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iii. In re Stephens, 704 F.3d 1279 (10th Cir. 2013)
Issue: Whether the "absolute priority rule" applies in this case.
Holding: On direct appeal, the Tenth Circuit reversed the bankruptcy court's confirmation of a plan. The Court held that the appeal was not moot eventhough the plan had been substantially consumated and then held that the plan did not satisfy the absolute priority rule because it proposed to provide 1% distribution to unsecured creditors while the debtor retained property of the estate. The Court adopted the narrow view because the statutory provisions are ambiguous as to whether Congress intended to abolish the absolute priority rule as it relates to individual Chapter 11 plans, and there was no legislative history evidencing an intent by Congress to do away with the absolute priority rule.
iv. In re Maharaj, 681 F.3d 558 (4th Cir. 2012)
Issue: 1) Whether the plan may "strip off" the lien of DB Structured Products; and 2) whether the debtors have satisfied the requirement for "cram down" confirmation over the rejection of the plan by the class of unsecured creditors, and, specifically, whether the "absolute priority rule" applies in this case.
Holding: The court denied confirmation of the debtors' chapter 11 plan. The court first addressed whether the debtor's plan could strip DB Structured's lien from the Poland Road property. The court first noted that under § 506 of the Code, a claim is only deemed secured to the extent of the value of the collateral and is otherwise deemed unsecured, and that a claim that is not an allowed secured claim is void. The court then stated, "[s]ince there is clearly no equity to which DB Structured Products' lien can attach, there is no substantive bar to the voidance of DB Structured Products' subordinate deed of trust." The court when on to note that "[t]here is, of course a procedural issue, namely whether voidance of a deed of trust on the ground that there is no equity to which it can attach can be accomplished by plan confirmation or requires a separate adversary proceeding or contested matter brought for that purpose." The court then found that "[w]hile the Fourth Circuit has held that a separate proceeding would always be required in a chapter 13 case, it has allowed extinguishment of a lien by plan confirmation in the chapter 11 context." Thus, the court found that the debtors' plan could extinguish DB Structured's lien.
The court then addressed the absolute priority rule issue. The court noted that the debtors' plan had not been accepted by the general class of unsecured creditors, and thus had to satisfy the requirements for cram down, including the requirement that the plan be fair and equitable to each impaired class that has not accepted the plan. The court then stated that, under the absolute priority rule, "To be considered 'fair and equitable' to a dissenting class of unsecured claims, a plan must, at a minimum, provide that 'the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section."
©2014 William L. Norton III
