Todeschi v. Juarez (In Re Juarez), 603 B.R. 610

Background

Debtor Ubaldo Juarez filed Chapter 11 to address creditor litigation and large federal/state tax liabilities; schedules listed residence (claimed $150,000 homestead exemption), UBLA Properties LLC interest, and ~ $414,683 unsecured debt.
Creditors Edgar Todeschi and Georgina Ponce hold a large unsecured claim (~$261,390) and objected to confirmation of Juarez’s plan, arguing bad faith and violation of the absolute priority rule.
Original plan proposed modest unsecured distributions plus a $10,000 "new value" contribution from Juarez’s partner (Arreola); bankruptcy court denied confirmation finding the $10,000 untimely/insubstantial and plan failed § 1129(a)(15).
Debtor filed an amended plan increasing the up-front new value to $15,000 (from third‑party Michael Gray, by effective date), adjusted unsecured distributions to $33,580, and the court confirmed the amended plan after concluding objections lacked merit.
Creditors appealed, arguing (inter alia) that exempt property must be matched by new value under the absolute priority rule, that the best‑interests test and § 724(b) were misapplied, and that Debtor’s prepetition transfers and formation/use of UBLA showed bad faith.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the absolute priority rule requires new value for exempt property	Exempt assets must be included in “any property” and thus Debtor must provide commensurate new value	Exempt property is not retained “under the plan” or “on account of” debtor’s interest and thus is outside §1129(b)	Exempt property is excluded from the absolute priority rule; Debtor may retain exempt property without new value
Whether the Amended Plan satisfied the new‑value exception (5‑factor test)	$15,000 was insufficient or improperly measured because debtor didn’t value exempt assets	$15,000 from Gray met the five factors and was reasonably equivalent given nonexempt assets were encumbered by tax liens	Bankruptcy court correctly found the $15,000 satisfied the new‑value test and was reasonably equivalent
Whether plan met best‑interests test (§1129(a)(7)) and effect of §724(b)	Creditors argued liquidation would yield more (claiming trustee could access exemption proceeds under §724(b))	Debtor showed chapter 7 would yield less; secured tax lien and trustee costs consume available funds; §724(b) doesn’t authorize tapping exempt property for administrative expenses	Court correctly found Amended Plan better for unsecured creditors than a chapter 7 liquidation and rejected §724(b) argument
Whether Debtor acted in bad faith / improperly reduced disposable income (commissions, UBLA formation) under §§1129(a)(2),(a)(3),(a)(15)	Creditors alleged Debtor diverted commissions to Arreola, used DIP funds for personal expenses, formed UBLA to evade creditors and avoid committing disposable income	Debtor testified commissions paid to Arreola were earned by her; court credited testimony, found no clear evidence of bad faith, and that projected disposable income under §1129(a)(15) was satisfied	Bankruptcy court’s factual findings were not clearly erroneous; no reversible error on good faith or disposable income issues

Key Cases Cited

United States v. Hinkson, 585 F.3d 1247 (9th Cir.) (standards for abuse of discretion review)
Motor Vehicle Cas. Co. v. Thorpe Insulation Co., 677 F.3d 869 (9th Cir.) (equitable mootness factors)
Rev Op Grp. v. Mortgs. Ltd., 771 F.3d 1211 (9th Cir.) (equitable mootness / reliance on consummated plans)
Bonner Mall P’ship v. U.S. Bancorp Mortg. Co., 2 F.3d 899 (9th Cir.) (new value exception elements)
Sec. Farms v. Gen. Teamsters, Warehousemen & Helpers Union, Local 890, 265 F.3d 869 (9th Cir.) (individual debtor/new value requirements)
Law v. Siegel, 571 U.S. 415 (Supreme Court) (limits on using exempt funds for administrative expenses)
Computer Task Grp., Inc. v. Brotby, 303 B.R. 177 (9th Cir. BAP) (abuse of discretion standard and new value discussion)