DECISION ON CONFIRMATION OF THE PLAN
The Debtors are individuals who filed a Chapter 11 petition on February 2, 2012. On July 11, 2013, the Court held a confirmation hearing on the Debtors’ Chapter 11 plan. Kevin and Margaret Gerard objected to confirmation of the plan based on (1) lack of good faith; (2) failure to provide all projected disposable income; and (3) violation of the absolute priority rule.
On the good faith issue, after considering the testimony and documentary evidence, the Court determined that the scheduled $160,000 claim of Nancey Gerard’s brother, Norman Cerk, was not a loan but a gift. The Court concluded that the Debtors could cure the bad faith evidenced by including this claim by filing an objection to Cerk’s claim, and assuming the claim is disallowed, directing the dividend that would have gone to Cerk to Kevin and Margaret Gerard. With respect to the projected disposable income argument, the Court directed the Debtors to provide copies of their income tax returns to Kevin and Margaret Gerard’s attorney contemporaneously with filing them •with the taxing authorities. For each year of the Plan, to the extent the Debtors’ gross income exceeds 10% of the projected gross income in the Disclosure Statement, the Debtors must pay the amount in excess of such 10% to the unsecured creditor classes.
The remaining issue, application of the absolute priority rule, was taken under advisement. This decision constitutes the Court’s findings of fact and conclusions of
Since a class of unsecured creditors has not accepted the plan, the plan cannot be confirmed unless it is fair and equitable. 11 U.S.C. § 1129(b)(1). Section 1129(b)(2)(B) provides the definition of “fair and equitable” for unsecured claims:
(B) With respect to a class of unsecured claims&emdash;
(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) (1U) of this section.1
(emphasis supplied).
In turn, § 1115 provides:
(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&emdash;
(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.
The fair and equitable test codifies the “absolute priority rule” for unsecured creditors and equity holders. Under the absolute priority rule, a junior class may not receive anything from the plan unless all dissenting senior classes have been paid in full.
With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA), Congress amended § 1129(b)(2)(B)(ii) and added § 1115 to the Bankruptcy Code, creating an exception to the absolute priority rule for individual debtors. Courts are divided
Jumping on the bandwagon, the Debtors argue that § 1115(b) renders the absolute priority rule inapplicable to cases involving individuals. While dozens of bankruptcy courts and three courts of appeals have analyzed the application of the absolute priority rule to individual debtor cases, none has seized on § 1115(b) as grounds for abrogation of the absolute priority rule.
Even assuming that the statute is ambiguous, no legislative history suggests that the amendment to § 1129(b)(2)(B) and addition of § 1115(a) or (b) abrogates the absolute priority rule for individual debtors. See In re Draiman,
As noted, a minority of courts have found that § 1129(b)(2)(B)(ii) read in connection with § 1115(a) abrogates the absolute priority rule. These “broad view” courts reason that, for purposes of the absolute priority rule, property of the estate is completely redefined by new § 1115(a). In Dill Oil Co. v. Stephens (In re Stephens),
According to the broad view, § 1115 incorporates and supercedes § 541. Under § 1115, an individual’s estate includes post-petition property and earnings in addition to the pre-petition property established by § 541_ Initially, § 1115 creates a baseline estate of all the property covered by § 541. It then adds to that post-petition property. ... Section 1115 thus absorbs § 541 for individual Chapter 11 cases. Therefore, the [absolute priority rule] no longer applies to any property of an individual debtor’s estate.
(Internal citations and quotations omitted).
The Tenth Circuit also summarized the “narrow view” of those courts who do not
In contrast, the narrow view holds that § 1115 merely adds to — but does not replace— § 541’s definition of estate property for individual debtors. Section 1115 “includes” in the estate only that property which was not already included by § 541. In other words, § 1115 includes only post-petition property and earnings.
Id. (Internal citations and quotations omitted).
Noting the statute’s ambiguity, and the long history of the absolute priority rule in bankruptcy jurisprudence, the Stephens court then applied the presumption against implied repeal, concluding that neither the Bankruptcy Code nor the legislative history indicate clearly that Congress intended to abrogate the absolute priority rule. See also In re Lively,
There are attractive arguments supporting the broad view. See, e.g., In re O’Neal,
Kevin and Margaret Gerard contend that adopting the narrow view results in the conclusion that the Debtors cannot keep any property, whether exempt or non-exempt. The Debtors respond that even if the absolute priority rule applies, they are entitled to retain their exempt property. Prior to BAPCPA, courts were divided on whether an individual debtor’s retention of exempt property violated the absolute priority rule. Compare In re Gosman,
The issue was thoroughly analyzed in a pre-BAPCPA case, In re Henderson,
In In re Bullard,
The final issue concerns the Debtors’ non-exempt property and calls for the application of the “new value exception” to the absolute priority rule. The court in In re Draiman,
The Seventh Circuit has recognized an exception to the absolute priority rule called the “new value exception.” In order to qualify for the exception, one must contribute capital which is new, substantial, necessary for success of the plan, reasonably equivalent to the value retained, and in the form of money or money’s worth. Courts have discussed whether this new value exception is applicable to individual Chapter 11 debtors, typically holding that while it can apply it is very difficult to meet because the new value must come from a source other than the debtor.
(Emphasis supplied; internal citations and quotations omitted). See also In re Henderson,
In summary, after considering the evidence and arguments of counsel, and for the reasons stated in this Decision, the Court (1) rejects the Debtors’ argument that the absolute priority rule is abrogated by § 1115(b); (2) rejects Kevin and Margaret Gerard’s argument that the Debtors cannot retain exempt property without violating the absolute priority rule; (3) adopts the “narrow view” of the BAPCPA amendments to the absolute priority rule, but clarifies that the Debtors may retain exempt property without violating the rule; and (4) determines that the plan cannot be confirmed unless new value in an amount equal to or greater than the Debtors’ nonexempt property is contributed to the plan by a source other than the Debtors.
Since it appears that the Debtors’ plan lacks sufficient new value for confirmation, the Debtors should file a modified plan within 30 days. Any modified plan also should address the “good faith” and “projected disposable income” issues resolved at the confirmation hearing.
Notes
. Subsection (a)(14) is the domestic support obligation requirement, and does not apply here.
. The absolute priority rule does not apply when all classes of creditors vote in favor of the plan. In re Lafayette Hotel P'ship,
. In re Lindsey,