  |
  |
  |
    
  
   |
 | |||
|
|
|
|
| |||
11 U.S.C. § 1129(b)(2)(B)(ii). Section 1115 provides that property of an individual chapter 11 debtor's estate includes all property specified in section 541 that the debtor acquires after commencement of the case as well as earnings from services performed by the debtor after the commencement of the case. The court noted that courts disagreed as to whether section 1129(b)(2)(B)(ii), read in conjunction with section 1115, has the effect of "eliminating the absolute priority rule completely from individual chapter 11 case confirmation decisions or only as to post-petition earnings and other property acquired by individual chapter 11 debtors after the commencement of the case." The debtors' argument was as follows: "They read § 1115, with its internal reference to § 541, not merely as expanding upon what constitutes property of the estate for an individual debtor, but as defining it. Section 541 specifies property of the estate as including 'all legal or equitable interests of the debtor in property as of the commencement of the case.' Thus, the argument goes, § 1115 embraces all property interests of the debtor, whether acquired before or after the chapter 11 filing, and since § 1129(b)(2)(B)(ii) allows a debtor to keep the property 'included in the estate' by § 1115, an individual debtor may retain all of his or her property, subject only to the liquidation test and the disposable income test." According to the debtors, BAPCPA abolished the absolute priority rule for individual chapter 11 debtors. The court disagreed with this interpretation. The court concluded that BAPCPA did not abolish the absolute priority rule for individual debtors, but merely allowed a debtor to keep post-petition earnings and other property acquired after the commencement of the case. The court held that "the absolute priority rule continues to exist in individual chapter 11 cases with respect to non-exempt property that was owned by the debtor on the filing date of the petition." Accordingly, "[b]ecause the debtors' plan allow[ed] them to retain non-exempt property that they owned on the filing date of the petition while paying unsecured creditors less than 100 cents on the dollar, the requirements for 'cram-down' [were] not satisfied." The court denied confirmation of the debtors' plan.
v. Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (B.A.P. 9th Cir. 2012)
Issue: Whether the absolute priority rule embodied in section 1129(b)(2)(B)(ii) applies to individual chapter 11 debtors.
Holding: The BAP reversed (and remanded) the decision of the bankruptcy court denying confirmation of the debtor's plan and held that the absolute property rule does not apply in individual chapter 11 debtor cases. The BAP first discussed the history of the absolute priority rule and the "new value" exception thereto. The court then analyzed the language of section 1129 (b)(2)(B)(ii) and section 1115 and how those sections relate to the issue of whether the absolute priority rule applies to individual chapter 11 debtors. Section 1129(b)(2)(B)(ii) provides that a cramdown plan is fair and equitable if: "With respect to a class of unsecured claims-(ii) 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." The court summed this section up as follows: "Simply put, a plan not paying an unsecured creditor in full is
©2014 William L. Norton III
