Absolute Priority Rule Roundup

The absolute priority rule is one of the foundations of bankruptcy.  The debtor receives a discharge if he turns over all property that the creditors have the right to seize anyway.  The debtor can keep property as long as he pays the value of the property to his creditors.  Another way of saying this is that the plan must be “fair and equitable” to creditors.   Of course, this is “unless otherwise agreed,” meaning that the rule does not apply if the unsecured class votes for the plan.

BAPCPA apparently changed this basic rule in sction 1129(b)(2)(B) which provides that the debtor may keep “property included in the estate under section 1115.”  Property included in section 1115 is all property under section 541 and wages earned postpetition.

The argument that new 1129(b)(2)(B) did not change the apr is that apr is so foundational that if Congress is going to get rid of it, Congress should say so clearly.  The argument that it is gone is that the new language says the individual debtor can keep his stuff and anyway, Congress tried to make individual chapter 11s work like chapter 13s and there is certainly no apr in chapter 13.

Court opinions are all over the place on the issue.  In the 9th Circuit, the BAP is considering the issue in In re Friedman, No. 11-1149 (9th Cir. BAP) argued on January 18, in Phoenix.  Other cases addressing this issue that are currently in the courts include: In re Maharaj, 2011 WL 1753795 (Bankr. E.D. Va. May 9, 2011)(No. 11-217 (4th Cir.)); In re Kamell, 2011 WL 1760282 (Bankr. C.D. Cal. May 4, 2011)(No. 11-1246 (9th Cir. BAP)); In re Stephens, No. 11-29 (10th Cir. BAP); and In re Cobb, No. 09-25620 (Bankr. C.D. Cal.); SPCP Group LLC v. Biggins et al., 2011 WL 4389841 (M.D. Fla., Tampa Div. Sept. 21, 2011)(apr is gone); In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010)(apr still applies).

Here is a nice article by Andrew Balbus, published in 2011 in the Norton Journal of Bankruptcy Law, “Does the Absolute Priority Rule Apply to Individuals in Chapter 11?. ”   In his article, Andy discusses each of the opinions ruling on the issue through January 1, 2011; In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007)(apr gone), In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan. 2007)(apr gone), In re Shat, 424 B.R. 854 (Bankr D. Nev. 2010)(apr gone), In re Gbadebo, 341 B.R. 222 (Bankr. N.D. Cal. 2010)(apr still applies), In re Mullins, 435 B.R. 352 (Bankr. W.D. Va. 2010)(apr still applies), In re Steedley, 2010 WL 3528599 (Bankr. S.D. Ga. Aug. 27, 2010).(apr still applies), In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010)(apr still applies), In re Karlovich, 2010 WL 5418872 (Bankr. S.D. Cal. Nov. 16, 2010)(apr still applies).

In the Central District, Judge Ted Albert has ruled in a written opinion that the apr still applies.  See In re Kamell, 451 B.R. 505 (Bkrtcy C.D. CA. May 2011, Albert J.)  According to Dennis McGoldrick, Judges Tighe, Mund, Ahart, Zurzolo, Bluebond have found that apr is gone.  Judges E Carroll and Barry Russell have ruled that it is still here.  Judge Richard Neiter confirmed a plan for me that violated apr because the unsecured class voted no, but no one filed an objection to the plan or appeared at the confirmation hearing.  Judge Deborah Saltzman has apparently commented that the apr is will with us.

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