After a hearing on the approval of a disclosure statement, Judge Edward J. Coleman of the Middle District of Georgia ruled that the absolute priority rule and new value exception apply in individual Chapter 11 cases. In re Rogers, Ch. 11 Case No. 14-40219, 2016 WL 3583299 (Bankr. M.D. Ga June 24, 2016) (click here for .pdf of opinion).
Debtors were the sole owners of Wetdog LLC, which in turn owns the Foley House Inn in Historic Savannah. After a default in payments to Wetdog’s secured creditors, Wetdog filed a Chapter 11 petition. Wetdog’s Chapter 11 Plan was confirmed in September 2014. The individual Debtors, because they were guarantors of the Wetdog debt, filed their own Chapter 13 petition in February 2014 and subsequently converted their case to a Chapter 11 case. Their principal asset was their 100% ownership interest in Wetdog. Debtors filed a Plan and Disclosure Statement that called for a 25% distribution to unsecured creditors other than the two secured creditors of Wetdog. Debtors’ Plan called for no distribution to those creditors as they were being paid in full in the Wetdog Plan. Debtors also proposed to retain all non-exempt, pre-petition property, including their interest in Wetdog which they valued at $
The U.S. Trustee and creditors objected, in part, on the basis that the proposed Plan violated the absolute priority rule of 11 U.S.C. §1129(b)(2)(B)(ii), which provides:
With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(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.
(2005 BAPCPA amendment in italics). The Court first noted the split of authority since the 2005 BAPCPA amendments, then discussed each in detail.
Due to varying interpretations of these changes brought about by BAPCPA, a significant split of authorities has developed regarding the effect of these amendments on the absolute priority rule when the Chapter 11 debtor is an individual. In re Maharaj, 681 F.3d 558, 563 (4th Cir.2012). The split of authorities involves two different interpretations, commonly referred to as the “broad” and “narrow” views. Courts adopting the “broad view” interpret the added language in § 1129(b)(2)(B)(ii) and the newly added § 1115 to mean that a Chapter 11 debtor who proposes not to pay a rejecting class of unsecured creditors in full may nonetheless retain all of the debtor’s non-exempt, pre-petition property as well as all post-petition property and earnings and still obtain plan confirmation. Thus, theses courts conclude that, by broadly defining the property that debtors may retain and still effect a cramdown, Congress intended to abrogate the absolute priority rule in individual Chapter 11 cases.
Ultimately, Judge Coleman opted to follow the narrow view and held that the absolute priority rule applies in individual Chapter 11 cases.
This Court is persuaded that the decisions adopting the “narrow view” of § 1129(b)(2)(B)(ii) are better reasoned. While it may not be susceptible to a “plain” meaning interpretation, I find the most natural reading of the operative terms in §§ 1129(b)(2)(B)(ii) and 1115 to create only a limited exception to the absolute priority rule for individual Chapter 11 debtors. Further, I agree that “if Congress had intended to abrogate the absolute priority rule, it would have done so in a far less convoluted way, particularly in light of the well-established place of the absolute priority rule in bankruptcy jurisprudence.” Maharaj, 681 F.3d at 565–66. Accordingly, this Court finds that the absolute priority rule still applies in individual Chapter 11 cases.
Since the Debtors’ proposed Plan did not propose to pay unsecured creditors in full, and called for Debtors to retain property not included in §1115, it violated the absolute priority rule. However, the next question was whether the “new value exception” to the absolute priority rule applied to the case.
This Court agrees that the “new value” exception is applicable in individual Chapter 11 cases. However, as other courts have recognized, it is not an easy task for an individual debtor to satisfy the exception because the new value must typically come from a source other than the debtor… Although it may be the rare case in which an individual Chapter 11 debtor will meet the requirements of the “new value” exception, the Court finds no reason why the Debtors should not be given the opportunity to do so.
See also: Does the Absolute Priority Rule Apply to Individual Debtors, ABI Journal
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