Zachary v. California Bank & Trust
Zachary v. California Bank & Trust, ___F.3d ___, 2016 WL 360519 (9th Cir. Jan. 28, 2016), the U.S. Court of Appeals for the Ninth Circuit ( "9th Circuit") held that the absolute priority rule, codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code, continues to apply to individual chapter 11 cases following the enactment, in 2005, of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA 2005"). In so holding, the Ninth Circuit overruled the decision of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012) ("Friedman"), and adopted the "narrow view" of the individual debtor exception to the absolute priority rule. The narrow view, which Zachary adopts as the rule in the 9th Circuit, is that, for individuals filing Chapter 11 bankruptcy, the individual debtor’s Chapter 11 plan cannot be confirmed (approved by the Bankruptcy Court so it goes into effect, binding debtor and creditors) unless debtor puts into the Chapter 11 plan the value of all assets that the debtor had, at the time the debtor filed bankruptcy (all "prepetition" assets), except for those assets that the debtor claimed exempt (only individual debtors can claim exemptions). That has always been the rule for non-individual debtors’ Chapter 11 cases – corporations, LLCs, etc. – except corporations and LLCs and other non-individual debtors cannot claim exemptions.
The result of the absolute priority rule applying in individual Chapter 11 cases is that the value of all non-exempt prepetition assets of the individual debtor must be paid into the Chapter 11 plan to help fund the plan, so debtor has to give up all those assets, usually achieved by selling those assets, in the bankruptcy case.
The only exception to this requirement is if the debtor "buys back" debtor’s prepetition assets, by making a "new value" contribution in money or money’s worth (debtor’s promise of performing future labor does not constitute a "new value" contribution).
Per Zachary, an individual debtor does get to keep assets that the debtor acquires after debtor files bankruptcy (ie "postpetition").
However, in an individual Chapter 11 case, per 11 USC 1115, the individual debtor’s earnings, earned by work the debtor does during the bankruptcy case belongs to the debtor’s "bankruptcy estate". If any unsecured creditor objects to the individual debtor’s proposed Chapter 11 plan, the individual debtor must pay debtor’s "projected monthly disposable income" into debtor’s Chapter 11 plan, every month of the plan (minimum Ch 11 plan length for an individual is 5 years), to help fund the plan, per 11 USC 1129(a)(15), or the plan cannot be confirmed.