Brown v. Ferroni, __BR__, 2014 WL 695090 (District Court, ED PA 2014)
Brown v. Ferroni, __BR__, 2014 WL 695090 (District Court, ED PA 2014): U.S. District Court, Eastern District of Pennsylvania (Philadelphia), has become an additional court holding that the “absolute priority rule” applies in individual Chapter 11 bankruptcy cases, and that the 2005 BAPCPA amendments to the Bankruptcy Code did NOT eliminate the absolute priority rule from applying in Chapter 11 cases of individuals.
Courts are split nationwide at all levels (Bankruptcy Court, District Court, BAP, and Court of Appeals), as to whether or not the 2005 BAPCPA Amendments eliminated the absolute priority rule, in Chapter 11 bankruptcy cases of individuals (as opposed to Chapter 11 bankruptcy cases of corporations and partnerships, where everyone agrees the absolute priority rule applies). It seems inevitable that this nationwide split will eventually be ruled on by the US Supreme Court.
Brown v. Ferroni holds that Congress didn’t repeal the so-called absolute priority rule for individuals in chapter 11 when it amended the Bankruptcy Code in 2005, according to a recent ruling by a district judge in Philadelphia, Bloomberg News reported yesterday. The issue has divided federal courts, as three circuit courts of appeal and 17 bankruptcy courts follow the narrow view that absolute priority survives in individuals’ chapter 11s. One bankruptcy appellate panel, one district court and seven bankruptcy courts read the amendments broadly and contend that the absolute priority rule no longer applies to individuals in chapter 11, according to U.S. District Judge Timothy J. Savage in Philadelphia. The case turns on language added in 2005 to §1129(b)(2)(B)(ii) of the Bankruptcy Code and §1115.
The majority take the view that the plain meaning of the two statutes together only allows an individual using cramdown to keep property that was obtained after filing for bankruptcy. In his Brown v. Ferronia decision, US District Judge Savage found the language unambiguous, and even if it weren’t, he nonetheless subscribed to the narrow view.
He said that there is nothing in the statute or legislative history to indicate that Congress intended to abrogate absolute priority for individuals. Because repeal by implication is “disfavored,” Judge Savage concluded that absolute priority remains because nothing in the statute shows an intention to repeal the rule that existed before 2005.
The most recent appeals court decision on the issue came down in May from the circuit court in New Orleans in a case called Lively.