Opinion ID: 3173092
Heading Depth: 3
Heading Rank: 1

Heading: Individual chapter 11 bankruptcies and the

Text: absolute priority rule. “Individual debtors have two basic options under the Code.” Ice House Am., LLC v. Cardin, 751 F.3d 734, 736 (6th Cir. 2014). They can either liquidate their non-exempt assets under chapter 7, or file for reorganization under chapters 11 or 13. See 11 U.S.C. §§ 701–84, 1101–46, 1301–30. A chapter 13 reorganization, however, is only available to individual debtors whose debts fall below certain limits. See 11 U.S.C. § 109(e). Individual debtors with more debt can only file for reorganization under chapter 11, which is “used primarily by debtors with ongoing businesses.” Toibb v. Radloff, 501 U.S. 157, 163 (1991) (emphasis omitted). An individual filing under chapter 11 may confirm a plan of reorganization in one of two ways. The first is by satisfying the bankruptcy court that a plan complies with each of the sixteen paragraphs in 11 U.S.C. § 1129(a). Under this path, “[o]f particular note is the requirement of obtaining the consent of each class of creditor as required by paragraph (8) of § 1129(a).” In re Friedman, 466 B.R. at 480. Absent unanimous approval of the plan by each class of creditors, a debtor must pursue the second path to confirmation. Under the second path, a debtor can obtain confirmation by satisfying the bankruptcy court that, notwithstanding any creditor’s objections, the plan is “fair and equitable” to each creditor class. 11 U.S.C. § 1129(b)(1), (2). Because this “nonconsensual method of confirmation” is obtained over creditor objection, it is known as a “cramdown.” In re Friedman, 466 B.R. at 480. A debtor may cram down a plan only if it complies with the absolute priority rule in § 1129(b)(2)(B)(ii). Put another way, a bankruptcy judge 6 ZACHARY V. CALIFORNIA BANK & TRUST may find that a debtor’s plan is “fair and equitable” to an objecting creditor only if the plan complies with the absolute priority rule. The absolute priority rule is a “judicially created concept,” with its genesis in “early twentieth-century railroad cases.” In re Friedman, 466 B.R. at 478. It arose from the Bankruptcy Code’s statutory requirement, now codified in 11 U.S.C. § 1129(b)(2), that a reorganization plan be “fair and equitable” to each class of creditors. The rule “provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under a reorganization plan.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988) (alteration omitted) (quoting In re Ahlers, 794 F.2d 388, 401 (8th Cir. 1986)). “The U.S. Supreme Court adopted the absolute priority rule to prevent deals between senior creditors and equity holders that would impose unfair terms on unsecured creditors.” In re Friedman, 466 B.R. at 478; see also N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 503–04 (1913). The rule later “gained express statutory force, and was incorporated into Chapter 11 of the Bankruptcy Code adopted in 1978” as 11 U.S.C. § 1129(b)(2)(B)(ii). Norwest, 485 U.S. at 202. Before the adoption of BAPCPA in 2005, it was clear that “no Chapter 11 reorganization plan can be confirmed over the creditors’ legitimate objections (absent certain conditions not relevant here) if it fails to comply with the absolute priority rule.” Id. At that time, the absolute priority rule provided: [T]he condition that a plan be fair and equitable with respect to a class [of creditors] includes the following requirements: ZACHARY V. CALIFORNIA BANK & TRUST 7 .... (B) With respect to a class of unsecured claims–
of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. 11 U.S.C. § 1129(b)(2)(B)(ii) (1994) (emphasis added). Thus, under the pre-BAPCPA Bankruptcy Code, it was clear that “every unsecured creditor must be paid in full before the debtor can retain ‘any property’ under a plan.” Ice House, 751 F.3d at 737 (quoting 11 U.S.C. § 1129(b)(2)(B)(ii)).