Bankruptcy Judge Peter D. Russin of Fort Lauderdale, Fla., predicted that the Eleventh Circuit would follow five other circuits by holding that the amendment to Section 1129(b)(2)(B)(ii) in 2005 did not abrogate the absolute priority rule for an individual in chapter 11.
In his elegant opinion on September 8, Judge Russin took sides on another issue where the lower courts are divided by following a nonprecedential opinion from the Ninth Circuit and holding that the absolute priority rule does not preclude an individual chapter 11 debtor from retaining exempt property.
The Debts and the Plan
The individual debtor in chapter 11 owned a home and a truck that were both exempt. The debtor also owned two watches and about $12,000 in cash that were not exempt. Unsecured creditors had more than $750,000 in claims.
The debtor’s chapter 11 plan committed to pay $30,000 to unsecured creditors over five years, for a dividend of about 4% to unsecured creditors.
Two classes of secured creditors accepted the plan. The unsecured creditor class voted “no,” compelling the debtor to pursue confirmation of a so-called cramdown plan under Section 1129(b)(2)(B)(ii).
As amended in 2005 by the so-called BAPCPA amendments, Section 1129(b)(2)(B)(ii) provides that the “fair and equitable” requirement for classes of unsecured creditors means that “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 . . . .” [Emphasis added.]
Also added among the BAPCPA amendments in 2005, Section 1115(a) provides that property of the estate for an individual in chapter 11
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.
Judge Russin confronted the question of whether the 2005 amendments excepted all estate property from the absolute priority rule or only property of the estate that was added by Section 1115, namely, property acquired after filing and postpetition earnings from services.
Judge Russin’s Analysis
Judge Russin’s opinion merits reading in full text for his explication of the history of the absolute priority rule. Currently, he said there is “a split of authority over what Congress meant by” the phrase “retain property included in the estate under section 1115.”
Among lower courts, Judge Russin cited decisions taking the “broad view” that “an individual chapter 11 debtor can retain — without paying unsecured creditors in full — all property of the estate, whether it is acquired prepetition or postpetition.” [Emphasis in original.]
The “narrow view,” Judge Russin said, is that Congress only intended “to allow an individual debtor to retain the property that § 1115 added [i.e., after-acquired property and earnings after filing], not the rest of the estate’s property.”
Judge Russin stated that the question was whether “Congress effectively abrogated the absolute priority rule in individual chapter 11 cases.”
Although the Eleventh Circuit has not staked out a position, Judge Russin said that the Fourth, Fifth, Sixth, Ninth and Tenth Circuits have adopted the narrow view. He likewise adopted the narrow view, believing that the word “included” exempts after-acquired property and postpetition earnings from the absolute priority rule. Like the Fifth Circuit, he said that a broader reading would be “a stretch.”
Judge Russin therefore held that “the absolute priority rule continues to apply in individual chapter 11 cases.”
What About Exempt Assets?
Having decided that the absolute priority rule is alive and well, Judge Russin turned to the question of whether it precludes retention of both nonexempt and exempt property. He said that “courts are unanimous that individual debtors violate the absolute priority rule if they receive or retain non-exempt property, [but are] are split over whether they violate the absolute priority rule if they receive or retain exempt property.” [Emphasis in original.]
Judge Russin decided that the debtor would not violate the absolute priority rule by retaining exempt property, because the debtor would not be retaining the property “under the plan,” the proscription in Section 1129(b)(2)(B)(ii).
Instead, Judge Russin said that the debtor would be retaining exempt property under Section 522, not under the plan. He therefore held that Section 1129(b)’s “specific reference to property retained ‘under the plan’ limits the absolute priority rule’s prohibition to property of the estate, which simply does not include exempt property.”
Judge Russin followed the Ninth Circuit, which held in 2020 that the absolute priority rule does not prohibit an individual debtor in chapter 11 from retaining exempt property. In re Juarez, 836 F. App’x 557, 561 (9th Cir. 2020).
Given his belief that the statute was “plain and unambiguous,” Judge Russin held that “an individual chapter 11 debtor does not violate the absolute priority rule by receiving or retaining exempt property.”
The Holding and the Implications for the Debtor
Judge Russin held that while “the absolute priority rule continues to apply in individual chapter 11 cases, it does not preclude debtors from retaining exempt property, but it does preclude them from retaining non-exempt property other than property described in § 1115.”
Applying the holding to the case before him, Judge Russin said that the debtor could retain the exempt home and the exempt truck without violating the absolute priority rule. On the other hand, he declined to confirm the plan because the absolute priority rule precluded the debtor from retaining the two nonexempt watches and $12,000 in nonexempt cash.
Suggesting that his opinion was largely a victory for the debtor, Judge Russin allowed the debtor to amend the plan and “seek confirmation, possibly without having to resolicit.”
Evidently, the debtor can “borrow” the $12,000 from creditors by paying $12,000 over five years without interest. That’s a good deal!
Bankruptcy Judge Peter D. Russin of Fort Lauderdale, Fla., predicted that the Eleventh Circuit would follow five other circuits by holding that the amendment to Section 1129(b)(2)(B)(ii) in 2005 did not abrogate the absolute priority rule for an individual in chapter 11.
In his elegant opinion on September 8, Judge Russin took sides on another issue where the lower courts are divided by following a nonprecedential opinion from the Ninth Circuit and holding that the absolute priority rule does not preclude an individual chapter 11 debtor from retaining exempt property.