In re Brown
MEMORANDUM
Before me are motions filed by Mario Ferroni and Roberta A. Deangelis, Esq., the United States Trustee for Region 3, both seeking to dismiss this chapter 11 case pursuant to
The debtors oppose dismissal and request the opportunity to submit another chapter 11 plan to creditors for creditor voting.
After reviewing the parties’ thoughtful post-hearing submissions, for the following reasons I find that dismissal of this case is warranted. In so concluding, I shall address an issue of almost first impression within this circuit: whether the 2005 amendments to the Bankruptcy Code eliminated the requirement that individual chapter 11 debtors must meet the absolute priority rule when an impaired unsecured creditor class does not vote in favor of their plan.
I.
After an evidentiary hearing, the following facts, as relevant to this dispute, were proven.
The debtors, Steven and Linda Brown, filed a joint voluntary bankruptcy petition under chapter 11 on April 25, 2012. Mr. Brown is an architect, licensed in Pennsylvania, and Mrs. Brown is a homemaker and volunteer special education teacher. Only Mr. Brown earns income, see ex. T-l (Schedule I), and it is with his income that the debtors intend to reorganize.
In addition to providing architectural services, Mr. Brown also earns income as a construction manager and general contractor. He performs all of these services as an employee/member of one or more of the following three entities: Design Associates, Inc.; Design Build, LLC; and Build US, LLC. See ex. T-l; see generally
Indeed, Mr. Brown now operates primarily through Design Build, averring that he ceased using Design Associates in 2011 and formed Build U.S. in 2011. See ex. F4 (2011 Federal Tax Form 1120 for Build US, LLC). He is the sole member of Design Build, the sole shareholder of Design Associates, and one of two members (along with his bookkeeper) of Build US.
Design Associates, a subchapter S corporation, although not currently operating, has not dissolved as a corporation and has asserted a mechanics lien claim against real property owned by Mr. and Mrs. Do-
Design Build has current contracts for architectural work and has submitted proposals for construction management services. Mr. Brown testified that he takes distributions from this company as needed to pay his family expenses, and asserts that these distributions average about $11,000 per month. See also ex. F-7 (Amended Bankruptcy Schedule I). He further averred that his monthly expenses average approximately $9,710. Id. (Amended Bankruptcy Schedule J). The debtors’ monthly operating reports, however, reflect a lower average net monthly income. See ex. T-5.
At the time of their bankruptcy filing, the debtors (and two of their children) resided in real property owned jointly, located at 922 Cedar Grove Road, Broomall, Pennsylvania. They also owned property located at 1334 Burke Road, West White-land, Pennsylvania, and Mr. Brown owned realty located at 224 Dutton Mill Road, Willstown, Pennsylvania. Ex. T-l.
The West Whiteland realty is secured by a mortgage held by TD Bank. The mortgagee has obtained relief from the bankruptcy stay to foreclose and the debtors anticipate that this property will be sold at an execution sale with TD Bank asserting a deficiency claim estimated at $50,000. See ex. Dolan-1, at 3,10.
The Willstown property was secured by a lien held by Mr. Ferroni. Ex. Dolan-1, at 4. Mr. Ferroni confessed judgment against the debtors and began execution proceedings, which is the underlying reason the debtors filed their voluntary bankruptcy petition. Id., at 4; Debtors’ Posb-Hearing Memorandum, at 2, 6. Mr. Fer-roni executed upon the Willstown property and filed a deficiency claim in this court in the amount of $489,000. See Claim Register, Proof of Claim # 13. The debtors were afforded an opportunity to object to this deficiency claim, see docket entry # 119 (Order dated May 15, 2013), but opted not to do so. Thus, for purposes of this contested matter, Mr. Ferroni’s claim will be deemed allowed. See
On the debtors’ Amended Bankruptcy Schedule C they elected the federal bankruptcy exemptions found in section 522(b)(2). Ex. T-l. Rather than take any homestead exemption under section 522(d)(1),
As noted above, after confirmation of their initial chapter 11 plan was denied, the debtors filed an amended chapter 11 plan, ex. T-3, which they assert can be confirmed and should be submitted to creditors for voting. This amended proposed plan may be summarized in relevant part as follows:
1. The debtors will continue to pay the first mortgagee, Wells Fargo Bank, and the second mortgagee, Malvern Federal Savings and Loan, their regular monthly mortgage payments secured by their residence, and which obligations they contend are current;
2. The debtors propose to pay a small secured claim asserted by the Pennsylvania Department of Revenue in full within 30 days after an order of confirmation is entered.
3. All allowed unsecured claims, including the deficiency claims held by Mr. Ferroni and TD Bank, are placed in class 6. The debtors propose to pay $15,000 per annum to this class, to be distributed pro rata.7
Ex. T-3, at 7. Although the proposed plan does not so state, the debtors orally argued through their counsel that they intended to distribute payments to class 6 in quarterly installments for five years, thus totaling $75,000. See also Debtors’ Post-Hearing Memorandum, at 16 (referring to the “five year term of the plan”).
The interests of the debtors are placed in class 7 of the proposed plan, but the plan does not expressly provide for the treatment of this class, other than as follows:
On the Effective Date and except as otherwise set forth in this Plan, the Reorganized Debtors shall be vested with all assets that comprise the Debtors’ estates, free and clear of all Claims, liens, charges, encumbrances, rights and Interests of creditors and equity security holders. As of the Effective Date, the Reorganized Debtors may operate their business and use, acquire and dispose of property and settle and compromise Claims or Interests without supervision of the Bankruptcy Court free of any restrictions of the Bankruptcy Code other than as expressly set forth in the Plan or the Confirmation Order.
Ex. T-3, at 10 (¶ 7.1).
Since “[t]he Reorganized Debtors shall fund the payments required under the Plan from husband’s continued business operations,” id., at 11 (¶ 7.3.1), I conclude that the proposed plan must provide for Mr. Brown to retain his prepetition interests in his three entities: Design Associates, Design Build, and Build US. Moreover, the income derived from these entities is the debtors’ only possible source of plan funding.
At the hearing, it was agreed that Mr. Ferroni’s allowed unsecured claim will not and cannot be paid in full. See also Debt
II.
A.
As mentioned above, Mr. Ferroni and the United States Trustee separately filed motions to dismiss this chapter 11 case, motions supported by the Dolans. Both movants contend that the debtors are unable to reorganize under chapter 11, warranting dismissal under
In determining this issue, I shall focus only upon whether there is a realistic possibility that any feasible plan they might propose could be confirmed and not whether the precise amended plan the debtors have filed would be approved. See generally In re American Capital Equipment, LLC,
Mr. Ferroni, emphasizing information on certain federal tax returns filed by Design Build, Design Associates, and Build US, see ex. F-4, as well as upon certain expenses the debtors have incurred since the bankruptcy filing, contends that the debtors proposed amended plan materially understates their projected disposable income for purposes of section 1129(a)(15)(B), thereby precluding confirmation. See generally In re Gbadebo,
In addition, Mr. Ferroni, orally joined by the Dolans as well as the United States Trustee at the hearing, contends that these debtors cannot propose any chapter 11 plan that would meet the good faith requirement found in
Based upon these failures, which the movants contend were made by the debtors either knowingly or recklessly, the movants argue that the debtors cannot now propose any chapter 11 plan in good faith. See In re Georgetown Limited Partnership,
The debtors reply that any omissions in their Bankruptcy Schedules and Statement of Financial Affairs were either immaterial or inadvertent, and that these errors and omissions have been or will be corrected, thus rendering any plan proposed by them in good faith. See In re Marshall,
Any failures to disclose and omissions were excusable due to the fact that [the debtors] were unaware of the failure to disclose. It should also be noted that counsel for the Debtor is to blame for allowing documents to be filed that lacked information and for failing to discover pending litigation through a public records search. Counsel for the Debtor is also at fault for allowing the late filing of important documents. Debtors should not be punished for their Counsel’s failings. For these reasons, Debtors assert reasonable justification for omissions which they have addressed and cured within a reasonable time.
Debtors’ Post-Hearing Memorandum, at 13; cf. In re Jones,
Recognizing that “good faith” under
“[F]or purposes of determining good faith undersection 1129(a)(3) ... the important point of inquiry is the plan itself and whether such a plan will fairly achieve a result consistent with the objectives and purposes of the BankruptcyCode.” The purpose of requiring such a finding ... prevents a debtor-in-possession or trustee from effectively abrogating the creditor protections of Chapter 11.
(quoting In re Madison Hotel Assocs.,
The Court of Appeals has further explained the objectives and purposes that the good faith requirement of
Specifically, under Chapter 11, the two “recognized” policies, or objectives, are “preserving going concerns and maximizing property available to satisfy eredi-tors[J” Bank of Am. Nat.’l Trust and Sav. Ass’n v. 203 N. LaSalle St. P’ship,526 U.S. 434 , 453,119 S.Ct. 1411 ,143 L.Ed.2d 607 (1999) (citing Toibb v. Radloff,501 U.S. 157 , 163,111 S.Ct. 2197 ,115 L.Ed.2d 145 (1991)). More generally, the Bankruptcy Code’s objectives include: “giving debtors a fresh start in life,” Walters v. U.S. National Bank of Johnstown,879 F.2d 95 , 98 (3d Cir.1989), “discourag[ing] debtor misconduct,” id., “the expeditious liquidation and distribution of the bankruptcy estate to its creditors,” Integrated Solutions, Inc. v. Service Support Specialties,124 F.3d 487 , 489 (3d Cir.1997), and achieving fundamental fairness and justice. In re Kaiser Aluminum Corp.,456 F.3d 328 , 339-43 (3d Cir.2006).
In re American Capital Equipment, LLC,
In applying
In considering the evidence presented, I find that the strongest argument posed by the movants involves the debtors’ failure to disclose Mr. Brown’s interest in Design Associates and that entity’s mechanics lien claim against the property of Mr. and Mrs. Dolan. As Mr. Brown acknowledged, if the mechanics lien claim is successful, he may receive a significant distribution after payment of outstanding corporate liabilities. See generally
As for the material omissions concerning Design Associates, for purposes of this motion I will accept as credible Mr. Brown’s testimony that he failed initially to disclose his interest because Design Associates had ceased doing business at the time of his bankruptcy filing, and that he did not separately disclose information about Design Associates and Build U.S. because all of their net income is paid to Design Build. Furthermore, he did not mention the Dolan litigation to his bankruptcy counsel since that counsel had been referred to him by his attorney in the state court Dolan litigation; in other words, he assumed that bankruptcy counsel knew of the litigation and had concluded that it need not be disclosed. Thus, for purposes
Accordingly, for these reasons I find that these debtors may propose a chapter 11 plan that would meet the good faith requirement of
B.
In addition, Mr. Ferroni and the Dolans, but not the United States Trustee, also contend that the debtors cannot confirm a chapter 11 plan because they cannot meet the requirements of
As the parties agree that this legal issue is dispositive, in that there is no possible plan these debtors could propose that would not involve consideration of this issue, and as it has been well-addressed in their post-hearing memoranda, it is ripe for consideration.
In general, confirmation of a chapter 11 plan requires that the plan proponent meet all the requirements of
The condition set forth insection 1129(a)(8) is the only condition precedent which is not absolutely necessary for confirmation. If a plan satisfies the confirmation criteria set forth insection 1129(a) , including the requirement that if a class of claims is impaired, at least one impaired class of claims accepts the plan, the plan may be confirmed notwithstanding the opposition of one or more impaired classes of claims or interests, provided the plan satisfiessection 1129(b) .
As mentioned earlier, the debtors’ proposed plan contends that class 3, the claim of TD Bank, class 4, the claim of the Pennsylvania Department of Revenue, and class 5, the claim of Mr. Ferroni, are all impaired classes.
As summarized by the Third Circuit Court of Appeals:
qConfirmation of a proposed Chapter 11 reorganization plan is governed by11 U.S.C. § 1129 . A court will confirm a plan if it meets all of the requirements set out insection 1129(a) . Only one of these requirements concerns us in this appeal, and that is the requirement that the plan be consensual, with unanimous acceptance by all of the impaired classes.11 U.S.C. § 1129(a)(8) . If the plan is not consensual, a court may still confirm as long as the plan meets the other requirements ofsection 1129(a) , and “does not discriminate unfairly, and is fair and equitable” as to any dissenting impaired class.11 U.S.C. § 1129(b)(1) ; see Bank of Am. Nat’l Trust & Sav. Ass’n v. 20S N. LaSalle St. P’ship,526 U.S. 434 , 441,119 S.Ct. 1411 ,143 L.Ed.2d 607 (1999) [hereinafter La-Salle ]. The latter type of confirmation is also called a “cram down,” as the court can cram a plan down over the objection of an impaired class. See generally Kenneth N. Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am. Bankr.L.J. 133 (1979).
In re Armstrong World Industries, Inc.,
Since the parties in this contested matter agree that there is no possibility that all impaired classes will accept a plan pro
As explained by the Supreme Court, one important component of the “fair and equitable” standard in
As to a dissenting class of impaired unsecured creditors, such a plan may be found to be “fair and equitable” only if the allowed value of the claim is to be paid in full,§ 1129(b)(2)(B)(i) , or, in the alternative, if “the holder of any claim or interest that is junior to the claims of such [impaired unsecured] class will not receive or retain under the plan on account of such junior claim or interest any property,”§ 1129(b)(2)(B)(ii) . That latter condition is the core of what is known as the “absolute priority rule.”
Bank of America National Trust and Sav. Ass’n v. 203 North LaSalle Street P’ship,
It is undisputed that no plan could be proposed by these debtors in good faith that could provide for the payment in full of the unsecured deficiency claim of Mr. Ferroni. Therefore, the debtors cannot comply with
C.
Before 2005, the Supreme Court, in Norwest Bank Worthington v. Ahlers, concluded that the absolute priority rule applied in a chapter 11 case filed by individual debtors, and that this provision would be violated by the Ahlers’s retaining their interest in their family farm. Id.,
In addition, the Ahlers Court held that if an exception or corollary to the absolute priority rule, referred to as the “new value exception,” exists, that exception — which has generally been stated to require the junior interest holder that was retaining property to provide “1) new, 2) substantial, 3) money or money’s worth, 4) necessary for a successful reorganization and 5) reasonably equivalent to the value or interest received,” In re Bonner Mall Partnership, 2 F.3d 899, 908 (9th Cir.1993) — would not be met by the Ahlers’s proposal to fund their plan through future income earned from their farming efforts. Ahlers,
Viewed from the time of approval of the plan, respondents’ promise of future services is intangible, inalienable, and, in all likelihood, unenforceable. It “has no place in the asset column of the balance sheet of the new [entity].” Los Angeles Lumber, 308 U.S. at 122-123 ,60 S.Ct. at 11 . Unlike “money or money’s worth,” a promise of future services cannot be exchanged in any market for something of value to the creditors today. In fact, no decision of this Court or any Court of Appeals, other than the decision below, has ever found a promise to contribute future labor, management, or expertise sufficient to qualify for the Los Angeles Lumber exception to the absolute priority rule.
See also id., at 206,
Finally, the Ahlers Court also concluded that the retention of a property interest, even one whose value is primarily dependent upon future services provided by the chapter 11 debtor, violates the absolute priority rule found in
D.
Before discussing the 2005 statutory amendments as they apply to the question of the continued existence of the absolute priority rule in individual chapter 11 cases, I note that the debtors in this contested matter propose to retain their interest in the personal property they have claimed as exempt, as well as Mr. Brown’s interest in his three business entities. Mr. Ferroni makes no mention about the debtors’ retention of exempt property as violative of the absolute priority rule. See Ferroni’s Post-Hearing Memorandum, at 23. The Dolans, however, do not identify in their post-hearing memorandum the particular property interests that the debtors cannot retain. Therefore, they may take the position that the debtors’ retention of exempt property would violate
•Although the question of the application of the absolute priority rule to exempt property was not altered by the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 (“BAPCPA”), as the Dolans may be raising this issue, and because its resolution is consistent with my interpretation of amended
While the Ahlers decision made clear by 1988 that the absolute priority rule found in
Although the BAPCPA amendments to the Bankruptcy Code did not alter the relevant Code provisions that gave rise to
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(B) With respect to a class of unsecured claims—
(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.
The underlined portion of clause (ii) to subparagraph (B) was added in 2005 by BAJPCPA.
Because clause (ii), before and after its amendment in 2005, prohibits retention by junior interest holders of “any property,” rather than “any property of the bankruptcy estate,” decisions such as In re Fross concluded that Congress intended that property claimed by the debtor as exempt falls within the scope of
I find more persuasive, however, the reasoning of those courts and commentators who have observed that property allowed as exempt is removed from the bankruptcy estate, see generally In re Orton,
As the Third Circuit Court of Appeals observed, relying upon Bank of America National Trust and Savings Association v. 203 North LaSalle Street Partnership, the absolute priority rule in
Moreover, since 1978, section 1123(c) has provided:
In a case concerning an individual, a plan proposed by an entity other than the debtor may not provide for the use, sale, or lease of property exempted under section 522 of this title, unless the debtor consents to such use, sale, or lease.
While the literal language of section 1123(c) applies only to chapter 11 plans proposed by parties other than the individual debtor, the sparse legislative history states that this provision was enacted to “protect[ ] an individual debtor’s exempt property [by its terms].” H.R. Rep. No. 95-595, 95th Cong., 1st Sess. at 407, 1978 U.S.C.C.A.N. 5963, 6363 (1977). I find it counterintuitive that Congress intended to insure that an individual chapter 11 debtor is permitted to retain his or her exempt property as part of the confirmation process in all instances other than when the debtor’s own plan is at issue.
Indeed, the logic of those decisions that hold that the absolute priority rule applies to any and all property interests retained by the debtor after confirmation, including exempt property, seemingly would encompass even property interests that Congress, for policy reasons, expressly excluded from the scope of the bankruptcy estate in section 541(b) and the reach of creditors, such as retirement funds described in section 541(b)(5), educational trust funds in section 541(b)(6), and funds held by employers or received from them under section 541(b)(7). Such property interests need not be claimed as exempt to be unavailable to a bankruptcy trustee or creditors, and are thus retained by the debtor. It is not persuasive to conclude that Congress required that a chapter 11 debtor relinquish such non-estate property as part of the confirmation process whenever an impaired class of unsecured creditors does not support the proposed plan.
Accordingly, in considering whether Congress intended its 2005 amendments to the Bankruptcy Code to eliminate the absolute priority rule for individual chapter
III.
A.
The parties in this dispute all recognize that whether the absolute priority rule still applies in individual chapter 11 cases after the 2005 BAPCPA amendments is an issue that has divided courts. In 2005, Congress added or modified numerous sections of chapter 11 regarding individual debtors. Three such sections are clearly relevant to the analysis.
First,
(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 but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7,12, or 13, whichever occurs first.
(b) Except as provided in section 1104 or a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.
Section 321(a) of the Act creates a new provision under chapter 11 of the Bankruptcy Code specifying that property of the estate of an individual debtor includes, in addition to that identified in section 541 of the Bankruptcy Code, all property of the kind described in section 541 that the debtor acquires after commencement of the case, but before the case is closed, dismissed or converted to a case under chapter 7, 12, or 13 (whichever occurs first). In addition, it includes earnings from services performed by the debtor after commencement of the case, but before the case is closed, dismissed or converted to a case under chapter 7,12, or 13.
H.R.Rep. No. 109-31, Pt. 1, 109th Cong., 1st Sess. at 80, 2005 U.S.C.C.A.N. 88, 147 (2005).
Second,
(15) In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan—
(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325(b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.
Thus, in an individual chapter 11 case, if the debtor’s proposed plan does not provide for payment in full of an allowed unsecured claim then, upon the objection of that creditor to confirmation, the debt-
Third, as was mentioned earlier,
(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 undersection 1115 , subject to the requirements of subsection (a) (11) of this section.
(emphasis added).
The same House Report explains the addition of
Section 321(c) amends Bankruptcy Codesection 1129(a) to include an additional requirement for confirmation in a chapter 11 case of an individual debtor upon objection to confirmation by a holder of an allowed unsecured claim. In such instance, the value of property to be distributed under the plan on account of such claim, as of the plan’s effective date, must not be less than the amount of such claim; or be not less than the debtor’s projected disposable income (as defined in section 1325(b)(2)) to be received during the five-year period beginning on the date that the first payment is due under the plan or during the plan’s term, whichever is longer. Section 321(c) also amendssection 1129(b)(2)(B)(ii) of the Bankruptcy Code to provide that an individual chapter 11 debtor may retain property included in the estate undersection 1115 (as added by the Act), subject tosection 1129(a)(14) .16
H.R.Rep. No. 109-31, Pt. 1, 109th Cong., 1st Sess. at 80, 2005 U.S.C.C.A.N. at 147 (2005).
To a large extent, the debate over the meaning of
Those courts adopting the so-called “broad view” have held that
Section 1115 ’s identification of estate property consists of the property contained in § 541 and the two post-petition acquired assets — newly acquired property and income. The so-called disputes over what “included” means in§ 1129(b)(2)(B)(ii) and “in addition to” in§ 1115 arise from misinterpretation ofthe words. “Included” is not a word of limitation. To limit the scope of estate property in §§ 1129 and 1115 would require the statute to read “included, except for the property set out in Section 541” (in the case of§ 1129(b)(2)(B)(ii) ), and “in addition to, but not inclusive of the property described in Section 541” (in the case of§ 1115 ).
A plain reading of§§ 1129(b)(2)(B)(ii) and 1115 together mandates that the absolute priority rule is not applicable in individual chapter 11 debtor cases,
(footnote omitted).
Courts favoring this interpretation also emphasize that Congress, when amending chapter 11 in 2005, added a number of provisions similar or identical to chapter 13; and chapter 18, which permits individual debtors with regular income and liabilities below certain amounts (set forth in section 109(e)) to reorganize, has no absolute priority rule. See, e.g., In re O’Neal,
The broader view also savesSection 1129(b)(2)(B)(ii) from an almost trivial reading; if the narrow view is taken, the section protects only the value of aggregate postpetition earnings payable after the fifth anniversary of plan confirmation.
In re Shat,
Courts adopting the “narrow view” of
Support for the narrow view is derived from the absence of any legislative history suggesting that Congress intended to change the long-standing application of the absolute priority rule to all chapter 11 cases, including individual cases, see, e.g., In re Stephens,
A common thread running through many of the “narrow view” cases is that if Congress had intended to abrogate the absolute priority rule for individual Chapter 11 debtors, it would have done so in a far less convoluted way, particularly in light of the well established place of the absolute priority rule in bankruptcy jurisprudence. See, e.g., Kamell,451 B.R. at 509 . These cases note that if Congress had indeed had such an intent, it could have simply added the words “except with respect to individuals” at the beginning of§ 1129(b)(2)(B)(ii) . Karlovich,456 B.R. at 682 .
In re Maharaj,
Courts have also observed that if Congress intended in 2005 to eliminate the absolute priority rule in all individual bankruptcy reorganizations, it would have altered the eligibility requirements for filing chapter 13 cases, since chapter 13 contains no absolute priority rule:
Congress would simply have amended the statutory debt ceilings for Chapter 13 eases set out in11 U.S.C. § 109(e) , and either eliminate them altogether or set them much higher. Congress did no such thing, instead clearly intending that Chapter 11 statutory provisions would continue to apply to individual Chapter 11 cases while recognizing that post-petition earnings of individual Chapter 11 debtors should be available under§ 1129(b)(2)(B) , and protected, as it is in Chapter 13 cases under11 U.S.C. § 1306 .
In re Karlovich,
In considering the various arguments set forth above, I am persuaded that the narrow view more accurately reflects congressional intent. Indeed, section 321 of BAPCPA, P.L. No. 109-8, which both added
The effect of the new provision in§ 1129(b)(2)(B)(ii) is not to abrogate the absolute priority rule, but to make it the same for individual and non-individual Chapter 11 debtors, as it was prior to BAPCPA. In fact, when read in conjunction with newly added§ 1115 , the absolute priority rule with respect to individuals is exactly the same as it was pre-BAPCPA. That is, prior to BAPC-PA, property of the estate did not include post-petition acquired property and earnings for individuals and non-individuals alike. Hence, post-petition acquired property and earnings could be retained by a Chapter 11 debtor, individual and non-individual alike, without running afoul of the absolute priority rule. The addition of§ 1115 potentially changed that by adding to the property of the estate of an individual post-petition acquired property and earnings. Without a corresponding change to§ 1129(b)(2)(B)(ii) , individual debtors could no longer retain post-petition acquired property and earnings if they wished to “cram down” a plan. By adding the language excepting the§ 1115 property from the absolute priority rule of§ 1129(b)(2)(B)(ii) , Congress merely ensured that the absolute priority rule would be the same as it had been prior to BAPCPA and be the same for all Chapter 11 debtors. In other words, what Congress took from the individual debtor with its § 1115-hand, it returned for application of the absolute priority rule with its§ 1129 (b) (2) (B) (ii) -hand.
In re Karlovich,
Indeed, this analysis — which recognizes that it was only
Therefore, individual chapter 11 debtors who fail to obtain the consent of an impaired class of unsecured creditors cannot retain prepetition non-exempt property unless that dissenting creditor class will receive distributions under the proposed plan equal in value, as of the plan effective date, to the amount of its claims.
B.
One additional issue, the application of the new value exception in individual chapter 11 cases, must be considered in determining that these debtors cannot possibly reorganize under chapter 11.
As mentioned earlier, pursuant to
Section 1123(a)(8), added in 2005, provides that a chapter 11 plan shall:
in a case in which the debtor is an individual, provide for the payment to creditors under the plan of all or such portion of earnings from personal services performed by the debtor after the commencement of the case or other future income of the debtor as is necessary for the execution of the plan.
Plan payments made by an individual chapter 11 debtor that are derived from post-confirmation earnings, even those required by
As discussed earlier, the Supreme Court in Norwest Bank Worthington v. Ahlers instructed that plan funding consisting of payments derived from future earnings do not constitute “new value” for purposes of any exception to absolute priority rule. One commentator has opined, however, that in enacting section 1123(a)(8) Congress implicitly overruled this holding in Ahlers. See 2007 No. 1,
Section 1123(a)(8) does not mandate that individual debtors can only fund their plans from the earnings of postpetition services. Rather, it directs that such earnings be so applied “as is necessary for the execution of the plan.” Thus, if a plan can be fully funded from the sale of the debtor’s assets it can be confirmed without the inclusion of any post-confirmation earnings. See In re Lippmann,
Accordingly, consistent with the Supreme Court’s directive in Ahlers, to the extent that
IV.
As noted at the outset, the movants seek dismissal of this chapter 11 case pursuant to
Fundamental bankruptcy policy continues to support the proposition that the inability to propose a feasible reorganization or liquidation plan provides “cause” for dismissal or conversion of a chapter 11 case on request of an interested party.
In re DCNC North Carolina I, LLC,
As earlier mentioned, the debtors in this contested matter concede that they cannot reorganize unless Mr. Brown can retain his non-exempt interests in his business entities: Design Associates, Design Build, and Build US. They also concede that they cannot afford to pay Mr. Ferroni’s allowed unsecured claim in full, even over time, and that there will be an impaired class of creditors — the one containing Mr. Ferroni — that will not approve any feasible plan they can propose. Thus, as the debtors acknowledge, the imposition of the absolute priority rule in
Therefore, the movants have established grounds for relief under
I also note that, given the debtors’ assets and liabilities, no party in interest suggests that conversion to chapter 7 would be in the best interests of creditors and the bankruptcy estate.
Accordingly, an order will be entered dismissing this chapter 11 case. Moreover, as the movants requested at the hearing, this dismissal order will limit the debtors’ ability to file future chapter 11 bankruptcy cases. See generally
Notes
. Mr. Ferroni’s motion to dismiss was filed along with his objection to confirmation of the debtors’ earlier proposed chapter 11 plan. Confirmation of the debtors' plan was denied by order dated July 23, 2013, thus leaving the request for dismissal.
. After confirmation of the debtors’ prior plan was denied, the debtors filed a new disclosure statement and plan. Although the debtors moved for court approval of their ’’2nd Modified Disclosure Statement,” they conceded at the hearing that further modifications were needed before approval could be granted. See also Debtors’ Post-Hearing Memorandum, at 1. Thus, the sole issue I need now address is whether this chapter 11 case should be dismissed under
. The only court within this circuit to consider the issue did so recently in a brief footnote, stating that the absolute priority rule still applied in individual chapter 11 cases. See In re Grasso,
. The debtors’ post-hearing memorandum attached documents, denoted exhibits A through D, which concern their finances and those of their affiliated companies. Those documents were not introduced in evidence at the hearing and so cannot now be considered, as the United States Trustee, Mr. Ferroni, and the Dolans had no opportunity to challenge their authenticity or admissibility, cross-examine witnesses regarding those documents, or offer rebuttal evidence. See, e.g., In re Millman,
. In 2010 and 2011, the debtor also operated an entity known as Line Road Associates, L.P. See exs. T-1, at 1; F-4 (2010 and 2011 Federal Tax Forms 1065). Mr. Brown is the general partner of this limited partnership. See ex. F-4 (Line Road Partnership Agreement). No evidence was presented whether this partnership is still in existence and, if so, whether it has any assets.
. They believe their residence is overencum-bered. See ex. T-l (Amended Schedule A).
. I appreciate that the debtor's proposed plan places the claims of TD Bank and Mr. Ferroni in classes 3 and 5 respectively, and not in class 6. Ex. T-3, at 7. However, the plan does refer to these creditors as holding unsecured claims in the approximate amounts of $50,000 and $489,000 respectively, and that other unsecured claims "aggregate approximately $22,174.20.” Id.., at 7. The plan expressly states that class 6 is composed of "General Unsecured Claims” and that the proposed distribution to class 6 will be “approximately fifteen thousand ($15,000) dollars a year, which will be distributed pro rata to the holders of allowed unsecured claims.” Id., at 7. Unless the debtors’ proposed plan intended the unsecured claims of TD Bank and Mr. Ferroni to be included in class 6, there would be no need for any pro rata distribution to class 6 creditors. Instead, the plan would simply propose full payment of class 6 claims in less than two years.
Accordingly, I need not consider whether the debtors' proposed plan seeks impermissi-bly to classify unsecured deficiency claims separately. See In re Swedeland Development Group, Inc.,
. The debtors acknowledge that Mr. Brown has approximately $22,000 in a retirement account. See Debtors' Post-Hearing Memorandum, at 5.
. Mr. Ferroni also argues, post-hearing, that these same failures and omissions justify dismissal under
. Mr. Ferroni and the Dolans also argue in their post-hearing submissions that the debtors have not filed the instant chapter 11 case in good faith for the same reasons that they argue that the debtors cannot propose a plan in good faith. This ground was not raised in Mr. Ferroni's motion to dismiss.
The Third Circuit has recently observed that: "The question of whether a Chapter 11 bankruptcy petition is filed in good faith is a judicial doctrine, distinct from the statutory good faith requirement for confirmation pursuant to§ 1129(a)(3) .” In re American Capital Equipment, LLC,688 F.3d 145 , 157 (3d Cir.2012). Whether any bankruptcy case is filed in bad faith depends upon the totality of the circumstances. See, e.g., In re 15375 Memorial Corp. v. Bepco, L.P.,589 F.3d 605 , 618 (3d Cir.2009). While the totality of the circumstances approach is not constrained to any particular fact pattern, the Third Circuit has generally instructed: "Our cases have accordingly focused on two inquiries that are particularly relevant to the question of good faith: (1) whether the petition serves a valid bankruptcy purpose, e.g., by preserving a going concern or maximizing the value of the debtor’s estate, and (2) whether the petition is filed merely to obtain a tactical litigation advantage.” In re Integrated Telecom Express, Inc.,384 F.3d 108 , 119-20 (3d Cir.2004), cert. denied,545 U.S. 1110 ,125 S.Ct. 2542 ,162 L.Ed.2d 286 (2005)384 F.3d at 119-20 ; see In re 15375 Memorial Corp. v. Bepco, L.P.,589 F.3d at 618 .
In this contested matter, Mr. Ferroni and the United States Trustee both alleged that dismissal was warranted because the debtors cannot reorganize, and the debtors have focused upon that issue in their opposition. To the extent that Mr. Ferroni now contends that the debtors acted in bad faith in filing their April 2012 chapter 11 petition, and that bad faith is distinct from the question of their ability to confirm a chapter 11 plan, I decline to address it as I conclude that reorganization is not possible.
. The United States Trustee declined to take a position on this legal issue.
. As explained in note 7 above, I believe that the debtors’ plan actually places the unsecured claims of TD Bank and Mr. Ferroni in class 6, although TD Bank may hold a class 3 secured claim if it has not yet sold its collateral via foreclosure. The analysis below, however, is not altered if Mr. Ferroni were to hold a class 5 rather than a class 6 claim.
. Because only an individual can claim property as exempt, see
. The recent decision, In re Lively,
Lively does not dispute that his plan fails to comply with the absolute priority rule, because it allows him to retain the above-listed valuable, non-exempt, pre-petition assets.
Id., at 408; see also In re Grasso,
. For example,
Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined undersection 502 of this title as if suchdebt had arisen, before the commencement of the case[.]
.
. As one court noted, this argument does not consider that an individual debtor’s “projected disposable income,” mentioned in
Moreover, the requirement of
. If one were to conclude that current
. If so, then the dispute over the proper interpretation of
. Although