Court Opinion

ID: 4514566
Source: CourtListenerOpinion
Date Created: 2020-03-11 00:01:41.340082+00
Date Added: 2024-06-11T12:34:09.384613
License: Public Domain

FILED
                                                            AUG 21 2019
                        ORDERED PUBLISHED               SUSAN M. SPRAUL, CLERK
                                                           U.S. BKCY. APP. PANEL
                                                           OF THE NINTH CIRCUIT

           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                        BAP No. AZ-19-1028-FLB

UBALDO JUAREZ,                                Bk. No.   0:17-bk-06277-BMW

                  Debtor.

EDGAR TODESCHI; GEORGINA
PONCE,

                  Appellants,

v.                                            OPINION

UBALDO JUAREZ,

                  Appellee.

                   Argued and Submitted on July 18, 2019
                           at Phoenix, Arizona

                            Filed – August 21, 2019

               Appeal from the United States Bankruptcy Court
                         for the District of Arizona

     Honorable Brenda Moody Whinery, Chief Bankruptcy Judge, Presiding
Appearances:        William R. Richardson of Richardson & Richardson, P.C.
                    argued for appellants Edgar Todeschi and Georgina
                    Ponce; Thomas H. Allen of Allen Barnes & Jones, PLC
                    argued for appellee Ubaldo Juarez.

Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.

FARIS, Bankruptcy Judge:

                                 INTRODUCTION

      Appellants Edgar Todeschi and Georgina Ponce (the “Creditors”)

appeal from the bankruptcy court’s order confirming debtor Ubaldo

Juarez’s amended chapter 111 plan. They argue (in summary) that

Mr. Juarez acted in bad faith and that his plan violated the “absolute

priority rule.”

      The bankruptcy court held three hearings and comprehensively

addressed the Creditors’ objections to plan confirmation. We do not discern

any error in the court’s rulings. Accordingly, we AFFIRM. We publish

because this appeal presents a question of first impression in this circuit:

whether the “absolute priority rule” permits an individual debtor in a

chapter 11 case to retain exempt property without making a commensurate

“new value” contribution.

      1
       Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure.

                                           2
                            FACTUAL BACKGROUND2

A.     Prepetition events

       1.     Mr. Juarez’s financial arrangement with his girlfriend

       Mr. Juarez is a licensed real estate broker. He worked with his

longtime domestic partner, Leticia Arreola,3 who is a real estate agent and

his assistant. Mr. Juarez and Ms. Arreola initially worked at Realty

Executives McConnaughay. All commissions that they earned were

payable to Mr. Juarez and deposited into the couple’s joint bank account.

Ms. Arreola periodically withdrew the portion of the commissions that she

had earned and deposited it into her personal bank account. In the twenty-

two months prior to the petition date, Mr. Juarez or Ms. Arreola transferred

over $72,000 from the joint account to Ms. Arreola.

       Four months prior to the petition date, Mr. Juarez and Ms. Arreola

left Realty Executives McConnaughay and began working with Realty

Executives in Phoenix. Mr. Juarez managed a team that included

Ms. Arreola and had discretion to determine the commissions for his team.

During this time, Mr. Juarez and Ms. Arreola received separate paychecks.

       2
         We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2
(9th Cir. BAP 2008).
       3
        Later in the proceedings before the bankruptcy court, Mr. Juarez’s counsel
represented that Mr. Juarez and Ms. Arreola had separated and were no longer a
couple.

                                             3
      2.       The loan from the Creditors

      In 2011, the Creditors loaned Mr. Juarez the principal sum of

$200,000. In or around 2014, the Creditors sued Mr. Juarez in Arizona state

court for breach of contract, breach of good faith and fair dealing, unjust

enrichment, negligent misrepresentation, fraud, and constructive trust.

Mr. Juarez denied the allegations.

B.    Mr. Juarez’s bankruptcy petition

      Mr. Juarez filed his chapter 11 petition in June 2017 to address the

costly litigation brought by the Creditors and a large federal and state tax

liability arising from years of incorrect joint tax returns.

      Mr. Juarez scheduled assets totaling approximately $365,000. Among

his scheduled assets was his residence located in Yuma, Arizona. He

reported that the residence was worth $300,000 and encumbered by a

$156,000 lien. He claimed a $150,000 exemption in the residence.

      He disclosed a ninety percent interest in UBLA Properties, LLC

(“UBLA”).4 He had formed UBLA the day before filing his chapter 11

petition for the purpose of acquiring and holding title to a vacant lot in

Yuma. He disclosed UBLA’s equitable interest in the vacant lot, valued at

$35,000. In January 2018, Mr. Juarez received a $10,000 distribution from

UBLA, which he disclosed in his monthly operating report.

      He scheduled liabilities totaling $673,749.77, of which $414,682.82

      4
          Ms. Arreola owned the remaining ten percent membership interest.

                                           4
was general unsecured debt. The remainder was largely state and federal

tax liabilities.5

       Mr. Juarez paid some of Ms. Arreola’s personal expenses from the

debtor-in-possession (“DIP”) account postpetition. He also made various

cash withdrawals postpetition that he did not explain in the monthly

operating reports.6

       The Creditors filed a proof of claim in the amount of $261,390.40.7

Mr. Juarez did not object to the Creditors’ claim.

C.     The initial chapter 11 plans

       Mr. Juarez filed a proposed plan and disclosure statement, followed

by a revised plan and disclosure statement. Mr. Juarez proposed to make

plan payments of approximately $3,446 per month. He would fund the

plan using post-confirmation commission income.

       5
        The plan identified an allowed priority tax claim held by the Arizona
Department of Revenue totaling $10,325.99 and a general unsecured claim totaling
$1,500.42. The Internal Revenue Service held an allowed priority tax claim totaling
$53,350.81, a general unsecured claim totaling $6,691.20, and a secured claim totaling
$74,610.14.
       6
        At trial, Mr. Juarez admitted using the DIP account for some of his and
Ms. Arreola’s personal expenses, including travel, movies, clothes, and dining. He also
acknowledged that he made certain cash withdrawals and wrote checks without
disclosing them in his operating reports.
       7
        The Creditors also filed an adversary proceeding (not at issue in this appeal),
seeking a determination that their debt was nondischargeable under § 523(a)(2)(A). That
case remains pending.

                                            5
      He proposed paying the state and federal tax claims over fifty-four

months.

      He proposed to pay Class 4 general unsecured creditors a total of

$20,467.44 over five years. He also proposed to pay Class 4 creditors a

$10,000 new value contribution, which would be provided by Ms. Arreola

in the third year. If the funding source failed, Mr. Juarez pledged to sell his

residence to make the $10,000 new value contribution.

      The bankruptcy court approved the disclosure statement and

scheduled a confirmation hearing.

      The Creditors objected to the plan. They argued that the plan was not

proposed lawfully and in good faith under §§ 1129(a)(2) and (a)(3) because

they would recover only five percent of their claim, Mr. Juarez’s

postpetition expenses were excessive, and he failed to explain certain cash

withdrawals. They also argued that the plan failed to include Ms. Arreola’s

income and assets, even though Mr. Juarez held her out as his “wife” and

they shared bank accounts and household expenses.

      They argued that the plan did not satisfy the “best interests of the

creditors” test under § 1129(a)(7) because a hypothetical chapter 7 trustee

would likely include Ms. Arreola’s assets in the calculation of estate assets.

      They contended that, under § 1129(a)(15), Mr. Juarez was not

committing all of his disposable income to the plan.

      Finally, the Creditors argued that the plan was not fair and equitable

                                       6
under § 1129(b) because it did not satisfy the absolute priority rule or the

new value exception. Mr. Juarez proposed to retain property under the

plan, even though Class 4 creditors voted to reject the plan. They argued

that there was neither “new” value because Ms. Arreola’s contribution

should be considered property of the estate nor “money’s worth” because

the contribution was “sufficiently unreliable.”

      The Class 4 creditors rejected the plan. Three Class 4 unsecured

creditors voted in favor of the plan, but the Creditors, whose vote

represented 96.87 percent of the Class 4 votes, voted against the plan.

      The bankruptcy court held a hearing and a trial on plan confirmation

and denied confirmation of the plan.

      The bankruptcy court held that the plan was proposed in good faith

under § 1129(a)(3). It ruled that Mr. Juarez’s stated reasons for filing for

bankruptcy protection – to address tax liabilities and costly state court

litigation – were not improper on their face.

      It rejected the Creditors’ assertion that Mr. Juarez’s failure to

schedule certain assets amounted to bad faith. It accepted Mr. Juarez’s

testimony that his omission of a car that he owned – but was driven and

maintained by his daughter – was inadvertent. The court also found that

Mr. Juarez failed to report prepetition commissions but that he

nevertheless deposited those commissions into his DIP account. It stated

that the Creditors had provided no evidence in support of their argument

                                       7
that Mr. Juarez had undervalued his interest in a boat.

      The court found that Mr. Juarez had filed all of his monthly operating

reports and supplemented them with complete bank statements. It agreed

with Mr. Juarez that his failure to disclose what he did with certain cash

withdrawals was inadvertent and stated that the Creditors failed to

produce any evidence that his use of DIP funds was in bad faith.

      The Creditors contended that Mr. Juarez had used UBLA to avoid

bankruptcy court supervision. However, the bankruptcy court stated that

Mr. Juarez’s prepetition interest in the vacant lot was unclear, that he had

properly disclosed his interest in UBLA, and that he had deposited money

that he received from UBLA into his DIP account.

      The court found nothing improper with the $72,000 that Mr. Juarez

allegedly gave to Ms. Arreola prepetition. The court found that the transfer

represented amounts that Ms. Arreola earned while working at Realty

Executives McConnaughay. It further determined that Mr. Juarez should

not have paid any of Ms. Arreola’s expenses from his DIP account, but

there was no evidence that the payments were made in bad faith. It

overruled the Creditors’ § 1129(a)(3) objection.

      The bankruptcy court held that the plan was feasible under

§ 1129(a)(11). It found that Mr. Juarez could generate sufficient income to

make his proposed plan payments of $3,446 per month and that his DIP

                                      8
account balance had been rising steadily.

      However, the court found two fatal flaws with the plan.

      First, the bankruptcy court held that the plan did not comply with

§ 1129(a)(15)’s requirement that Mr. Juarez commit five years’ worth of his

projected disposable income to his unsecured creditors. The court

concluded that Ms. Arreola was not Mr. Juarez’s dependent and that her

expenses could not be used to reduce the amount that Mr. Juarez was

required to commit to the plan.

      Second, the court held that Ms. Arreola’s contribution of $10,000 to

the plan in the third year did not satisfy the new value exception to the

absolute priority rule under § 1129(b)(2)(B)(ii). The court considered

whether the contribution was (1) new, (2) substantial, (3) money or

money’s worth, (4) necessary for a successful reorganization, and

(5) reasonably equivalent to the value or interest received.

      The court easily concluded that the $10,000 contribution was “new,”

because it was funded from an outside source or Mr. Juarez’s exempt

assets.

      The court further found that the proposed contribution was

reasonably equivalent to the value or interest received because “all of the

Debtor’s non-exempt assets are encumbered by a federal tax lien; thus, the

Debtor would be retaining encumbered assets in exchange for a $10,000

contribution.”

                                      9
      The court determined that the proposed contribution was necessary,

given that Class 4 creditors rejected the plan and Mr. Juarez needed to

satisfy the absolute priority rule or new value exception.

      However, the court concluded that the contribution was not “money

or money’s worth” because Ms. Arreola did not have the money as of the

trial date and would only make the contribution in the third year.

      It also found that the proposed contribution was not substantial. The

$10,000 infusion represented only 3.2 percent of the total general unsecured

debt. The court required the contribution to be five percent or greater of the

total unsecured debt.

      Based on the relatively small contribution and the timing of the

contribution, the court concluded that Mr. Juarez did not satisfy the new

value exception. Accordingly, it sustained the § 1129(b) objection.

D.    The amended plan

      Mr. Juarez filed an amended plan (“Amended Plan”). Notable

changes included: (1) the increase of new value contribution from $10,000

to $15,000, which would be paid by Michael Gray, a business associate who

sometimes lends Ms. Arreola money, by the effective date of the Amended

Plan; and (2) modification of the payment to Class 4 general unsecured

creditors to a total of $33,580 to be paid in four annual payments of $2,008

and the balance in the fifth year.

      The bankruptcy court approved the disclosure statement. Only Class

                                      10
4 rejected the Amended Plan.

      The Creditors again objected to plan confirmation. In addition to the

arguments raised in the earlier objection, they argued that Mr. Juarez

continued to spend over $1,000 a month without disclosing the purpose of

the expenditures. They alleged that he had suddenly begun transferring

over seventy percent of his commissions to Ms. Arreola only eleven days

before the petition date.8 They also asserted that Mr. Juarez had improperly

used DIP funds for Ms. Arreola’s shopping at department stores.

      The Creditors also argued that Mr. Juarez’s assignment of his

commissions to Ms. Arreola and his use of the DIP funds improperly

decreased his disposable income under § 1129(a)(15).

      The Creditors contended that the Amended Plan was unfair under

§ 1129(b) because it back-loaded payments and would not begin paying

Class 4 creditors for almost a year. They argued that Mr. Juarez would

retain all of his assets without fully paying unsecured creditors.

      The bankruptcy court held a confirmation hearing on January 23,

2019. It declined to hear more evidence and overruled the objection from

the bench.

      8
        Mr. Juarez had discretion to assign commissions to his team members at Realty
Executives. The Creditors’ counsel prepared a chart summarizing the commission
payments to Mr. Juarez and Ms. Arreola and argued that, beginning on May 26, 2017,
Mr. Juarez improperly directed $86,771.96 of commissions to Ms. Arreola, while he
collected only $34,864.57 (for a total of $124,048.53).

                                          11
      The court reiterated its ruling concerning §§ 1129(a)(2) and (a)(3) and

stated that the Creditors did not offer any additional arguments that would

change the court’s earlier ruling or require an evidentiary hearing.

      The court also rejected the Creditors’ § 1129(a)(7) argument, holding

that the Creditors did not raise this issue at the trial on the original plan

(and that the relevant provisions of the Amended Plan were the same as

the original plan).

      The court held that the Amended Plan satisfied the court’s concerns

regarding § 1129(a)(15). It stated that Mr. Juarez “amended the budget . . .

and followed the national guidelines with a couple of small exceptions that

have been noted.”

      Finally, the court addressed the Creditors’ objection under § 1129(b).

The court noted that the Amended Plan satisfied its earlier concerns and

that Mr. Juarez would make an additional payment upfront to the

unsecured creditors. It held that the Amended Plan complied with all of the

requirements under § 1129(b).

      The court later entered a written order confirming the Amended

Plan. The order addressed each element of §§ 1129(a) and (b).

      The bankruptcy court held that the Amended Plan satisfied

§ 1129(a)(7) because it provided that the unsecured creditors would receive

distributions worth at least as much as the amount that they would receive

in a chapter 7 liquidation.

                                       12
      As to § 1129(b), the court stated that the Amended Plan provided that

Mr. Juarez would “not receive or retain under the plan on account of a

junior claim or interest any property. Instead, the Debtor retains property

on account of an infusion of new value into the Plan. Such value has been

determined [to be] sufficient for plan confirmation purposes.”

      The Creditors timely filed their notice of appeal.

E.    Motion for stay pending appeal

      Shortly thereafter, the Creditors filed in the bankruptcy court a

motion for stay pending appeal. They argued that they would be

irreparably harmed in the absence of a stay, because Mr. Juarez would

consummate the Amended Plan, rendering the appeal moot.

      The bankruptcy court denied the motion, holding that (1) the

Creditors were unlikely to succeed on appeal; (2) they would not suffer

irreparable injury because the appeal would not be either constitutionally

or equitably moot; (3) other creditors would necessarily be harmed by a

delay in distributions; and (4) the public interest would not be served by

granting the motion.

                              JURISDICTION

      The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334

and 157(b)(2)(L).

      “We cannot exercise jurisdiction over a moot appeal.” Ellis v. Yu (In re

Ellis), 523 B.R. 673, 677 (9th Cir. BAP 2014)(citations omitted). An appeal is

                                      13
moot if events have occurred that prevent an appellate court from granting

effective relief. See Ederel Sport, Inc. v. Gotcha Int’l L.P. (In re Gotcha Int’l

L.P.), 311 B.R. 250, 253-54 (9th Cir. BAP 2004). A case may become

constitutionally, statutorily, or equitably moot. Clear Channel Outdoor Inc. v.

Knupfer (In re PW, LLC), 391 B.R. 25, 33 (9th Cir. BAP 2008) (“In bankruptcy,

mootness comes in a variety of flavors: constitutional, equitable, and

statutory.”).9 The “party moving for dismissal on mootness grounds bears a

heavy burden.” Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe

Insulation Co.), 677 F.3d 869, 880 (9th Cir. 2012) (quoting Jacobus v. Alaska,

338 F.3d 1095, 1103 (9th Cir. 2003)).

      Mr. Juarez argues that this appeal is equitably moot because the

Creditors did not seek a stay pending appeal and the Amended Plan has

been substantially consummated.

      Under the equitable mootness doctrine, we may “dismiss appeals of

bankruptcy matters when there has been a ‘comprehensive change of

circumstances . . . so as to render it inequitable for this court to consider the

merits of the appeal.’” Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.),

      9
         The Ninth Circuit has summarized the three types of mootness: “Constitutional
mootness is jurisdictional and derives from the case-or-controversy requirement of
Article III. Equitable mootness concerns whether changes to the status quo following
the order being appealed make it impractical or inequitable to ‘unscramble the eggs.’
Finally, statutory mootness codifies part, but not all, of the doctrine of equitable
mootness.” Castaic Partners, II, LLC v. Daca-Castic, LLC (In re Castaic Partners II, LLC),
823 F.3d 966, 968 (9th Cir. 2016) (citing In re PW, LLC, 391 B.R. at 33-35).

                                            14
771 F.3d 1211, 1214 (9th Cir. 2014) (quoting In re Thorpe Insulation Co., 677

F.3d at 880). “An appeal is equitably moot if the case presents ‘transactions

that are so complex or difficult to unwind’ that ‘debtors, creditors, and

third parties are entitled to rely on [the] final bankruptcy court order.’” Id.

at 1215 (quoting In re Thorpe Insulation Co., 677 F.3d at 880). To determine

whether an appeal is equitably moot:

      We will look first at whether a stay was sought, for absent that
      a party has not fully pursued its rights. If a stay was sought and
      not gained, we then will look to whether substantial
      consummation of the plan has occurred. Next, we will look to
      the effect a remedy may have on third parties not before the
      court. Finally, we will look at whether the bankruptcy court can
      fashion effective and equitable relief without completely
      knocking the props out from under the plan and thereby
      creating an uncontrollable situation for the bankruptcy court.

In re Thorpe Insulation Co., 677 F.3d at 881.

      First, although the Creditors did not request a stay pending appeal

from this Panel, they sought a stay from the bankruptcy court. This cuts

against equitable mootness.

      Second, the Creditors acknowledge that the Amended Plan has been

substantially consummated because Mr. Juarez has begun making

payments under the Amended Plan, including a $5,000 payment to the

Creditors. This factor favors equitable mootness.

      Third, a reversal of the confirmation order would affect third parties,

                                        15
but there is no indication that the third parties would necessarily be

negatively affected. Indeed, a reversal might result in a new plan that

would make more money available for unsecured creditors. This does not

favor equitable mootness.

      Lastly, as the bankruptcy court correctly noted, this case is not so

complex that it cannot unwind the transactions and require a further

amended plan, if necessary. It would not be “inequitable” to consider the

merits of this appeal. See In re Mortgs. Ltd., 771 F.3d at 1214. This factor does

not support equitable mootness.

      Based on these four factors, we hold that this appeal is not equitably

moot. Therefore, we have jurisdiction under 28 U.S.C. § 158.

                                    ISSUES

      Whether the bankruptcy court erred in confirming Mr. Juarez’s

Amended Plan because it:

      (1) failed to satisfy the absolute priority rule under § 1129(b);

      (2) failed to meet the “best interest of the creditors test” under

§ 1127(a)(7) and failed to address the effects of § 724(b);

      (3) failed to satisfy §§ 1129(a)(2), (a)(3), and (a)(15) because Mr. Juarez

improperly transferred the majority of his real estate commissions to

Ms. Arreola and committed other acts of bad faith; and

      (4) failed to satisfy §§ 1129(a)(2) and (a)(3) because Mr. Juarez created

UBLA one day before the petition date for improper purposes.

                                       16
                         STANDARDS OF REVIEW

      We review the bankruptcy court’s ultimate decision to confirm a

chapter 11 reorganization plan for an abuse of discretion. Computer Task

Grp., Inc. v. Brotby (In re Brotby), 303 B.R. 177, 184 (9th Cir. BAP 2003). We

apply a two-part test to determine whether the bankruptcy court abused its

discretion. United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009)

(en banc). First, we consider de novo whether the bankruptcy court applied

the correct legal standard to the relief requested. Id. Then, we review the

bankruptcy court’s factual findings for clear error. Id. at 1262. We must

affirm the bankruptcy court’s factual findings unless we conclude that they

are illogical, implausible, or without support in inferences that may be

drawn from the facts in the record. Id.

      We review for clear error the bankruptcy court’s findings regarding

good faith, compliance with disclosure requirements, and best interest of

the creditors. See United States v. Arnold & Baker Farms (In re Arnold & Baker

Farms), 177 B.R. 648, 653 (9th Cir. BAP 1994), aff’d, 85 F.3d 1415 (9th Cir.

1996) (“A bankruptcy court’s property valuation, the ‘good faith

determination,’ and ‘best interests of creditors’ determination are all

findings of fact.”); see also In re Brotby, 303 B.R. at 184 (good faith and

disclosure requirements).

      Factual findings are clearly erroneous if they are illogical,

implausible, or without support in the record. Retz v. Samson (In re Retz),

                                        17
606 F.3d 1189, 1196 (9th Cir. 2010). “To be clearly erroneous, a decision

must strike us as more than just maybe or probably wrong; it must . . .

strike us as wrong with the force of a five-week-old, unrefrigerated dead

fish.” Papio Keno Club, Inc. v. City of Papillion (In re Papio Keno Club, Inc.), 262

F.3d 725, 729 (8th Cir. 2001) (citation omitted). If two views of the evidence

are possible, the court’s choice between them cannot be clearly erroneous.

Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985).

                                  DISCUSSION

A.    The bankruptcy court did not err in holding that the Amended Plan
      satisfied the new value exception to the absolute priority rule.

      The Creditors argue that the Amended Plan is not “fair and

equitable” under § 1129(b) because it fails to comply with the absolute

priority rule and does not satisfy the new value exception. They contend

that the bankruptcy court failed to determine that the new value was

“reasonably equivalent” to the value received. We disagree.

      Section 1129(b) provides that the court can only confirm a chapter 11

plan that is “fair and equitable, with respect to each class of claims or

interests that is impaired under, and has not accepted, the plan.” § 1129(a).

In order to be “fair and equitable” to unsecured creditors, the plan must

provide either (1) “that each holder 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 (2) that “the holder of

                                         18
any claim or interest 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, except that in a case in which the debtor is an individual, the

debtor may retain property included in the estate under section 1115 . . . .”

§ 1129(b)(2)(B).

      In other words, if a class of unsecured claims does not accept a

chapter 11 plan by the requisite majorities, the court can confirm it only if

the plan either provides for full payment of the dissenting class or provides

that no junior class will receive or retain anything under the plan. This last

criterion is called the absolute priority rule. Zachary v. Cal. Bank & Tr., 811

F.3d 1191, 1194 (9th Cir. 2016).

      There are two important exceptions to the absolute priority rule.

First, a debtor who is an individual may retain postpetition property and

income from postpetition services. § 1129(b)(2)(B)(ii). Second, a junior class

can receive or retain property on account of a “new value” contribution:

            The new value exception to the absolute priority rule
      allows junior interest holders (e.g. shareholders of a corporate
      debtor) to receive a distribution of property under a plan if they
      offer “value” to the reorganized debtor that is: (1) new;
      (2) substantial; (3) money or money’s worth; (4) necessary for a
      successful reorganization; and (5) reasonably equivalent to the
      value or interest received.

In re Brotby, 303 B.R. at 195 (citing Bonner Mall P’ship v. U.S. Bancorp Mortg.

Co. (In re Bonner Mall P’ship), 2 F.3d 899, 909 (9th Cir. 1993)); see Sec. Farms v.

                                        19
Gen. Teamsters, Warehousemen & Helpers Union, Local 890 (In re Gen.

Teamsters, Warehousemen & Helpers Union, Local 890), 265 F.3d 869, 873 (9th

Cir. 2001) (“Under the new value exception that this circuit recognizes, an

equity holder may retain its interest only if it contributes sufficient new

value to ensure successful reorganization.”)(citations omitted).

       The bankruptcy court found that the $15,000 contribution offered by

Mr. Gray met each of the five elements. On appeal, the Creditors basically

concede that the first four elements were met.10 They make two arguments

concerning the fifth element.

       First, they argue that the bankruptcy court failed to value the

property that Mr. Juarez proposed to retain to determine whether the value

of that property was “reasonably equivalent” to the new value. We reject

this argument. The bankruptcy court stated after the trial that “the

proposed [$15,000] contribution is ‘reasonably equivalent to the value or

interest received’ given that all of the Debtor’s nonexempt assets are

encumbered by a federal tax lien; thus, the Debtor would be retaining

encumbered assets in exchange for a [$15,000] contribution.” Thus, the

bankruptcy court found that $15,000 was “reasonably equivalent” to the

       10
         The Creditors argued for the first time in their reply brief that the contribution
was not “new” because Mr. Gray received a postpetition payment of $10,500 from
UBLA. We will not consider arguments that were not raised specifically and distinctly
in the opening brief. Indep. Towers of Wash. v. Washington, 350 F.3d 925, 929 (9th Cir.
2003).

                                             20
equity in the assets. The bankruptcy court did not explicitly value each

asset, but it was not required to do so. The Creditors offered no evidence at

trial to challenge Mr. Juarez’s valuation of his nonexempt assets, and the

bankruptcy court was justified in rejecting their request at the final

confirmation hearing for another evidentiary hearing where they failed to

identify any new evidence that they would offer at such a hearing.

      Second, on appeal, the Creditors argue that the new value

contribution must be at least equal to the value, not just of the nonexempt

assets, but also of the exempt assets. They contend that “even exempt

property is not beyond the reach of the absolute priority rule.” They cite

two cases from other jurisdictions, In re Gosman, 282 B.R. 45 (Bankr. S.D.

Fla. 2002), and In re Ashton, 107 B.R. 670 (Bankr. D.N.D. 1989), and urge us

to accept the “better analysis” concluding that exempt assets are subject to

the absolute priority rule.

      This is a question of first impression in this circuit. The

nonprecedential decisions are divided. See In re Gbadebo, 431 B.R. 222, 227

n.6 (Bankr. N.D. Cal. 2010) (“Courts differed as to whether an individual

debtor could retain exempt property without violating the ‘absolute

priority’ rule.” (citing In re Bullard, 358 B.R. 541, 544-45 (Bankr. D. Conn.

2007) (holding that the debtor could retain exempt property because it was

not property of the estate)). We hold that exempt property is not properly

included within the phrase “any property” under the absolute priority rule.

                                       21
We reach this decision for two reasons.

      First, the absolute priority rule only comes into play if the debtor

retains “any property . . . under the plan on account of [the debtor’s

interest] . . . .” We agree with the courts holding that a debtor does not

retain exempt property either “under the plan” or “on account of the

debtor’s interest . . . .” Rather, the debtor retains exempt property due to

the exemption statutes. The debtor would be entitled to the exempt

property even if no plan were confirmed; therefore, it cannot be said that

the debtor retains the exempt property “under the plan” or “on account of

the debtor’s interest.”

      Second, the Creditors’ interpretation of § 1129(b) creates a conflict

between that section and §§ 522(c) and (k). Those sections provide that,

with certain exceptions that do not apply here, exempt property is not

liable for the payment of prepetition claims or administrative expenses.

Requiring a debtor to pay for exempt assets via a new value contribution

would effectively make those assets available to creditors.

      Cases from other jurisdictions support our view. For example, the

bankruptcy court for the Eastern District of Wisconsin extensively

considered this exact question and stated that, “once a debtor’s exemptions

have been approved, the exempt property is no longer property of the

bankruptcy estate. Therefore, an individual debtor’s exempt property does

not fit within the third component [the determination whether the property

                                      22
is retained ‘on account of’ the junior claim or interest], and retaining

exempt property does not implicate the absolute priority rule.” In re Gerard,

495 B.R. 850, 855 (Bankr. E.D. Wis. 2013) (citations omitted). It concluded

that “the debtor’s exempt property that has been removed from the estate

prior to confirmation is not property that is received or retained ‘under the

plan’ as required for application of the absolute priority rule.” Id.; see In re

Brown, 498 B.R. 486, 500 (Bankr. E.D. Pa. 2013), aff’d, 505 B.R. 638 (E.D. Pa.

2014) (“Property allowed as exempt, however, is retained because of

section 522, independently of any plan provision or the confirmation

process itself. Therefore, retention of exempt property is outside the scope

of section 1129(b)(2)(B)(ii).” (citations omitted)); In re Martin, 497 B.R. 349,

352 (Bankr. M.D. Fla. 2013) (“Although some courts have held that even the

retention of exempt property violates the absolute priority rule, the

majority (and better reasoned) decisions disagree, concluding that the total

liquidation of an individual Chapter 11 debtor’s assets is not required in

order to satisfy the absolute priority rule.”)(citations omitted). We agree

that the reasoning expressed in these cases is sound.

      Thus, the bankruptcy court did not err in allowing Mr. Juarez to

retain his exempt property without making a corresponding “new value”

contribution.

                                        23
B.    The bankruptcy court did not err in holding that the Amended Plan
      satisfied the best interest of the creditors test under § 1129(a)(7).

      The Creditors argue that the bankruptcy court erred in considering

the best interest of the creditors. We reject this argument.

      Under the best interest of the creditors test, “[s]ection 1129(a)(7)(A)(ii)

requires bankruptcy courts to determine what creditors would receive

under a hypothetical chapter 7 liquidation, and then compare that amount

to what the same creditors would receive under a chapter 11

reorganization.” Schoenmann v. Bank of the West (In re Tenderloin Health), 849

F.3d 1231, 1237 (9th Cir. 2017). Section 1129(a)(7) requires that:

      (7) With respect to each impaired class of claims or interests –

            (A) each holder of a claim or interest of such class –

                  (I) has accepted the plan; or

                  (ii) will receive or retain under the plan on account
                  of such claim or interest property of a value, as of
                  the effective date of the plan, that is not less than
                  the amount that such holder would so receive or
                  retain if the debtor were liquidated under chapter
                  7 of this title on such date . . . .

§ 1129(a)(7) (emphases added).

      On appeal, the Creditors argue that the bankruptcy court “made no

valuation determination” of amounts that unsecured creditors could

                                       24
receive in a chapter 7 liquidation. They complain that the court “refused to

conduct any hearing and never made an analysis of this issue.”

      To the contrary, the bankruptcy court held an evidentiary hearing,

but the Creditors failed to raise the § 1129(a)(7) objection either in the

pretrial statement or at the hearing. The Creditors additionally failed to

offer any argument or evidence in support of their § 1129(a)(7) objection at

the confirmation hearing for the Amended Plan. The bankruptcy court held

that the Amended Plan “provides that each creditor not accepting the Plan

will receive or retain property of a value, as of the Effective Date of the

Plan, that is not less than the amount that each creditor would receive in a

Chapter 7 liquidation.”

      The record supports this finding. The court had before it Mr. Juarez’s

schedules, to which he attested under penalty of perjury. He later testified

in his declaration that the schedules were accurate. He also testified that

“[t]he Plan provides for payment to unsecured creditors in excess of what

they would recover in a Chapter 7 liquidation.” The only contrary material

that the creditors offered in their objection to the Amended Plan was an

online valuation for Mr. Juarez’s residence and a NADA valuation of the

boat. Neither of these documents was authenticated or accompanied by a

declaration and therefore neither was admissible.

      Mr. Juarez’s evidence showed that, in a chapter 7 liquidation,

approximately $69,472 would be available for distribution to pay

                                       25
Mr. Juarez’s debts including administrative claims, the federal secured tax

lien, the state and federal priority tax liens, and unsecured creditors. The

federal secured tax lien ($74,610.14) and the chapter 7 commissions

(approximately $7,550)11 would more than consume the $69,472 available

for distribution, leaving nothing for the unsecured priority tax claims

($63,676), let alone nonpriority unsecured creditors. The $33,580.51 offered

to Class 4 creditors under the Amended Plan was more favorable to

unsecured creditors than chapter 7 liquidation.12

      The Creditors argue that, under § 724(b), if a chapter 7 trustee

liquidated Mr. Juarez’s residence, he or she could pay the federal taxes

“from the proceeds of the sale of the otherwise exempt residence plus

administrative costs.” In other words, they believe that the $74,610.14

secured tax lien should be subtracted from the homestead exemption,

rather than the $69,472 of available estate funds.

      We reject this argument. Section 724(b) provides that, in a chapter 7

case, certain administrative expenses have priority over certain tax liens. It

does not provide, nor does any other Code section provide, that secured

      11
         This figure assumes that the trustee would not administer the house, because it
has no equity after subtracting the homestead exemption. Therefore, we base our
calculations on the $69,472 available for distribution plus the $17,337 lien on the Jeep
Wrangler. See § 326(a).
      12
         We assume, without deciding, that the accumulated chapter 11 administrative
expenses (estimated at $86,000 to $98,000) were not included in the calculation. If they
were, it would be even more clear that the Amended Plan satisfied the test.

                                           26
tax claims must, or even may, be paid out of exempt assets before

nonexempt assets. To the contrary, the secured tax lien is a prepetition

claim against the estate and a § 502(b) allowed claim that must be paid out

of available estate funds pursuant to § 726.

      Moreover, the Creditors’ calculations do not add up. Even accepting

their incorrect premise that the secured tax lien is paid out of the

exemption first, there would still be only $69,472 available to pay the

trustee’s fees (approximately $19,000)13 and the unsecured priority tax

claims ($63,676), leaving nothing for the unsecured creditors. In other

words, the Creditors would still recover nothing in a chapter 7 liquidation.

      Furthermore, § 724(b) does not permit a trustee to recover

administrative expenses from exempt property. Section 522(k) specifically

provides that exempted property “is not liable for payment of any

administrative expense[,]” with certain exceptions not applicable here.

§ 522(k). The Creditors are patently wrong in claiming that exempt

property can be used to pay for administrative expenses. Cf. Law v. Siegel,

571 U.S. 415, 422 n.2 (2014) (holding that exempt funds are only liable for

administrative expenses under two narrow exceptions to § 522(k)).

      The bankruptcy court did not err in overruling the Creditors’

      13
         If we assume that the trustee administers the house to pay the secured tax lien,
then we recalculate the trustee’s commission to include the distributions on account of
the mortgage and the tax lien, in addition to the $69,472 available for distribution and
the $17,337 lien on the Jeep Wrangler. See § 326(a).

                                           27
§ 1129(a)(7) objection.

C.    The bankruptcy court did not clearly err in its findings concerning
      the commission arrangement.

      The Creditors argue that the bankruptcy court erred when

considering the commissions that Ms. Arreola withdrew from Mr. Juarez’s

account. They argue that Mr. Juarez began transferring seventy percent of

his commissions to Ms. Arreola shortly before the petition date and that he

was not committing all of his disposable income to the Amended Plan. We

discern no clear error.

      Section 1129(a)(2) mandates for plan confirmation that “[t]he

proponent of the plan complies with the applicable provisions of this title.”

§ 1129(a)(2). “The section’s primary purpose is to assure that the plan

proponents have complied with the disclosure and solicitation

requirements of §§ 1125 and 1126.” Pineda Grantor Tr. II v. Dunlap Oil Co.,

Inc. (In re Dunlap Oil Co., Inc.), BAP No. AZ-14-1172-JuKiD, 2014 WL

6883069, at *11 (9th Cir. BAP Dec. 5, 2014).

      Relatedly, § 1129(a)(3) requires that “[t]he plan has been proposed in

good faith and not by any means forbidden by law.” § 1129(a)(3). “Good

faith in proposing a plan of reorganization is assessed by the bankruptcy

judge and viewed under the totality of the circumstances. Good faith

requires that a plan will achieve a result consistent with the objectives and

purposes of the Code. It also requires a fundamental fairness in dealing

                                      28
with one’s creditors.” Stolrow v. Stolrow’s, Inc. (In re Stolrow’s Inc.), 84 B.R.

167, 172 (9th Cir. BAP 1988) (citing Jorgensen v. Fed. Land Bank of Spokane (In

re Jorgensen), 66 B.R. 104, 108-09 (9th Cir. BAP 1986)).

      The Creditors contend that Mr. Juarez directed the majority of his

commissions to Ms. Arreola shortly before the petition date. They claim

that there is no proof that Ms. Arreola earned any of those commissions.

Further, they argue that, once Mr. Juarez and Ms. Arreola moved to Realty

Executives, they received separate paychecks and could not share

Mr. Juarez’s commissions. They claim that these facts show that Mr. Juarez

purposefully misrepresented his income and did not act in good faith.

       The bankruptcy court heard testimony from Mr. Juarez and

Ms. Arreola regarding their commission-sharing arrangement. It credited

their testimony. Although the Creditors provided evidence of the

withdrawals, they did not establish that the sharing of commissions or

withdrawals were improper. As the fact finder, the bankruptcy court was

free to choose Mr. Juarez’s evidence over the Creditors’ evidence. Based on

the facts in the record, the bankruptcy court did not clearly err.

      Additionally, the Creditors argue that Ms. Arreola’s sharing of

Mr. Juarez’s commissions necessarily meant that Mr. Juarez failed to

commit all of his disposable income to the Amended Plan over five years.

Section 1129(a)(15) provides:

      (15) In a case in which the debtor is an individual and in which

                                         29
      the holder of an allowed unsecured claim objects to the
      confirmation of the plan –

             (A) the value, as of the effective date of the plan, of the
             property to be distributed under the plan on account of
             such claim is not less than the amount of such claim; or

             (B) the value of the property to be distributed under the
             plan is not less than the projected disposable income of
             the debtor (as defined in section 1325(b)(2)) to be received
             during the 5-year period beginning on the date that the
             first payment is due under the plan, or during the period
             for which the plan provides payments, whichever is
             longer.

§ 1129(a)(15). In other words, if an allowed unsecured creditor objects to

the plan, the debtor must commit all of his projected disposable income for

at least five years.

      The term “projected disposable income” is borrowed from

§ 1325(b)(1)(B); “disposable income” is defined in § 1325(b)(2) as monthly

income minus certain reasonable expenses for support and maintenance

obligations. See United States v. Villalobos (In re Villalobos), BAP No.

NV-11-1061-HKwJu, 2011 WL 4485793, at *8 (9th Cir. BAP Aug. 19, 2011).

Courts must employ “a ‘forward-looking’ approach that takes into account

known or nearly certain information about changes in a debtor’s earning

power during the plan period.” Danielson v. Flores (In re Flores), 735 F.3d

855, 861 (9th Cir. 2013)(citations omitted).

                                        30
      Mr. Juarez offered evidence that the money that Ms. Arreola

withdrew from the joint account was her earned commissions, and the

bankruptcy court was free to credit that evidence over any contrary

evidence. Further, the record supports the bankruptcy court’s findings

concerning the calculation of expenses under § 1129(a)(15). These factual

determinations are not clearly erroneous.

D.    The bankruptcy court did not clearly err in its findings concerning
      UBLA.

      The Creditors contend that Mr. Juarez used UBLA to circumvent the

bankruptcy process and acquire, hold, and sell property without

bankruptcy oversight. They argue that his actions demonstrate bad faith

and manipulation of the Bankruptcy Code. We again find no clear error.

      The Creditors point to the fact that Mr. Juarez formed UBLA the day

before filing his petition and gave Ms. Arreola a ten percent interest for no

consideration. They also argue that UBLA received postpetition property in

which Mr. Juarez had a prepetition interest and acquired and sold other

real property. Mr. Juarez allegedly used UBLA to pay some of his and

Ms. Arreola’s prepetition unsecured debts, including payments to his

accountant, Ms. Arreola’s attorney, and Mr. Gray.

      The bankruptcy court considered these arguments at trial and

rejected them. The court found that there was no evidence that UBLA was

improperly formed, funded, or operated. It also found that Mr. Juarez’s

                                      31
prepetition interest in the vacant lot was unclear, as the only testimony

presented referred to a “handshake interest.” The court noted that

Mr. Juarez properly scheduled his ninety percent interest in UBLA and

deposited the distribution he received from UBLA into his DIP account.

Moreover, contrary to the Creditors’ assertion on appeal, Ms. Arreola

testified at trial that she contributed substantial sums to UBLA and that the

ten percent membership interest reflected the work she would put into

UBLA’s operations.

      The bankruptcy court credited Mr. Juarez’s and Ms. Arreola’s

testimony regarding the formation, purpose, and operation of UBLA. The

bankruptcy court’s findings were not clearly erroneous.

                              CONCLUSION

      The bankruptcy court did not err in confirming Mr. Juarez’s chapter

11 plan. Accordingly, we AFFIRM.

                                      32