by In a thoughtful and comprehensive opinion, the BAP for the Ninth Circuit held yesterday that the absolute priority rule does not apply to individual debtors filing chapter 11 bankruptcy. In re Friedman, Nos. 11-1149, 11-1105 (B.A.P. 9th Cir. March 19, 2012).
Daniel Press is to be congratulated on his fine oral argument on behalf of NACBA in this case.
The court began its analysis with a review of the history of the absolute priority rule, noting that prior to BAPCPA the rule had been applied with an eye toward practical consequences and legislative intent to prevent unfair advantage to corporate shareholders over unsecured creditors. These considerations permitted application of such corollary rules as the “new value” and “equity interest” exceptions to cases that would otherwise be governed by the absolute priority rule.
With that history in mind the court turned to the language of sections 1129(b)(2)(B)(ii) and 1115. Section 1129(b)(2)(B)(ii) explicitly creates an exception to the absolute priority rule where a debtor is permitted to retain property included in the estate pursuant to section 1115. Section 1115 provides that property of the estate “includes, in addition to the property specified in section 541 . . .” property or earnings acquired after commencement of the case. Examining the language of both provisions within the overall context of the entire statutory scheme, the court found that there was no clear legislative directive requiring application of the absolute priority rule to individual debtors. Next, it found that the underlying context of the individual chapter 11 statutory construct, which is reflective of many chapter 13 provisions designed to encourage reorganization rather than liquidation, favors non-application of that rule.
Judge Jury filed a dissenting opinion finding that the language of the statute is ambiguous. While agreeing that section 1115 carves out certain property as not subject to the absolute priority rule, the dissent focused on the meaning of the word “included” in section 1115 to determine the extent of that carve out. Judge Jury agreed with the “narrow view” that section 1115 is intended only to supplement section 541 by adding post-petition earnings to the estate property, in which case, only those post-petition assets are released from the absolute priority rule.
This issue is scheduled for argument on March 22, in the Fourth Circuit in In re Maharaj, No. 11-1747. NACBA filed an amicus brief in that case and is seeking leave to allow Mr. Press to participate in oral argument.