In Re SM 104 Ltd.

AMENDED MEMORANDUM, OPINION AND ORDER

This matter is before the court on the objections of EquiVest Inc., the successor to Realty South Investors, to the confirmation of the plan of the Debtor, SM 104 Limited. For the reasons stated below, the court denies confirmation.

FACTS

The Debtor, SM 104 Limited, is a limited partnership which owns and operates an office complex called Cypress Creek Executive Court in Fort Lauderdale, Florida. The office complex is situated on land leased from the City of Fort Lauderdale. The Debtor acquired the leasehold in 1984 and, subsequently, built the office complex on it. Construction financing was provided by South Florida Savings Bank.

The Debtor is one of nine limited partnerships set up by William Murphy and Martin Sadkin. Each limited partnership was to own a single piece of commercial real estate. 2 SM Corporation is the general partner of each of the nine limited partnerships, including the Debtor. Sadkin withdrew from all.of the limited partnerships and SM Corporation in January 1990. Since that time, Murphy has been the principal officer and sole owner of SM Corporation. The Debtor’s limited partners are: (1) Murphy (59%); (2) Mur-vest, which is owned and controlled by Murphy and his brother (25%); and (3) Desert Oil, which is owned and controlled by Murphy’s cousin, Kevin Murphy (15%). At the time the Chapter 11 petition was filed, the Debtor was managed by Douglas Management and Realty (“DM & R”), a corporation wholly owned by Murphy. The Debtor paid DM & R management fees, leasing commissions and fees for supervising tenant and capital improvements on the Cypress Creek property. In short, Murphy is the sole owner of both the Debtor’s general partner and its prepetition management company. He is also the owner of the bulk of the limited partnership interests in the Debtor. Effectively, if not legally, Murphy could be equated with the Debtor.

In January 1987, at the Debtor’s request, Callaway & Price, Inc. (“C & P”) conducted an- appraisal of the Cypress Creek property. C & P valued the property at $4.93 million as of January 1987, and at $5,525 million at “stabilization.” 3 C & P estimated that the property would be stabilized by November 1987.

In June 1987, the Debtor borrowed approximately $4.8 million from Realty South Investors, Inc., the predecessor to EquiVest, Inc. (“EquiVest”). The loan was secured by a first mortgage on the Cypress Creek property and its rents, and a $100,000 letter of credit. The loan was guaranteed by both *207 Murphy and Sadkin (up to $400,000 each). 4 The loan was for a term of five years, with interest at 9.75%, plus a contingent equity kicker. The Debtor used most of the proceeds of the EquiVest loan, $3.68 million, to take out South Florida Savings Bank’s secured construction loan. It is not clear what happened to the remaining $861,000. 5

In October 1987, the Debtor’s principal leased tenant, Thasc Sales Company, leased one-third of the Cypress Creek property. Thasc is still the Debtor’s major tenant, and continues to occupy one-third of the Cypress Creek property. Thasc’s lease is currently at an above-market rent, and expires in September 1994. 6

The Debtor’s problems began almost immediately after the EquiVest loan was made. From the loan’s inception in June 1987 through February 1989, the Debtor consistently failed to make its payments to Equi-Vest on time, and quickly fell four months behind in its payments. In March 1989, EquiVest restructured the loan in an attempt to help the Debtor make up the four monthly payments it was behind, but the Debtor’s defaults continued. Between June 1987 and February 1989, EquiVest sent several letters notifying the Debtor of its defaults under the loan agreement. Finally, in January 1990, EquiVest brought a state court action against the Debtor, seeking to foreclose its lien against the Cypress Creek property.

On February 1, 1990, the state court entered an agreed lockbox order. That order provided for the establishment of a lockbox account to protect EquiVest’s interest in the rents generated by the Debtor. The order provided that all rents generated by the Cypress Creek Property were to be deposited directly into the lockbox account. The Debt- or was not to take any rents it collected. EquiVest was to take the monthly interest due it from the lockbox account, and remit the remainder of the rents back to the Debt- or (actually to DM & R) to pay the necessary operating expenses of the property. On February 16, 1990, the Debtor and EquiVest entered into a settlement agreement dismissing the state court foreclosure case. Under the settlement agreement, the Debtor paid EquiVest almost all of the past-due interest it owed EquiVest. 7 While the agreement dismissed the state court action, it expressly stated that the lockbox order was to survive the dismissal, and that the court retained jurisdiction to enforce the agreement.

From February 1990 through July 1990, about $60,000 in rents were deposited into the lockbox account each month. In August 1990, however, only $25,000 was deposited into the lockbox. When Alfred Chambliss, then EquiVest’s president, asked Murphy why the August deposits were lower than usual, Murphy told Chambliss that Thasc had withheld its rent because the roof was leaking. However, Murphy’s statement to Chambliss was not true. Thasc had in fact paid its August 1990 rent.

The Debtor continued to divert Thasc’s rental payments from the lockbox for most of the next year. On several occasions, Murphy told Chambliss that Thasc was not paying its rent due to Thasc’s own financial problems. Again, Murphy’s story was untrue. Thasc was paying its rent on time, and, on some occasions, even before it was due.

Finally, in September 1991, EquiVest filed a motion for a judgment of foreclosure in the state court action. On December 12, 1991, the court continued the motion for an eviden-tiary hearing, and ordered the Debtor to abide by the terms of the first lockbox order issued in February 1990. Nevertheless, the Debtor once again ignored the lockbox order, and continued to divert Thasc rent checks •from the lockbox.

*208 Early in 1992, the Debtor stopped paying the rent due under its ground lease with Fort Lauderdale, its property taxes, and certain of its operating expenses. On March 9, 1992, the state court, responding to Equi-Vest’s motion to appoint a receiver, appointed a Special Master for the purpose of overseeing and recommending payment of invoices for the operation and maintenance of the Cypress Creek property. After the appointment of the Special Master, EquiVest voluntarily agreed to fund certain operating expenses, such as the ground lease, from the lockbox.

In April 1992, the Debtor requested a loan from Riverside Capital Advisors to pay off EquiVest. The loan request package was prepared by Fred Welker, a mortgage banker and the Debtor’s interest rate expert at the confirmation hearing in this case, and was titled “Douglas Management and Realty Co.” The loan application claimed that the property had an appraised value of $6.7 million, according to the January 1987 C & P appraisal. The application provided that the Cypress Creek property cost $6.4 million to build. The loan request also represented the property’s estimated net operating income before debt service to be $388,460.

All three of those pieces of information were false. C & P had valued the entire fee at $6.7 million, but had only valued the Debt- or’s leasehold interest at $4.93 million in January 1987 and at $5,525 million at “stabilization,” which it projected would be in November 1987. In addition, the loan request package did not mention the fact that Equi-Vest had. received an appraisal from its appraiser, Hume Real Estate Consultants, valuing the property at $3.07 million in December 1991. Although Murphy obtained a copy of the Hume appraisal sometime in the spring of 1992, he did not bring the appraisal to Riverside’s attention. In addition, construction records and Murphy’s testimony at the confirmation hearing make it clear that the actual cost of constructing the Cypress Creek property was only about $4 million. Finally, the $383,450 estimated net operating income was 26% higher than the net operating income forecast by the Debtor’s own appraisal expert, Fred Roe, in June 1992.

Despite the March 1992 appointment of the Special Master, the Debtor continued to divert funds from the lockbox account. Thasc’s May 1992 rent check was deposited in the bank account of one of the Debtor’s affiliates (SM 109), and Thasc’s June 1992 rent check was converted into a cashiers’ check. In fact, between September 1990 and May 1992, only four of Thasc’s twenty-one rent checks were actually deposited in the lockbox. The remainder were either deposited into the Debtor’s unrestricted bank account, deposited into the bank accounts of other SM affiliates, or converted to cashiers’ checks. These diversions took place despite EquiVest’s numerous reminders of the Debt- or’s defaults; indeed, EquiVest sent the Debtor nine default notices between April 1991 and May 1992 alone. Finally, in late spring 1992, EquiVest moved to have the Debtor held in contempt for diversion of rent from the lockbox. A hearing on EquiVest’s motion was scheduled for June 18, 1992.

At about this time, EquiVest apparently got word of the Hume appraisal to Riverside. In June 1992, Riverside offered to loan the Debtor’s $2.3 million to pay off EquiVest, provided the Debtor could verify that its interest in the Cypress Creek property was worth $3.07 million. Riverside’s terms for such a loan, however, were onerous. Riverside offered the Debtor a three year loan, at interest of 15% plus a 10-20% equity kicker. Riverside also demanded a consulting fee of $34,000. Despite Riverside’s exorbitant terms, Murphy, desperate to save the property from foreclosure, apparently was willing to accept Riverside’s loan offer. Murphy sent EquiVest a copy of Riverside’s offer, along with a request that EquiVest accept $2.2 million in complete satisfaction of its loan to the Debtor. EquiVest declined to do so.

Also at about this time, the Debtor renegotiated its ground lease with the City of Fort Lauderdale. The negotiation lead to a reduction in the Debtor’s lease payments to the city. As a condition of the lower lease payments, Fort Lauderdale required the Debtor to pay all rent arrearages ($38,000) and its *209 1991 property taxes, which were past due (approximately $99,000). 8

On June 18, 1992, before the Debtor could pay the city’s rent arrearages and past-due 1991 property taxes, on the morning the contempt hearing on the Debtor’s diversion of rents was scheduled, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On July 28,1992, Marika Tolz was appointed Chapter 11 Trustee. Subsequently, the court approved the employment of Beverly Backhoff as the Trustee’s accountant.

On August 3, 1992, the Debtor collected a past-due rent check from Bruce S. Butler, Inc., one of the Debtor’s tenants. The check was in the form of a cashiers’ check made payable to SM Corporation, the Debtor’s general partner. Murphy deposited the check in the bank account of SM Corporation. He then wrote a check from SM Corporation to Michael Peinman, the Debtor’s collection attorney, in the amount of the rent collected from Butler. The check to Fein-man was dishonored for insufficient funds. About one month later, Backhoff, the Trustee’s accountant, discovered that Murphy had collected the rent from Butler. Backhoff wrote Murphy to demand that Murphy forward the past-due Butler rent to the Trustee. Murphy did not respond. Backhoff would not back off, and continued to press the matter. Finally, on November 13, 1992, the morning the Debtor’s examination by the Trustee at the § 341 creditors’ meeting was scheduled, SM Corporation’s check to Fein-man was honored, and Feinman turned the rent over to the Trustee. See 11 U.S.C. § 341.

On September 18, 1992, the Debtor filed a proposed plan of reorganization. The Debtor amended that plan on November 14, 1992. 9 The Debtor’s plan divides the claims against the Debtor into 7 classes. Class 1 is Equi-Vest’s disputed nonrecourse secured claim. 10 Class 2 is the claim of Capital Bank, which has a nonrecourse junior mortgage on the Cypress Creek property as a result of a loan it made to SM 108. Capital Bank’s claim and mortgage is worthless, because the Cypress Creek property is fully encumbered by Equi-Vest’s senior claim, leaving no equity for Capital Bank’s mortgage, and Capital Bank’s loan is nonrecourse. See 11 U.S.C. § 502(b); § 506(a); § 1111(b). Class 3 is EquiVest’s unsecured deficiency claim. 11 Class 4 is the claim of Fort Lauderdale for rent arrearages and the past-due 1991 property taxes. That claim has been paid in full. Class 5 is the claims of the Debtor’s trade creditors, total-ling approximately $175,000. Class 6 is the unsecured claims of Murphy. Finally, Class 7 is the interests of the Debtor’s equity security holders.

Basically, the Debtor’s plan proposes to pay EquiVest’s secured claim over 10 years, with interest at 8%, based on a twenty year amortization. The plan also proposes to pay Capital Bank’s claim, EquiVest’s unsecured deficiency claim, and the general unsecured claims a equal dividend on the effective date, with any balance owed to be paid in equal quarterly installments over the next two years. The plan does not provide for Class 4, which has already been paid in full. Furthermore, the plan waives the Class 6 inside claims. Finally, the plan proposes to wipe out, in effect, the existing equity interests. Under the plan, the equity interests in the reorganized Debtor will go to Murphy in exchange for a one time payment of $200,000 from Murphy to the Debtor on the effective date of the plan. Murphy intends to distrib *210 ute the new equity interests to the old equity holders. 12

Several significant changes in the Debtor’s administration have been made by the Trustee. In November 1992, the Trustee, with court approval, entered into a property management agreement with Marstel Corporation, under which Marstel replaced DM & R as the manager of the Cypress Creek property. Since Marstel’s appointment, the Trustee has collected approximately $60,000 per month in rents from the Cypress Creek property.

Also in November 1992, this court granted EquiVest relief from the automatic stay to set a sale date for its final judgment of foreclosure on the state court action. On December 7, 1992, EquiVest filed its own plan of reorganization. 13 On December 8, 1992, the state court entered a final judgment of foreclosure on EquiVest’s loan to the Debtor. The final judgment released Murphy and Sadkin from their personal guaranties on the EquiVest loan.

On January 27, 1993, this court approved the Debtor’s disclosure statement. The Debtor’s plan was submitted to the various parties affected by the plan for a vote. 14

On February 10, 1993, this court entered an agreed cash collateral order, providing, inter alia, that the Trustee could pay the rent arrearages and the past-due 1991 property taxes due to the City of Fort Lauder-dale in connection with the lease renegotiation. 15 The cash collateral order also provided that, to the extent EquiVest’s cash collateral was used to pay the rent arrearages and 1991 property taxes, EquiVest would be entitled to adequate protection payments at confirmation. Pursuant to the cash collateral order, the Trustee paid the prepetition rent arrearages and 1991 property taxes.

On February 26, 1993, the Debtor modified its amended plan of reorganization to increase the unsecured dividend being paid to the Class 2 claim of Capital Bank, EquiVest’s Class 3 unsecured deficiency claim, and the Class 5 general unsecured creditors under the plan from 5% to 8.5%.

Ballots on the Debtor’s plan were due by March 1, 1993. Class 1, EquiVest’s secured claim, voted to reject the plan. Class 2, the claim of Capital Bank, originally voted to reject the plan, but, subsequent to the ballot deadline, was permitted to change its ballot to accept the plan. Class 3, EquiVest’s unsecured deficiency claim, voted to reject the plan. Class 4, the City of Fort Lauderdale, is unimpaired by the plan, and, therefore, does not vote. See 11 U.S.C. § 1126(f). Class 5, the trade creditors’ claims, voted to accept the plan. Classes 6 and 7, the claims of insider creditors and interests of existing equity holders, are wiped out by the plan and thus are deemed to reject it. See 11 U.S.C. § 1126(g).

On March 1,1993, EquiVest filed its objections to the confirmation of the Debtor’s plan. The court heard evidence with respect to the Debtor’s plan and EquiVest’s objections on March 8, 9, and 11, 1993. Equi-Vest’s objections are now before the court for decision.

Currently, the Debtor has approximately $137,000 in cash available to pay administrative expenses, the unsecured dividend, and any adequate protection payments due Equi-Vest under the February 1993 cash collateral order. This includes about $73,000 collected by the Trustee from Murphy in settlement of the Trustee’s preference actions against Murphy.

*211 JURISDICTION AND PROCEDURE

This court has jurisdiction over this matter under 28 U.S.C. § 1334(b) as a matter arising under § 1129 of the Bankruptcy Code. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(L) as a proceeding involving the proposed confirmation of a plan and is before the court pursuant to the Standing Order of Reference of the United States District Court for the Southern District of Florida automatically referring bankruptcy cases and proceedings to this court for hearing and determination.

DISCUSSION

I. EquiVest’s Claim.

There is no doubt that EquiVest’s claim is undersecured. EquiVest’s total claim is approximately $5.5 million. The parties agree that the value of EquiVest’s collateral, the Cypress Creek property, does not exceed $2.7 million. Section 506(a) provides that an undersecured claim is to be bifurcated into two claims, secured and unsecured. Under § 506(a), EquiVest has a secured claim to the extent of the value of its collateral. 11 U.S.C. § 506(a). Thus, EquiVest has a secured claim to the extent of the value of the Cypress Creek property. The remainder of EquiVest’s approximately $5.5 million claim is unsecured. 16 Obviously, the key to determining the nature and extent of EquiVest’s secured and unsecured claims is to determine the value of the Cypress Creek property.

In determining the amount of an un-dersecured creditor’s secured claim under § 506(a), property is to be valued “in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a). Where a debtor’s plan proposes to retain and use the property, it is appropriate to value the property at its fair market value. Matter of Savannah Gardens-Oaktree, 146 B.R. 306, 310 (Bankr.N.D.Ga.1992); In re Usry, 106 B.R. 759, 761 (Bankr.M.D.Ga.1989).

In this case, we have the usual battle of the appraisers. EquiVest’s appraiser, John Danner, values the property at $2.7 million. The Debtor’s appraiser, Fred Roe, values the property at $2.15 million. The higher value, of course, favors EquiVest by increasing the amount of its allowed secured claim under § 506. EquiVest’s secured claim must be paid in full under the Code, while its unsecured deficiency claim need only be paid 8.5 cents on the dollar. See 11 U.S.C. § 1129(b). The lower value favors the Debtor by reducing the amount it must pay in full and increasing the amount it can settle for 8.5 cents per dollar. Thus, it is no surprise that each appraiser came up with a value more favorable to the interests of its client. It is left to the court to determine which appraisal is to be afforded greater weight.

Real estate appraisers typically use three methods to approximate the fair market value of property. The first method is the “income capitalization approach.” See generally V. Brudney & A. Chirelstein, Corporate Finance, at 35-44 (2d ed. 1979). See also In re Ascher, 146 B.R. 764, 768 (Bankr.N.D.Ill.1992) (applying the income capitalization approach); Savannah Gardens-Oaktree, 146 B.R. at 310 (same). This method gives recognition to the view that investors do not buy the bricks and mortar of a building. Rather, they buy the earnings the bricks and mortar will produce in the future. Measuring the fair market value of collateral under the income capitalization approach is a two-step analysis. First, the future net operating income of the property is estimated. Next, that income is divided by a capitalization rate (“capitalized”) to obtain the fair market value of the property. Brudney & Chirelstein, at 42. See also Ascher, 146 B.R. at 768; Savannah Gardens-Oaktree, 146 B.R. at 310. 17

*212 The capitalization rate is computed by determining the annual rate of return a hypothetical investor would be looking for in deciding whether to buy the property. See R. Brealey & S. Myers, Principles of Corporate Finance, at 49,192-99 (3d ed. 1988). 18 More specifically, the capitalization rate equals the risk-free interest rate available in the marketplace plus some risk premium the hypothetical investor would require to induce her to make the investment. Brealey & Myers, at 136-37; Brudney & Chirelstein, at 61-62 (quoting Lewellen, The Cost of Capital (1969)). The risk premium is determined by analyzing the risk involved in the business to be valued. Brealey & Myers, at 136-37; Brudney & Chirelstein, at 61-62 (quoting Lewellen, The Cost of Capital (1969)).

The second method used to determine the value of a business like that of the instant Debtor is the “comparable sales approach.” Under that method, the appraiser researches the debtor’s marketplace to find several recent sales of similar properties. Since every piece of property is unique, the appraiser then adjusts the actual sales prices of the comparables to account for both positive and negative differences between the compara-bles and the subject property. This process generates a range of adjusted sales and prices, within which the appraiser places the debtor’s property in an attempt to ascertain what the debtor’s property would actually sell for in its own market. See C.F. Sirmans, Real Estate Finance, at 132-37 (2d ed. 1989).

The final method is the replacement cost approach. This approach attempts to replicate the precise amount it would cost to reconstruct a piece of property of similar utility or usefulness as the subject property, applying currently used materials and building techniques, and factoring in actual and actuarial depreciation. Id. at 138. In effect, this method attempts to determine the actual present value of the debtor’s bricks and mortar. This method is most useful in determining value for insurance purposes.

Roe, the Debtor’s appraiser, valued the property in July 1992. Danner, EquiVest’s appraiser, valued the property in February 1993. Both Roe and Danner analyzed the value of the Cypress Creek property under all three standard methods. Their conclusions as to the value of the Cypress Creek property were not all that far apart. Roe concluded that the Cypress Creek property is worth $2.16 million, while Danner says it is worth $2.7 million. The difference between the valuations reached by the two appraisals stemmed from disagreement about the level of risk involved in running the Cypress Creek property. While Danner concluded that the Cypress Creek property is no riskier than any other similar commercial real estate property in the Fort Lauderdale area, Roe concluded that the property is significantly riskier than other similar properties in the Fort Lauderdale market. The primary basis for Roe’s view of the risk associated with the Cypress Creek property is the fact that some % of the Debtor’s space is occupied by a single tenant, Thasc. The Thasc lease is at an above-market rental. Unfortunately for the Debtor, the Thasc lease expires soon, and a new lease will have to be negotiated. In these negotiations, given the glut of office space available in South Florida and the Fort Lauderdale area, the Debtor will be at a significant disadvantage. Thus, in his analysis under the income capitalization approach, Roe chose to employ a much higher capitalization rate than Danner (13.5%, compared to the 10.5% used by Danner).

By the same token, Danner’s analysis of comparable sales reached a higher value for the Cypress Creek property than Roe’s analysis did. Roe and Danner strongly disagreed about what sales were comparable in terms of geography, the nature of the property and the business, and age.

Both Danner and Roe properly gave little weight to replacement value. Both recognized that the cost of rebuilding the Cypress Creek property is of, at best, limited relevance here. Indeed, if some disaster destroyed the Debtor’s building, the appraisers’ testimony suggests that, given the excess of available office space in South Florida, it *213 would be fruitless to even rebuild the Cypress Creek property. Instead, a rational investor might well pocket the insurance proceeds and sell the leasehold for some other use. That option is not available to the Debtor; the Debtor’s building is in fine condition. Therefore, both appraisers concluded that a rational investor would either hold the buildings to reap the rewards of the Debtor’s future earnings or would offer it to the marketplace for sale, and thus emphasized the income capitalization and comparable sales approaches.

Unfortunately, neither appraisal is particularly pérsuasive. Danner’s appraisal contains a number of careless errors that greatly affect the credibility of the appraisal. Furthermore, there is some risk that Danner was not a disinterested witness. He owns an office building within 2 miles of the Debtor’s Cypress Creek property. Thus, there is at least some possibility that the shutdown of the Debtor could inure to his benefit. Consequently, the court is hesitant to give Dan-ner’s appraisal much weight. On the other hand, Roe appraised the property in July 1992, some eight months before the confirmation hearing. Thus, Roe’s appraisal is weakened by its age. Interest rate conditions have changed in the past eight months, affecting the capitalization rate used by Roe in his income capitalization approach. Moreover, the sales comparables used by Roe are outdated, due to changes in interest rate conditions and the Fort Lauderdale area real estate market.

The court does, however, agree with Roe’s view that the status of Thasc’s lease makes the Cypress Creek property signifi-eantly riskier than other similar Fort Laud-erdale commercial real estate properties. In addition, because of the admitted errors in Danner’s appraisal and his possible conflict of interest, this court is left with little choice but to use Roe’s appraisal. Moreover, because of the facts of this case, the court places primary reliance on the income capitalization approach Roe used to value the Debtor. 19

Roe’s appraisal, however, can only be relevant after it is brought up to date. Thus, it must be adjusted to give recognition for the significant reduction in risk-free interest rates over the past eight months. This adjustment is crucial. Under the income capitalization approach, the value of a commercial real estate property is computed by discounting its net cash flows by an appropriate capitalization rate. Where risk-free interest rates decrease, capitalization rates decrease, since capitalization rates are computed by taking the risk-free interest rates and adding a risk premium. Thus, other things being equal, when interest rates decrease, the values of all commercial real estate properties increase.

At the time of the appraisal, the risk-free rate used by Roe was 3.3%. 20 As of the date of the confirmation hearing, that same risk-free rate was approximately 3.15%. See Treasury Bonds, Notes & Bills, Wall St. J., March 15, 1993, at C16 (quoting September, 1993 treasury bill ask yield as of Friday, March 12, 1993). Adjusting Roe’s $2.15 million valuation for this significant drop in interest rates, the court values the Cypress Creek property at $2.27 million. 21

*214 Consequently, the value of EquiVest’s collateral is $2.27 million. Under § 506(a), EquiVest’s secured claim is fixed at that amount. EquiVest’s unsecured claim is equal to the difference between its total claim of approximately $5.5 million and its secured claim, $3.23 million.

II. EquiVest’s Objections to Confirmation of the Debtor’s Plan.

EquiVest objects to the confirmation of the Debtor’s plan on five grounds. First, EquiVest alleges that the classification of its unsecured deficiency claim separately from other unsecured claims is impermissible under § 1122. Next, EquiVest claims that Murphy’s purchase of the equity interest in the reorganized debtor violates the absolute priority rule contained in § 1129(b)(2)(B)(ii). Third, EquiVest argues that the treatment of its secured claim under the plan is not fair and equitable, in contravention of § 1129(b). Furthermore, EquiVest claims that the Debtor’s plan is not feasible, in violation of § 1129(a)(ll). Finally, EquiVest insists that the Debtor’s plan was not filed in good faith, as required by § 1129(a)(3). It is the Debt- or’s burden to prove each of the requirements of confirmation by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

A. May the Debtor separately classify EquiVest’s unsecured deficiency claim created by § 1111(b) from the general unsecured claims?

EquiVest’s initial objection to the Debtor’s plan is that its separate classification of EquiVest’s unsecured deficiency claim from the claims of the general unsecured creditors is impermissible. EquiVest’s argument in this regard is erroneous.

An attempt to force a Chapter 11 plan on one or more impaired classes of creditors that have rejected the plan is commonly referred to as “cramdown.” See generally Kenneth Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am.Bankr.L.J. 133 (1979). Section 1129(a)(10) of the Bankruptcy Code provides that before a plan can be crammed down over the objections of a creditor class, at least one impaired class of creditor claims must vote to accept the plan, without regard to any insider votes. 22 11 U.S.C. § 1129(a)(10). Thus, the Debtor, to get its plan confirmed over EquiVest’s objections, must come up with one impaired creditor class that accepts the plan, without regard to any insider votes in that class.

The Debtor has placed EquiVest’s § 1111(b) — created deficiency claim in a separate class by itself, Class 3. This court has previously held EquiVest’s unsecured claim is $3.23 million. The other unsecured creditors’ claims are placed by the Debtor’s plan in Class 5, and total $175,000. Given the size of EquiVest’s § 1111(b) unsecured deficiency claim relative to the other unsecured claims and EquiVest’s opposition to the plan, it is obvious the reason the Debtor seeks to separately classify EquiVest’s § 1111(b) deficiency claim from the claims of other unsecured creditors is to satisfy the requirements of § 1129(a)(10); i.e., to get one impaired class to accept the plan. 23 EquiVest claims that *215 the Debtor’s apparently manipulative motive is improper, and that EquiVest’s unsecured deficiency claim should be placed in the same class as the claims of the general unsecured creditors. If the court accepts EquiVest’s argument that it should be classified with the other general unsecured creditors in a single class and EquiVest’s argument that the Class 5 unsecured- creditors were the only impaired class to accept the plan, such a joint classification would be the death knell for the Debt- or’s plan because the Debtor could no longer satisfy the requirements of § 1129(a)(10). EquiVest’s deficiency claim would be large enough to overwhelm the claims of the other members of that single class, and, by voting no, EquiVest could prevent the plan from being accepted by two-thirds in amount of the total unsecured claims. See 11 U.S.C. § 1126(c).

On the other hand, the Debtor claims that the validity of its plan’s separate classification is moot, since Class 2, the claim of Capital Bank, is impaired and has accepted the plan. The Debtor also argues that even if Class 2 is not impaired, and the validity of the plan’s separate classification is at issue, such separate classification, whether or not done solely to gerrymander to create an accepting impaired class, is perfectly consistent with the Bankruptcy Code.

(1) Is Class 2 impaired?

Class 2 consists of a single creditor, Capital Bank, which holds a junior, nonrecourse mortgage against the Cypress Creek property. The Debtor argues that Class 2, which accepted the plan, 24 is an impaired class, and thus any question about the separate classification of EquiVest’s unsecured deficiency claim and the general unsecured claims is moot. Unfortunately for the Debtor, the Class 2 claim is not impaired. 25

Section 1124 provides that a class of claims is impaired if, with respect to any claim in the class, the plan alters the “legal, equitable or contractual rights” to which such claim is entitled. 11 U.S.C. § 1124(1). Under § 1124, any alteration in a creditor’s rights or privileges constitutes impairment. In re Club Assocs., 107 B.R. 385, 401 (Bankr.N.D.Ga.1989), appeal dismissed, 956 F.2d 1065 (11th Cir.1992).

The basis of Capital Bank’s Class 2 claim is a nonrecourse junior mortgage on the Cypress Creek property. Section 506(a) provides that “an allowed claim” is considered to be secured to the extent of the value of the creditor’s interest in the collateral, and unsecured to the extent that the value of the creditor’s claim exceeds that interest. Section 502(b)(1), however, provides that claims which are “unenforceable against the debtor and property of the debtor” are not allowable. 11 U.S.C. § 502(b)(1). Since Capital Bank’s claim is nonrecourse, any unsecured claim it holds can only be allowed under § 502 to the extent § 1111(b) permits a non-recourse lender to assert a deficiency claim against the estate. However, § 1111(b) is only available to those creditors who have a “claim secured by a lien on property of the estate.” 11 U.S.C. § 1111(b)(1)(A).

Here, the court has already been determined that the value of the Cypress Creek *216 property is insufficient to satisfy EquiVest’s first mortgage claim. See Section I above. Since Capital Bank’s mortgage is junior to EquiVest’s mortgage, it necessarily follows that the value of Capital Bank’s interest in the property of the Debtor, and thus the amount of its secured claim and lien, is zero. See 11 U.S.C. § 506(a). Accordingly, Capital Bank does not hold a “claim secured by a lien on property of the estate” and does not have a § 1111(b) deficiency claim. See 11 U.S.C. § 1111(b)(1)(A). In addition, since the loan is nonrecourse, § 502(b)(1) prevents Capital Bank from maintaining any unsecured deficiency claim. Since Capital Bank has no right to payment from the Debtor or the Debtor’s property, it is not a creditor of the Debtor. Since Capital Bank, the only member of Class 2, is not a creditor, Class 2 cannot be considered an “impaired class,” or even a class. See 11 U.S.C. §§ 101(5), (10); § 102(2). 26 See also § 1122 (only claims or equity interests can be classified). 27 Consequently, Class 5, the general unsecured claims, is the only impaired class to accept the Debtor’s plan.

(2) May a plan classify an unsecured deficiency claim created by § 1111(b) separately from other general unsecured claims? 28

In general, the proponent of a Chapter 11 plan has broad discretion to classify claims and interests in the plan according to the particular facts and circumstances of each case. In re Holywell Corp., 913 F.2d 873, 880 (11th Cir.1990). The provision in Chapter 11 governing classification is § 1122, which provides:

(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. '

(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience. 29

11 U.S.C. § 1122.

Section 1122(a) expressly provides that only substantially similar claims may be placed in the same class. It does not expressly require that all substantially similar claims be placed in the same class, nor does it expressly prohibit substantially similar claims from being classified separately. See In re Bryson Properties XVIII, 961 P.2d 496, 502 (4th Cir.), cert. denied, — U.S. -, 113 S.Ct. 191, 121 L:Ed.2d 134 (1992). Nevertheless, many courts, including five circuit courts of appeal, while recognizing that § 1122 does not explicitly forbid a plan proponent from placing similar claims in separate classes, have imposed significant limits on the ability of a plan proponent to do so. See, e.g., Hancock Mutual Life Insur. Co. v. Route 37 Business Park Assoc., 987 F.2d 154, 159-60 (3d Cir.1993); In re Lumber Exchange Bldg. Ltd., 968 F.2d 647, 649 (8th Cir.1992); Bryson Properties, 961 F.2d at 502; Matter of Grey stone III Joint Venture, 995 F.2d 1274, 1278-1279 (5th Cir.1991); In re U.S. Truck Co., 800 F.2d 581, 586 (6th Cir.1986). See also Holywell Corp., 913 F.2d at 880. 30 The majority of lower courts have *217 followed suit. 31

In Greystone, the Fifth Circuit held that “one clear rule” has emerged from the otherwise muddled § 1122 caselaw: “thou shalt not classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan.” Greystone, 995 F.2d at 1279. The court reasoned that if § 1122(a) were wholly permissive regarding the formation of different classes from similar types of claims, there would be no need for § 1122(b) to authorize a class of smaller, unsecured claims. The Greystone court then held that a broad interpretation of the powers to classify similar claims separately under § 1122(a) “would render § 1122(b) superfluous, a result that is anathema to elementary principles of statutory construction.” Id. at 1278. Consequently, the Greystone court held that § 1122 must contemplate some limits on classification of claims of similar rights. Id.

However, while Greystone and the other cases have paid lip service to principles of statutory construction and the language of § 1122, they have turned more on notions of basic fairness and good faith. Indeed, most courts seem to base their rulings less on the language of § 1122 than on their view that separate classification is usually done to manipulate the voting to insure that at least one impaired class of creditors accepts the plan, and thus that the plan meets the requirements of § 1129(a)(10). 32 See In re ZRM-Okla. Partnership, 156 B.R. 67, 70 (Bankr.W.D.Okla.1993) (calling the “unspoken belief’ underlying the Greystone line of cases “disconcerting”). Such manipulation is viewed as some sort of “abuse” of Chapter 11. As the Eleventh Circuit noted, “[t]here must be some limit on a debtor’s power to classify creditors ... The potential for abuse would be significant otherwise.” Holywell, 913 F.2d at 880. See also Route 37, 987 F.2d at 158; Lumber Exchange, 968 F.2d at 650; Bryson Properties, 961 F.2d at 502; Greystone,