Report About Oral Argument In re Zachary

Michael St. James sent out the below very nice and thoughtful email.  I sure hope he’s wrong.  I sent it to Judge Jury with the comment that I hope he is wrong.  Her comment was we disagree about that.  By the way, you can watch the oral argument here.    (Thanks to Judge Kwan for reminding me of that).

From: “Michael St. James” []
Sent: Wednesday, October 21, 2015 4:08 PM
To: M. Jonathan Hayes;
Subject: [Bankr-L] Ninth Circuit Oral Argument: Absolute Priority Rule in Individual Chapter 11 Cases

Based on Mr. Hayes’ email, below, on October 21, 2015 I attended oral argument before the Ninth Circuit in Zachary, a direct appeal from the Bankruptcy Court (E.D. Cal., Holman, J.) addressing whether the absolute priority rule applied in individual Chapter 11 cases. 

Each of the three Judges, Richard Paez, Andrew Hurwitz and Mary Murguia, was actively engaged and very conversant with the legal issues.  It also seemed clear to me that they were likely to rule against the Debtor and find that the absolute priority rule was applicable.

Judge Paez began by noting that although the Ninth Circuit was not bound by them, four Circuits had already ruled against the Debtor’s position (as had the Bankruptcy Appellate Panel, “but it’s not Article III”):  “If we wanted to rule for the Debtor, what  would we say.”  Debtor’s counsel pushed his basic theory: Section 1115 establishes three tranches of property of the estate, the first of which is Section 541 property.  That led to a discussion of what “in addition to” means and what conclusions would be reached by a “natural reading” of Section 1115 and Section 1129(b)(2)(B)(ii).  Each of the three Judges seemed to think a natural reading of the statute would not support the Debtor.

Judge Hurwitz tracked the circuitous reasoning required to get to the Debtor’s construction, and suggested that if Congress really wanted to do away with the absolute priority rule in individual cases, there was a far more straight-forward way to accomplish that.  Judge Hurwitz and later Judge Murguia wondered why BAPCPA was creating such a powerful weapon for debtors if everyone agreed that BAPCPA was intended to protect creditors.

Judge Murguia focused on the underlying facts, which were problematic.  The Debtor had a successful practice as an engineer and a valuable vacation rental in Lake Tahoe, but was burdened with a $2 million guarantee debt.  Believing there was no absolute priority rule problem, the Plan proposed to gently restructure the secured debts and to cash out the guarantee debt with a single $5,000 payment.  The Debtor argued that without an exemption from the absolute priority rule, individual Chapter 11s would be impossible, but Judge Paez noted that it would only make cram-down in individual cases impossible.  Judge Hurwitz noted that the cram-down proposed in the Debtor’s Plan seemed like “exactly the kind of debtor abuse” that Congress was trying to prevent.

Judge Murguia noted that the  cram-down / absolute priority rule for individuals pre-BAPCPA was that the individual could be required to give up all  pre-petition assets and but could keep post-petition earning.  The language of the statute  suggested that the same rule applied post-BAPCPA.  She  then turned to the argument which I thought resonated and would expect to see in the decision:  as a matter of statutory interpretation, there is a presumption against implied repeal; here, there is nothing the Debtor can use to overcome that presumption in order to advance an interpretation which repeals the absolute priority rule.

The Judges were clearly all engaged and very well prepared, and allowed the Debtor’s oral argument to go over time.  My prediction is a unanimous decision  sustaining the Bankruptcy Court’s application of the absolute priority rule to deny confirmation.

Best regards,

Michael St. James
St. James Law, P.C.
155 Montgomery Street, Suite 1004
San Francisco, CA.  94104

Board Certified:  Business Bankruptcy
American Board of Certification

Legal Specialist: Bankruptcy
State Bar of California




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