In Re Arnold
471 B.R. 578
Bankr. C.D. Cal.2012Background
- Debtors David L. Arnold and Grace E. Arnold filed a voluntary Chapter 11 petition on March 3, 2011; they are co-trustees of a revocable trust holding investment properties and their residence.
- Full House Enterprises, L.P. filed a Chapter 11 petition and was controlled by the Debtors; the Debtors’ trust and Full House form an interrelated, extensive real estate portfolio.
- U.S. Bank holds liens on several properties (El Camino, Treehaven, Yorba, Lido Sands, Beacon Bay); loan-to-value ratios are high and stay relief orders have been issued for some properties.
- Debtors proposed an Amended Disclosure Statement and Plan with five Plan Options (A–E); the sole viable Options under dispute are D and E, involving a New Value Contribution of $250,000.
- U.S. Bank objected to the Amended Disclosure Statement on grounds that it lacks adequate information and that the Plan would violate the absolute priority rule; the court must decide adequacy of information and applicability of the absolute priority rule in light of BAPCPA and Friedman.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Amended Disclosure Statement contains adequate information under §1125(a). | Bank argues the Amended Disclosure Statement omits key disclosures and misleads creditors. | Arnolds contend the statement provides enough information and alternatives for creditors to evaluate. | No; the Amended Disclosure Statement lacks adequate information. |
| Whether the absolute priority rule applies to this individual Chapter 11 after BAPCPA. | Bank contends the rule remains applicable to individual debtors. | Arnolds contend BAPCPA abrogates the rule under a broad §1115 interpretation. | Yes; the absolute priority rule applies. |
| Whether the New Value Contribution and multiple Plan Options render the Plan unconfirmable. | Bank argues the New Value Contribution is inadequately substantiated and Options are ill-defined. | Arnolds argue feasibility should be evaluated later and the New Value Contribution is a valid option. | Plan is not feasible and the New Value Contribution is not substantiated. |
| Whether the Debtors may cram down a plan under §1129(b) given the asserted impairment of Class 5. | Bank asserts Class 5 is impaired and will reject, necessitating a cramdown. | Arnolds argue plan can be confirmed despite dissenting unsecureds. | Crabdown not permissible; the plan violates the absolute priority rule. |
Key Cases Cited
- In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012) (majority view on §1115 broad interpretation; not binding here but cited)
- Bank of America Nat. Trust & Sav. Assn. v. 203 N. LaSalle Street P'ship, 526 U.S. 434 (U.S. 1999) (establishes absolute priority rationale and framework)
- In re Kamell, 451 B.R. 505 (Bankr.C.D. Cal. 2011) (narrow view on §1115 and absolute priority)
- In re Lindsey, 453 B.R. 886 (Bankr.E.D. Tenn. 2011) (discusses §1115(a) scope and interpretation)
- In re Gbadebo, 431 B.R. 222 (Bankr.N.D. Cal. 2010) (narrow view supporting continued application of absolute priority)