   to the general unsecured creditor class.   According to debtor,
14   the Second Note, as modified in 2009, did not require any debt
15   service unless the property had sufficient cash flow.    If there
16   was not adequate cash flow, then no payment was required and the
17   deferred interest would be added to the balloon payment due in
18   2037.   Citing several tax cases, debtor maintained that the
19   payment terms under the Second Note had the character of a
20   redeemable preferred stock or similar equity investment which
21   receives a dividend only if the issuer has the ability to pay.
22        On October 9, 2013, the bankruptcy court issued a
23   memorandum decision granting AHFC’s Rule 3013 Motion.    The
24   bankruptcy court found that the separate classification of
25   AHFC’s Second Note deficiency was not proper for several
26   reasons.
27        First, the court decided that debtor’s attempted separate
28   classification of the unsecured deficiency Second Note claim was

                                    -9-
 1   a “disfavored attempt to manipulate the voting on the plan to
 2   meet the confirmation standard of having at least one class of
 3   non-insider claims approve the plan” — i.e., gerrymandering.
 4        Second, the court found no special circumstances that
 5   warranted the separate classification under the holding in
 6   Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 323, 327
 7   (9th Cir. 1994).   In In re Johnston, the Ninth Circuit affirmed
 8   the separate classification of an unsecured creditor’s claim
 9   because its claim was partially secured by collateral of a
10   nondebtor company.   Further, the creditor was embroiled in
11   litigation with Johnston and therefore its claim might be offset
12   or exceeded by Johnston’s own claim against the creditor, and if
13   the creditor was successful in litigation, it could be paid in
14   full before all other unsecured creditors.    In re Johnston,
15   21 F.3d at 327.    The bankruptcy court effectively distinguished
16   In re Johnston from the facts in this case stating:
17        Although Marlow was a guarantor on the loan, he is
          apparently not personally solvent and has many unpaid
18        money judgments against him. He is not like the
          creditor in Johnston, which had viable guarantors to
19        collect from, at least in part. Nor is there any
          other collateral than the real and personal property
20        securing the two loans owed to AHFC, valued at no more
          than $2.7 million.
21
22        Next, relying on Barakat v. The Life Ins. Co.
23   (In re Barakat), 99 F.3d 1520 (9th Cir. 1996), the bankruptcy
24   court noted that while it was possible to classify similar
25   claims in different classes, there were limits to that right.
26   Separate classification cannot be used to “gerrymander an
27   affirmative vote on a reorganization plan” and, if claims are
28   substantially similar, there must be a valid business or

                                     -10-
 1   economic reason for the separate classification.    Id. at 1527.
 2   The bankruptcy court concluded that AHFC’s unsecured deficiency
 3   Second Note claim was substantially similar to the separately
 4   classified, noninsider unsecured creditor claims:
 5        The claim on the second promissory note is very
          similar to a garden variety unsecured claim,
 6        notwithstanding its ‘easy terms.’ [Section] 502(b)(1)
          makes the claim presently allowable despite being an
 7        unmatured claim, the balance of which is due in 2037.
          Also, under the terms of the second loan agreement,
 8        the second promissory note can be accelerated due to
          the default under the first promissory note. And,
 9        even if [sic] second promissory note had been
          nonrecourse (which it is not), in chapter 11 it is
10        treated as a recourse claim.
11        The court also decided that debtor offered no satisfactory
12   business or economic reason for the separate classification of
13   the substantially similar claims.    The bankruptcy court rejected
14   debtor’s argument that AHFC should bear some of the
15   responsibility for the failure of Marlow’s plan to develop
16   Unit B into an assisted living center.   Noting that AHFC was a
17   completely distinct entity from the entity that changed the
18   Medicaid subsidies, the bankruptcy court observed that both
19   debtor and AHFC had the “rug pulled out from under them” due to
20   the change in projected Medicaid subsidies.
21        Finally, the bankruptcy court was not persuaded by debtor’s
22   argument that the Second Note was akin to an equity
23   contribution.
24        Due to the court’s ruling, it found it unnecessary to
25   address the merits of debtor’s motion under Rule 3018 seeking to
26   change Northrim’s vote on the SAP.
27        2.   The TAP
28        On November 12, 2013, debtor filed the TAP.    According to

                                   -11-
 1   debtor, the classification of AHFC’s claims in the TAP
 2   recognized that through the modification agreement, AHFC and
 3   debtor in effect turned the original two loans into three:
 4   (1) under the First Note, monthly installment payments were due
 5   on $3.125 million; (2) under the First Note, the $1 million
 6   carve out required payments only from cash flow; and (3) under
 7   the Second Note, payments on the $1.325 million were required
 8   only from cash flow.   Following these payment terms, debtor
 9   placed AHFC’s claims in class 2, 3, and 4:
10        Class 2 - Secured Claim of AHFC.    Debtor stated AHFC’s
11   secured claim was for $3.125 million, with interest at 5.75%,
12   and payments would be made in monthly installments (after a
13   $30,000 payment on the effective date), increasing at various
14   intervals to June 1, 2037 (this apparently represents the
15   $3 million portion of the First Note, as defined by the
16   modification agreement).   This claim was impaired.
17        Class 3 - the $1 million carve out from the First Note.
18   Debtor labeled this claim as secured and if AHFC did not make an
19   election under 1111(b) then debtor would pay this claim in
20   accordance with the terms of the modification agreement.    The
21   plan further provided that the maturity of this claim — as such
22   maturity existed prior to any default — “shall be reinstated.”
23   In addition, the plan stated that no payment of any cure amount
24   or on account of any damages incurred as a result of any
25   prepetition default shall be required.   Because debtor was
26   proposing to pay this claim according to its terms, debtor
27   labeled this class as unimpaired and deemed to have accepted the
28   plan.

                                    -12-
 1        Class 4 - the $1.325 million owed on the Second Note.
 2   Again, debtor labeled this deficiency claim as secured and
 3   stated that it would be paid in accordance with the terms of the
 4   modification agreement.   This class was also described as not
 5   impaired and “deemed to accepted the plan.”
 6        On January 17, 2014, AHFC filed its second Rule 3013 Motion
 7   seeking to have the bankruptcy court find that its unsecured
 8   deficiency claims in classes 3 and 4 were improperly classified
 9   as secured and unimpaired.   AHFC also argued that its deficiency
10   claims should be placed with the substantially similar general
11   unsecured claims in class 6 due to the bankruptcy court’s
12   previous ruling in connection with the SAP.
13        Debtor opposed, arguing that it was offering to repay the
14   two loans exactly as required by the loan documents and thus
15   class 3 and 4 were not impaired and were not entitled to vote
16   for or against the TAP.   Debtor further argued that the business
17   reason for separate classification was based on the specific
18   terms of the modification agreement, which carved out $1 million
19   from the First Note, and the terms of the $1.325 million Second
20   Note, neither of which required any debt service unless the
21   property had sufficient cash flow.    By limiting debt service to
22   debtor’s positive cash flow, debtor argued that AHFC
23   subordinated a total of $2.325 million of its loans to debtor’s
24   operating expenses and to debt service on the balance of the
25   First Note.   The subordination of the two debts, according to
26   debtor, created a substantially different economic treatment of
27   the loans from that of the debts owed to general unsecured
28   creditors.

                                    -13-
 1        On March 5, 2014, the bankruptcy court heard the matter.
 2   The court questioned debtor’s counsel about the purpose behind
 3   classifying AHFC’s deficiency claim separately in class 4 even
 4   though it previously ruled that separate classification was
 5   improper.
 6        THE COURT: And the purpose of doing that is to take
          it out of the voting so it would be deemed to be
 7        unimpaired?
 8        MR. BUNDY: Right. That is the purpose. And the same
          with the Class 3 claim. As now indicated, the million
 9        dollars would be treated as unimpaired and wouldn’t
          get to vote either. If the court rules that we can’t
10        do that and we have to put all these claims together
          because there’s no collateral value for . . . Class 3
11        and 4 at this point, then, you know, the plan doesn’t
          work, and we concede that.
12
13        In the end, the court found that AHFC’s deficiency claims
14   in class 3 and 4 were improperly classified as secured and
15   unimpaired when they were both unsecured and impaired.    The
16   bankruptcy court entered an order granting AHFC’s Rule 3013
17   Motion and debtor timely appealed.
18        On March 24, 2014, the bankruptcy court issued a memorandum
19   decision which elaborated on its March 5th oral ruling.    The
20   court explained that class 3, the $1 million carve out from the
21   $4.125 million First Note and its collateral, and class 4, the
22   junior $1.325 million Second Note with the same collateral, were
23   improperly classified as secured and unimpaired when they were
24   both unsecured and impaired.   The court further stated that
25   AHFC’s class 2 claim (the $3.125 million portion of the First
26   Note) was listed as secured up to the full value of the
27   collateral and was classified by debtor as being impaired.      As a
28   simple mathematical proposition, the bankruptcy court reasoned

                                    -14-
 1   that class 3 and 4 could not be secured under § 506(a) since
 2   class 2 used up all the collateral value.6
 3           The bankruptcy court also concluded that AHFC’s classes 3
 4   and 4 claims were improperly classified as unimpaired because
 5   the rights of AHFC in each class were modified.     Although debtor
 6   claimed that the payment terms of classes 3 and 4 were left
 7   unchanged, the court found that the TAP made changes in AHFC’s
 8   contract rights which ipso facto were an impairment.
 9           Finally, the bankruptcy court observed that it had
10   previously ruled that separately classifying AHFC’s general
11   unsecured deficiency Second Note claim from other general
12   unsecured creditors in debtor’s SAP was improper gerrymandering
13   for the purpose of obtaining the affirmative vote of at least
14   one class so it could possibly confirm a cramdown plan.      For the
15   same reasons set forth in its previous ruling, the court found
16   there was no business or economic reason to classify AHFC’s
17   unsecured deficiency claims in class 3 and 4 in the TAP
18   separately from the other general unsecured class 6 creditors.
19           On April 22, 2014, the BAP clerk’s office issued an order
20   regarding finality, indicating that the order on appeal did not
21   appear final and requiring a response from appellant.     After
22   receiving the response, the Panel entered an order granting
23   debtor leave to appeal to the extent it was necessary.
24                             II.   JURISDICTION
25           The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
26
27
         6
          The bankruptcy court did not hold a valuation hearing nor
28 were appraisals submitted regarding the value of the property.

                                      -15-
 1   §§ 1334 and 157(b)(2)(L).    We have jurisdiction under 28 U.S.C.
 2   § 158.
 3                                III.    ISSUES
 4        Whether the bankruptcy court erred by finding that the
 5   classification of AHFC’s deficiency claims was improper on the
 6   bases that:
 7        A.   The deficiency claims were unsecured and impaired;
 8        B.   The deficiency claims were substantially similar to
 9   the general unsecured class 6 creditor claims; and
10        C.   Debtor offered no business justification or economic
11   reason for the separate classification.
12                       IV.     STANDARDS OF REVIEW
13        Whether a claim is impaired under § 1124 is a question of
14   law, subject to de novo review.       Acequia, Inc. v. Clinton
15   (In re Acequia, Inc.), 787 F.2d 1352, 1357-58 (9th Cir. 1986).
16        Whether claims are “substantially similar” under § 1122(a)
17   is a question of fact; a bankruptcy court has broad latitude in
18   making this determination, which is reviewed for clear error.
19   In re Johnston, 21 F.3d at 327.       A factual finding is clearly
20   erroneous if it is illogical, implausible, or without support in
21   inferences that may be drawn from the facts in the record.
22   Retz v. Sampson (In re Retz), 606 F.3d 1189, 1196 (9th Cir.
23   2010).
24                               V.   DISCUSSION
25   A.   The bankruptcy court did not err in finding that AHFC’s
          deficiency claims were unsecured and impaired.
26
27        In its opening brief, debtor concedes that AHFC’s
28   deficiency claims under the First Note and Second Note are

                                         -16-
 1   unsecured under § 506(a).    Section 506(a) divides a creditor’s
 2   claim into “secured and unsecured portions, with the secured
 3   portion of the claim limited to the value of the collateral.”
 4   Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961 (1997).
 5   Here, debtor assigned a value of $2.7 million to AHFC’s secured
 6   First Note claim.   Therefore, as noted by the bankruptcy court,
 7   simple math confirms that AHFC’s deficiency claims under the
 8   First Note and the Second Note are unsecured.   Accordingly,
 9   debtor’s classification of AHFC’s unsecured claims as secured is
10   in direct violation of § 506(a).
11        As the holder of both a secured and unsecured claim, AHFC
12   is entitled to vote on debtor’s plan in both capacities.
13   Because the TAP treats AHFC’s unsecured deficiency claim on the
14   First Note as fully secured even though AHFC is an undersecured
15   creditor, the plan improperly treats AHFC as if AHFC had made
16   the § 1111(b)(2) election.   However, the decision whether to
17   make the § 1111(b)(2) election is controlled solely by the
18   creditor.    Montclair Retail Ctr., L.P. v. Bank of the W.
19   (In re Montclair Retail Ctr., L.P.), 177 B.R. 663, 666 (9th Cir.
20   BAP 1995).   Accordingly, debtor’s classification of AHFC’s
21   unsecured deficiency claim under the First Note as secured is in
22   direct violation of § 1111(b).
23        Debtor also maintains, without analysis, that AHFC’s
24   deficiency claims in classes 3 and 4 are unimpaired under § 1124
25   on the basis that it is making the same payments to AHFC as
26   those required under the modification agreement.
27   Section 1124(2) states that a class of claims or interests is
28   impaired, and thus entitled to vote, unless the treatment in the

                                      -17-
 1   plan of those claims or interests, notwithstanding any right to
 2   demand accelerated payment upon default: (A) cures the default,
 3   (B) reinstates the maturity of the claim or interest,
 4   (C) compensates the claim or interest holder for damages for
 5   relying on the acceleration clause, (D) compensates for
 6   nonmonetary defaults, and (E) “does not otherwise alter the
 7   legal, equitable, or contractual rights to which such claim or
 8   interest entitles the holder.”    If a plan can satisfy these
 9   requirements, that claim or interest holder will not be
10   considered impaired.
11        Nowhere does debtor discuss these requirements, instead
12   arguing that the bankruptcy court did not explain how the
13   deficiency claims were impaired.    However, the record shows that
14   the court supported its finding by citing AHFC’s brief filed in
15   support of its second Rule 3013 Motion.    There, AHFC argued that
16   debtor was in default on the First and Second Notes.
17   Accordingly, debtor was obligated to AHFC for missed payments
18   and for substantial costs and attorney’s fees.     As noted by
19   AHFC, the TAP specifically provides that the defaults will not
20   be cured.   Thus, § 1124(2)(A) has not been met.
21        Moreover, the modification agreement entitles AHFC to
22   receive annual payments on the $1 million carve out and Second
23   Note in an amount equal to 100% of debtor’s available cash flow.
24   Instead of paying AHFC the available cash flow, the TAP will use
25   it to pay general unsecured creditors.    Therefore, the TAP
26
27
28

                                      -18-
 1   alters AHFC’s contractual rights under § 1124(2)(E).7
 2        Accordingly, the bankruptcy court did not err in concluding
 3   that AHFC’s unsecured deficiency claims in classes 3 and 4 were
 4   impaired under § 1124(2).
 5   B.   The bankruptcy court did not err in finding that the
          separate classification of AHFC’s unsecured deficiency
 6        claims was improper.
 7        Section 1122(a) provides that, except as provided in
 8   subsection (b), which is not relevant here, “a plan may place a
 9   claim or an interest in a particular class only if such claim or
10   interest is substantially similar to the other claims or
11   interests of such class.”
12        The Ninth Circuit has a two-step analysis for determining
13   whether claims have been permissibly separated into different
14   classes.   Wells Fargo Bank, N.A. v. Loop 76 LLC (In re Loop 76,
15   LLC), 465 B.R. 525, 536-37 (9th Cir. BAP 2012).   First, the
16   trial court should determine whether the claims are
17   substantially similar, and second, if so, whether there is a
18   business justification for separately classifying them.     Id.   If
19
20
        7
          Debtor’s third amended disclosure statement provides that
21 payments and distributions under the plan will be funded by the
   following:
22
23        Payments to creditors will come from cash on hand,
          collections of receivables, and ongoing revenue.
24        Payments on the Class 3 and 4 claims will come mostly
          from refinancing or sale of the Property on maturity of
25        the Claims in 2037.
26
          The financial projections show that the Debtor will
27        have sufficient income to make the required payments on
          the Class 2 claim of AHFC and the Class 6 unsecured
28        claims. . . .

                                    -19-
 1   the claims are not substantially similar, their separate
 2   classification is not only permissible, but required under
 3   § 1122(a).   If the claims are substantially similar, that
 4   implicates the gerrymandering concern, but the debtor may still
 5   separately classify them “if the debtor can show a business or
 6   economic justification for doing so.”    Id.   The bankruptcy court
 7   has broad discretion in classifying claims under § 1122.
 8   In re Johnston, 21 F.3d at 327.
 9        Here, the bankruptcy court evaluated AHFC’s deficiency
10   claims under the same analysis as the Ninth Circuit did in
11   In re Johnston and In re Barakat and found no distinguishing
12   characteristics rendering them dissimilar to the general
13   unsecured claims.   The court found Marlow, the guarantor, was
14   not a source of recovery for AHFC’s deficiency claims because he
15   was insolvent and had multiple judgments against him.    Finding
16   no special circumstances, the bankruptcy court concluded that
17   AHFC’s unsecured deficiency claims were “garden variety”
18   unsecured claims.
19        Debtor’s attempt to use the contract payment terms under
20   the modification agreement as a distinguishing characteristic
21   for classification purposes is disingenuous at best when debtor
22   proposes to use its available cash flow to pay unsecured
23   creditors rather than AHFC.   Further, the contractual payment
24   terms under the modification agreement do not alter the legal
25   character of AHFC’s unsecured deficiency claims warranting
26   separate classification.   AHFC’s unsecured deficiency claims and
27   general unsecured trade claims enjoy similar rights and
28   privileges within the Bankruptcy Code.   Accordingly, the

                                    -20-
 1   bankruptcy court’s factual determination that AHFC’s unsecured
 2   deficiency claims were substantially similar to those of the
 3   unsecured creditors in class 6 was not clearly erroneous.
 4        We also agree with the bankruptcy court’s assessment that
 5   debtor has pointed to no legitimate business or economic reason
 6   for the separate classification of AHFC’s deficiency claims.
 7   Debtor has all but admitted that the separate classification of
 8   AHFC’s deficiency claims as secured and unimpaired was to
 9   prevent AHFC from voting against the plan.
10        [S]eparate classification for the purpose of
          preventing the undersecured creditor from rejecting
11        the plan is contrary to the principles underlying the
          Bankruptcy Code, that is, that creditors holding
12        greater debt should have a comparably greater voice in
          reorganization. . . . Although [this] will
13        effectively bar single asset debtors from utilizing
          the Bankruptcy Code’s cramdown provisions, the court
14        was not persuaded that a single-asset debtor should be
          able to cramdown a plan that disadvantages the largest
15        creditor. Thus, absent a legitimate business or
          economic reason, separate classification is not
16        permitted.
17   In re Barakat, 99 F.3d at 1526 (internal citations omitted).
18   Accordingly, the bankruptcy court did not err in finding that
19   debtor’s classification of AHFC’s deficiency claims in classes 3
20   and 4 was improper.
21                           VI.   CONCLUSION
22        For the reasons stated, we AFFIRM.
23
24
25
26
27
28

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