All posts in Absolute Priority Rule

4th Circuit Rejects Broad View; First Among CCAs to Address Abrogation of Absolute Priority Rule in Individual Chapter 11 Case

On June 14, 2012 the United States Court of Appeals for the Fourth Circuit published its opinion in In re Maharaj which succintly concludes that, “the absolute prioirty rule as it applies to individual debtors in Chapter 11 has not been abrogated by BAPCPA.” See, In re Maharaj, -F.3d-, No. 11-1747 (4th Cir. 2012). The case was before the 4th Circuit on direct appeal from an order denying confirmation entered by the bankruptcy court.

In reaching its decision, the 4th Circuit compiled all of the divergent published opinions recognizing that one district court, one bankruptcy appellate panel and five bankruptcy courts have taken the “broad view” (including the BAP’s Friedman decision) and over a dozen bankruptcy courts have adopted the “narrow view” (including Judge Kwan’s Arnold decision and Judge Albert’s Kamell decision).  On June 20, 2012 the Ninth Circuit dismissed the Friedman appeal, thus leaving intact the 9th Circuit BAP decision.

Thus, the status of the absolute priority rule in individual chapter 11 cases within the Central District remains a matter to be determined on a judge by judge basis. First, Central District Courts differ on whether BAP opinions bind the Bankruptcy Courts. Second, if not bound by the BAP’s Friedman decision, our Courts still differ on the legal issue as to whehter BAPCPA abrogated the absolute priority rule in individual chapter 11 cases.

The author is aware that Judge Smith, Judge Tighe and Judge Ahart (based on his CBJ article) subscribe to the “broad view.” Replies with experiences on the subject before other Central District courts would be helpful.

Does RadLAX Opinion Help re Absolute Priority Rule in Individual Cases?

A friend commented that the last paragraph of Justice Scalia’s opnion in RadLAX gives us a clue to how the Supremes may rule in Friedman, if the absolute priority rule issue in that case gets to the Supreme Court.  He is certainly right (again).  The code says what it says.

“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction.  See United States v. Ron Pair Enterprises, Inc., 489 U. S. 235–241 (1989).  Under that approach, this is an easy case.”

The previous paragraph states:

“[N]othing in the generalized statutory purpose of protecting secured creditors can overcome the specific manner of that protection which the text of §1129(b)(2)(A) contains.  As for pre-Code practices, they can be relevant to the interpretation of an ambiguous text, but we find no textual ambiguity here.  And the pros and cons of credit-bidding are for the consideration of Congress, not the courts.”

Judge Robert Kwan Rules that the Absolute Priority Rule Still Applies in Individual Chapter 11 Cases

In re Arnold,  — B.R. — , 2:12-bk-15623 (Bkrtcy, C.D. Ca. May, 2012  Kwan.J.)

Issue:   Does the absolute priority rule still apply in individual chapter 11 cases?

Holding:   Yes.

Judge Robert Kwan

The debtors here filed a individual chapter 11.  They own a number of pieces of real property.  They filed a chapter 11 disclosure statement and plan and US Bank objected on the basis that the disclosure statement did not contain adequate information and that the plan was patently unconfirmable because it violates the absolute priority rule.  The US Bank unsecured claim was based on a deficiency on property which the debtors had guaranteed.

Judge Kwan agreed with US Bank and refused to approve the disclosure statement.  As to whether the disclosure statement contained adequate information, the court found that the options given to unsecured creditors were confusing, did not advise creditors which option would apply, and did not advise creditors of the significance of various court rulings on the various options.  The disclosure statement also advised creditors that the debtors would make a new value contribution of $250,000 “at their election” but did not say where that money was going to come from and therefore the feasibility of making the contribution.

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