BAPCPA Eliminates the Absolute Priority Rule for Individual Chapter 11 Debtors

By: Christina Kormylo

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The addition of section 1115 to the Bankruptcy Code by the 2005 BAPCPA amendments created an exception to the “absolute priority rule” for individual Chapter 11 debtors according to the bankruptcy court in In re Tegeder.

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  In Tegeder, the general unsecured creditor class did not accept the Chapter 11 plan proposed by an individual debtor who was engaged in business, thereby triggering the “cram down” provisions of 11 U.S.C. § 1129(b).

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 Although all other requirements for plan confirmation under section 1129(a) were met, the U.S. Trustee argued that the debtor, as a holder of interests junior to the dissenting class, could not retain any property pursuant to the absolute priority rule of section 1129(b)(2)(B)(ii).

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  The absolute priority rule, as amended by BAPCPA, states, “the holder of any claim or interest that is junior to the claims of such class will not receive or retain . . . 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.”

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  Addressing the effect of the cross-reference to section 1115, the Tegeder court held that the absolute priority rule does not prevent a plan’s confirmation where both pre- and post-petition assets are retained by an individual debtor.

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  The court explained that the 2005 BAPCPA amendment and the addition of section 1115 created an exception to the rule, allowing an individual debtor to retain property included in the estate.

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Non-Claim Status of Clean-Up Injunctions Limited to States

By: Klevis Peshtani

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Does the equitable right of an individual, whose property has been damaged by the debtor’s pollution, to injunctive clean-up relief constitute a “claim” that may be discharged in the debtor’s Chapter 11 bankruptcy?  Yes, according to the Pennsylvania Bankruptcy Court, which in Krafczek v. Exide

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  held that individual plaintiffs who are not exercising the state’s police and regulatory powers, cannot qualify for the narrow exclusion that allows for state enforcement actions to survive a Chapter 11 bankruptcy discharge.

Chapter 13 Plan Must Pay Adequate Protection Payments Prior to Attorneys Fees

By: Brian Lacoff

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In a decision of importance to Chapter 13 debtors’ attorneys, the Bankruptcy Court for the District of New Jersey ruled that an undersecured creditor, Ford Motor Credit Co., was entitled not only to adequate protection payments, but that the section 507(b)

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“super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fees.

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Ford Motor Credit objected to the debtor’s Chapter 13 plan for failure to provide adequate protection payments, violating 11 U.S.C. §§ 361, 1325 and 1326.

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  The debtor modified the plan to include adequate protection payments, but objected to the creditor’s contention that those payments had super-priority over debtor’s attorney fees.

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  The court agreed with Ford Motor Credit, reasoning that the creditor, having a lien on the debtor’s property, must be afforded protection against the daily depreciation of its property.

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Early Retirement Benefits Not Entitled to Severance Priority

By: Joe Scolavino

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Although the Second Circuit generally treats severance payments as priority administrative expenses when employment is terminated during the employer’s bankruptcy,

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early retirement benefits triggered by severance are not entitled to administrative expense treatment.

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  In Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.) the early retirement withdrawal penalty was waived due to the employee’s termination.

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  The employee argued that the extra money derived from the waived penalty constituted a severance payment that was entitled to an administrative priority in the Bethlehem bankruptcy.

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  The court disagreed, reasoning that that the lump-sum retirement benefits for which the employee became eligible at termination did not constitute a new benefit earned at termination, and was thus not entitled to administrative priority.

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Technical Defects in Proof of Claim Not Grounds for Disallowance

By: Robert Ryan

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland

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held that a claim could not be disallowed under 11 U.S.C. § 502

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for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.

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  Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,

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neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.

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 The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.

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  Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.

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