Absolute Priority Rule Found to Apply to Individual Debtor

Posted by NCBRC - January 17, 2013

The Tenth Circuit joined the Fourth Circuit in finding that BAPCPA did not abrogate the absolute priority rule with respect to individual debtors in chapter 11 bankruptcy. In re Stephens, No. 11-6309 (10th Cir. Jan. 15, 2013) (agreeing with In re Maharaj, 681 F.3d 558 (4th Cir. 2012)).

Turning first to the language of the relevant provisions, the court launched its decision from an initial finding of statutory ambiguity in sections 1129 and 1115. Section 1129(b)(2)(B)(ii) delineates an exception to the absolute priority rule by providing that an individual “debtor may retain property” included in section 1115. Section 1115 provides that property of the estate “includes, in addition to property specified in section 541”all property of the kind specified in section 541 that the debtor acquires after commencement of the case but before the case is closed. Addressing these provisions, the Tenth Circuit divided the decisions of other courts into the “narrow view,” under which only property acquired after commencement of the case is excluded from the absolute priority rule, and the “broad view,” espoused by the debtor, under which all property described by section 541 as well as after-acquired property are excepted from application of the rule. The court found that the existence of disagreement among courts as to the meaning of these provisions renders the texts ambiguous.

The court then turned to legislative history and congressional intent noting that, like the relevant statutory language, courts have disagreed as to meaning. The court was persuaded that Congress did not intend to abrogate the absolute priority rule, in part, by the fact that in a listing of debtor benefits found in BAPCPA’s legislative history, abrogation of the rule was absent. Additionally, the court found that there was insufficient textual evidence of clear congressional intent to repeal the rule with respect to individual debtors.

The court rejected the argument that Congress’s inclusion of language in section 1129(b)(2)(B)(ii) addressing individual debtors as an exception to the rule, as well as it use of broad and inclusive language in section 1115 to define the relevant property, were clear indications that Congress intended to exclude individual debtors from application of the absolute priority rule. Both Stephens and Maharaj, essentially deleted the language, “includes, in addition to the property specified in section 541,” out of the interpretation of section 1115 by finding that only property acquired after commencement of the case was removed from the constraints of the absolute priority rule.

NACBA continues to fight this battle in other courts and intends to take part in the cases of In re Lively, No. 12-20277 (5th Cir.); Lindsey v. Pinnacle Nat’l Bank, No. 12-6362 (6th Cir.); and Arnold v. U.S. Trustee, No 12-57265 (9th Cir.).

Stephens opinion


Post a Comment

You must be logged in to post a comment.