BANKRUPTCY CORNER
BANKRUPTCY CORNER
Application of the Absolute Priority Rule in an Individual Chapter 11
JASON S . RIGOLI
In a chapter 11 bankruptcy , the reorganization of a debtor ’ s debts or an orderly liquidation of the debtor is done through a plan . The plan is proposed to the bankruptcy court and creditors and interest holders whose votes are solicited for acceptance of the plan to get the plan confirmed . When all interested parties agree to the treatment provided for in the plan , there is generally no issue for the bankruptcy court to address and confirmation is granted . However , if there is a class of creditors who vote not to accept the plan , the debtor must prove to the bankruptcy court that “ the plan does not discriminate unfairly , and is fair and equitable , with respect to each class of claims or interests that is impaired under , and has not accepted , the plan .” 11U . S . C . § 1129 ( b )( 1 ).
To satisfy , at least the “ does not discriminate unfairly ” prong , the debtor can demonstrate that the plan satisfies the absolute priority rule which governs the order of payment among creditors and , generally , requires senior creditors to be paid in full before junior creditors or interest holder can be paid or retain property of the estate . See 11 U . S . C . § 1129 ( b ).
In 2005 , Congress enacted BAPCPA which significantly overhauled the Bankruptcy Code . The BAPCPA amendments have caused a split among bankruptcy courts as to the application of the absolute priority rule in individual chapter 11 bankruptcy cases . See In re Joseffy , Case No . 21- 19419-PDR , 2023 Bankr . LEXIS 2218 at * 6-9 , 2023 WL 5842000 ( Bankr . S . D . Fla . Sept . 8 , 2023 ). The two modifications in BAPCPA that have generated the split are : ( i ) the addition of 11 U . S . C . § 1115 , which augments § 541 and provides that property of the estate in an individual chapter 11 case also includes property acquired postpetition and earnings from postpetition services and ( ii ) “[ amending 11 U . S . C .] § 1129 ( b ) ( 2 )( B )( ii )— the absolute priority rule — to provide that , even if a plan does not pay unsecured creditors in full , the debtor may still ‘ retain property included in the estate under section 1115 [.]’” In re Joseffy , 2023
Bankr . LEXIS 2218 at * 7-8 ( quoting 11 U . S . C . § 1129 ( b )( 2 )( B )( ii )).
As Judge Russin stated in Joseffy , the courts have come down on two sides , the “ broad view ” and “ narrow view .”
The “ broad view ” reads § 1115 to subsume rather than augment § 541 , which means that an individual debtor can retain all property of the estate , acquired pre- and postpetition , without paying unsecured creditors in full , rendering the absolute priority rule inapplicable in an individual chapter 11 . Joseffy , 2023 Bankr . LEXIS 2218 at * 9-10 .
Judge Russin followed the “ narrow view ,” which has been adopted by all the circuit courts of appeal that have addressed this issue . Id . at * 10 . The “ narrow view ” reads § 1115 to augment the bankruptcy estate by including certain postpetition property to the prepetition property of the estate already specified in § 541 . This in turn limits what the individual can retain , without paying unsecured creditors in full , to postpetition property under § 1115 . Id . at * 10 .
The debtor can also retain prepetition exempt property , which is governed expressly by § 522 , and is not being retained under the plan . Joseffy , at * 17-22 .
Conclusion
In an individual chapter 11 bankruptcy , the absolute priority rule applies and is satisfied so long as the plan provides for payment of the value of the nonexempt , prepetition property of the estate to the unsecured creditors .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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