Split Among Court Decisions re whether or not the absolute priority rule applies in an individual Chapter 11 case and individual Chapter 11 plan
The United States Court of Appeals for the Tenth Circuit (the "10th Circuit") has held that, notwithstanding the BAPCPA’s amendments to the Bankruptcy Code, individual chapter 11 debtors must still comply with the absolute priority rule (adopting the so-called "narrow view"). Dill Oil Company, LLC v. Arvin E. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir., Jan. 15, 2013). To view the full decision, click: https://www.ca10.uscourts.gov/sites/ca10/files/opinions/01018983694.pdf.
Facts
The debtors, Mr. and Mrs. Stephens (the "Stephens"), owned a chain of convenience stores and filed a voluntary individual chapter 11 case because the stores were operating at a loss. The Stephens sought confirmation of a plan of reorganization (the "Plan") that paid approximately 1% to allowed unsecured claims over a five-year period, but allowed for the Stephens to retain possession and control of their convenience stores.
Dill Oil Company, owned by Mr. and Mrs. Dill (the "Dills"), was the primary supplier of gasoline and gas station products to the Stephens’ stores. At the time the chapter 11 case was filed, the Stephens owed the Dills approximately $1.8 million. Repayment of the debt was partially secured by mortgages the Stephens granted to the Dills in various tracts of real estate. However, the mortgages were subject to more senior mortgages.
In the Stephens’ Plan, the Dills’ claims were classified as partially secured in the amount of $15,000, with the balance of the debt classified as unsecured. The Dills’ unsecured debt amounted to approximately 96% of the allowed unsecured claims class. The Dills objected to confirmation of the Plan and voted to reject it. Given the Dills’ vote of their unsecured claims, the only way the Stephens could confirm their Plan was by way of a "cram down," under Bankruptcy Code section 1129(b)(2)(B)(ii).
The Dills argued that the Plan could not be confirmed via cram down, because it violated the "absolute priority rule" of section 1129(b)(2)(B)(ii) (e.g., that a chapter 11 debtor cannot keep any pre-petition property unless the Plan provides for payment of all creditors in full), which they argued survived the 2005 enactment the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") (thereby asserting the so-called "narrow view" of the BAPCPA’s effect on the absolute priority rule in individual chapter 11 cases).
The bankruptcy court nevertheless crammed down the Plan over the Dills’ objections, adopting the "broad view," which concludes that the plain language of the BAPCPA abrogated the absolute priority rule in individual chapter 11 cases.
The Dills timely appealed the bankruptcy court’s decision to the Bankruptcy Appellate Panel ("BAP"), which, on its own motion, certified the case for direct appeal to the 10th Circuit, on the basis that the case presented a question of public importance for which there was no controlling law. The 10th Circuit accepted the appeal.
Holding and Reasoning
The 10th Circuit reversed the bankruptcy court and remanded the case for further proceedings. In doing so, the court adopted the "narrow view," by ruling that post-BAPCPA, the absolute priority rule remains valid and enforceable in individual chapter 11 cases, and therefore the Stephens’ Plan could not be confirmed because it violated the absolute priority rule.
The 10th Circuit’s analysis was twofold:
First, the Court examined the language of the operative statutes giving rise to the debate as to whether the absolute priority rule survived enactment of BAPCPA – namely 11 U.S.C. sections 1115 and 1129(b)(2)(B)(ii) – to determine whether the statutory language was clear and unambiguous. After recognizing the divergent views expressed by other courts adopting the broad or narrow views, the Court determined that the statutes were ambiguous because both views were plausible.
Second, the Court noted that, because the statutory language and the sparse legislative history are ambiguous, there was no clear evidence that Congress intended through BAPCPA to repeal the absolute priority rule in individual chapter 11 cases. Without a clearly stated intention to repeal the absolute priority rule, the Court adopted the presumption against "implied repeal," stating that, "[R]epeals by implication are not favored and will not be presumed unless the intention of the legislature to repeal is clear and manifest."
Commentary
There are now two post-BAPCPA circuit court rulings on the absolute priority rule, both adopting the majority "narrow view" that the absolute priority rule remains valid and enforceable: (i) the 10th Circuit opinion in the Stephens case; and (ii) the 4th Circuit opinion in the case of In re Maharaj, 681 F.3d 558 (4th Cir. 2012) However, neither the 4th Circuit’s Maharaj opinion nor the 10th Circuit’s Stephens opinion is binding on bankruptcy courts in the 9th Circuit.
As it presently stands, the 9th Circuit’s BAP decision in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012), where the BAP’s majority adopted the minority "broad view," remains good law. Depending on the particular bankruptcy judge, however, the Friedman decision may or may not constitute binding authority in the 9th Circuit. See In re Arnold, 471 B.R. 578 (Bankr. C.D. Cal. 2012) (ruling that the Friedman decision was wrongly decided, and is not binding authority in the 9th Circuit).