Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX
The absolute priority rule under 11
U.S.C. §1129(b) is one of the fundamental principles of chapter 11. Under the absolute priority rule, a debtor
has three options: (i) obtain a favorable vote from all classes of
unsecured creditors; (ii) pay unsecured creditors in full; or (iii) provide
that interests junior to unsecured creditors will not receive or retain any
property on account of their interest.
In
2005, Congress amended the Bankruptcy Code to make Chapter 11 more like Chapter
13 for individual debtors. Because of
some inexact drafting a question arose as to whether the absolute priority rule
continued to apply in individual cases.
While the majority view is that Congress did not abrogate the absolute
priority rule in individual cases, there are still some circuits where the
question remains open.
There are three
relevant statutory sections. First,
section 1115 provides that property of the estate in an individual case
included property acquired post-petition, including earnings from personal
services. Second, section 1129(a)(15) provides
that in an individual case in which an unsecured creditor objected, the Debtor
must submit his projected disposable income under the plan for a period of five
years.
Finally, section 1129(b)(2)(B) provides
that a plan would be fair and equitable with regard to a rejecting class of
claims if:
(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. (emphasis added).
*--The reference
to subsection (a)(14) should probably refer to subsection (a)(15) instead.
The statutory provisions add certain
post-petition property to the estate, require the Debtor to make payments of
projected disposable income if a creditor objects and allow the Debtor to retain
"property included in the estate under section 1115." This required
an examination of just what property was included by section 1115. According to
section 1115(a)
(a) In a case in
which the debtor is an individual, property of the estate includes, in addition
to the property specified in section 541—
(1) all property
of the kind specified in section 541 that the debtor acquires after the
commencement of the case . . . ; and
(2) earnings
from services performed by the debtor after the commencement of the case. . . .
.
Courts which have examined this language have divided
between a "narrow" interpretation holds that "property included
in the estate under section 1115" refers only to the post-petition property
added to the estate, while the "broad" interpretation holds that
section 1115's reference to "property specified in section 541"
refers to all section 541 property. Under the broad interpretation, because
section 1115 encompassed all section 541 property, the Debtor could retain all
of his property without violating the absolute priority rule. For a brief period of time, the broad
approach seemed to be gaining favor.
However, today all circuit courts which have addressed the issue and
most lower courts have followed the narrow approach in which the absolute
priority rule continues to apply.
The trend in the cases is definitely in favor of the narrow approach. The Fourth, Fifth, Sixth, Ninth and Tenth Circuits have all adopted this approach, while no circuit court has followed the broad approach. While there is still a split of authority in the First, Seventh, Eighth and Eleventh Circuits, they are likely to come around to the narrow approach.
|
Circuit
|
Narrow
Approach
|
Broad
Approach
|
Status
|
|
First
|
In re Walsh, 447 B.R. 45
(Bankr. D. Mass. 2011); In re Lee Min
Ho Chen, 482 B.R. 473 (Bankr. D. P.R. 2012)
|
In re Perez, 2015 Bankr.
LEXIS 1488 (Bankr. D. P.R. 2015)
|
Courts
split. No consensus.
|
|
Second
|
In re Lucarelli, 517 B.R. 42
(Bankr. D. Ct. 2014);
|
|
Only
case found follows narrow approach
|
|
Third
|
Brown v. Ferroni (In re Brown), 505 B.R. 638
(E.D. Pa. 2014); In re Grasso, 497
B.R. 448 (Bankr. E.D. Pa. 2013)
|
|
Only
cases found follow narrow approach
|
|
Fourth
|
In re Maharaj, 681 F.3d 558
(4th Cir. 2012)
|
|
Definitely
Narrow Approach
|
|
Fifth
|
In re Lively, 717 F.3d 406
(5th Cir. 2013)
|
|
Definitely
Narrow Approach
|
|
Sixth
|
Ice House America, LLC v. Cardin (In
re Cardin), 751
F.3d 734 (6th Cir. 2014)
|
|
Definitely
Narrow Approach
|
|
Seventh
|
In re Gerard, 495 B.R. 850
(Bankr. E.D. Wisc. 2013); In re
Draiman, 450 B.R. 777 (Bankr. N.D. Ill. 2011)
|
In re Johnson, 402 B.R. 851
(Bankr. N.D. Ind. 2009)
|
Courts
split. No consensus.
|
|
Eighth
|
Heritage Bank
v. Woodward (In re Woodward), 537 B.R. 894 (8th Cir. BAP
2015)
|
In re Tegeder, 369 B.R. 477
(Bankr. D. Neb. 2007); In re O’Neal,
490 B.R. 837 (Bankr. W.D. Ark. 2013); In
re Woodward, 2014 Bankr. LEXIS 1940 (Bankr. D. Neb. 2014)
|
Courts
split. No consensus.
|
|
Ninth
|
Zachary v. Cal. Bank & Trust, 811 F.3d
1191 (9th Cir. 2016)
|
|
Definitely
Narrow Approach
|
|
Tenth
|
Dill Oil Company v. Stephens (In re
Stephens),
704 F.3d 1279 (10th Cir. 2013)
|
|
Definitely
Narrow Approach
|
|
Eleventh
|
In re Martin, 497 B.R. 349 (Bankr.
M.D. Fl. 2013); In re Gelin, 437
B.R. 435 (Bankr. N.D. Fl. 2010); In re
Steedley, 2010 Bankr. LEXIS 3113 (Bankr. S.D. Ga. 2010); In re Gbadebo, 431 B.R. 222 (Bankr.
N.D. Cal. 2010); In re Rogers, 2016
Bankr. LEXIS 2398 (Bankr. S.D. Ga. 2016)
|
SPCP Group, LLC v. Biggins, 465 B.R. 316
(M.D. Fl. 2011)
|
Cases
lean toward narrow approach
|
