A United States District Court Judge in Tampa, Florida has ruled that the "absolute priority rule" no longer applies to individual Chapter 11 debtors since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
The rule, codified at 11 U.S.C. § 1129(b)(2)(B)(ii), comes into play when a debtor does not obtain the consent of the class of unsecured creditors in connection with a proposed plan or reorganization, and the plan then becomes a so-called "cram down" plan. Essentially, the rule mandates that unsecured creditors receive payment in full before the debtor may retain property of the bankruptcy estate. This generally has come into play when equity holders in a debtor that is a business entity are affected.
U.S. District Judge Susan C. Bucklew of the Middle District of Florida ruled on appeal from a bankruptcy court decision granting plan confirmation to a group of individual Chapter 11 debtors that the rule no longer applies to them.
The underlying bankruptcy proceedings involve Cypress Creek Assisted Living Residence Inc. and a related company, which own and operate an assisted living facility in Sun City, Florida.
Cypress Creek borrowed $5 million from American Bank in 2007 to fund operations. Several of the company's individual shareholders personally guaranteed payment of the loan.
The individual guarantors subsequently filed Chapter 13 petitions, which were later converted to Chapter 11 cases.
American Bank's loan had been assigned to SPCP, which filed a $5.8 unsecured claim in each of individual's cases and lodged an objection to their reorganization plans.
The proposed plans called for the individuals to retain their ownership of Cypress Creek while not paying any money to SPCP because monthly payments were being made to SPCP by the Cypress Creek facility under its confirmed plan. SPCP would retain its right to enforce the guarantees if those payments stop.
The Bankruptcy Court confirmed the individuals' plans after a hearing in August of 2010. It relied on In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010), which held the "absolute priority rule" no longer applies to individual Chapter 11 debtors after the passage of BAPCA.
On appeal to the District Court, SPCP argued that the Bankruptcy Court should have adopted the more narrow view of BAPCPA set forth in In re Gelin, 437 B.R. 435 (Bankr M.D. FL. 2010).
The narrow interpretation would allow the individual debtor to keep only property acquired post-petition.
Judge Bucklew sided with the Bankruptcy Court and its reliance on the Shat decision. She said the plain language of BAPCPA permits a bankruptcy court to confirm an individual Chapter 11 debtor's plan over an unsecured creditor's objection even when the debtor retains pre- and post-petition property of the estate.
Judge Bucklew acknowledged that her decision conflicts with Gelin, a ruling from her own judicial district, but said that case was factually distinguishable from the one before her.
In this ever-changing legal environment an experienced bankruptcy attorney can provide valuable advice and guidance regarding the options available to struggling individuals and businesses.
