BAPCPA: Absolute Priority Rule No Longers Applies to Individual Chapter 11 Debtor

As previously mentioned, Chief Judge Paul G. Hyman held in the Gosman case that the retention of exempt property by an individual debtor in a chapter 11 violates the absolute priority rules unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002). Also as previously noted, some courts disagree with the Gosman decision and hold that the debtor’s retention of his exempt property is not subject to the absolute priority rule. See eg. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor’s junior interest in property).

Since the passage of BAPCPA and its amendments to 11 USC 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor’s retention of property. Judge Saladino’s decision in In re Tegeder, ___ B.R. ____, 2007 WL 1549067 (Bkrtcy.D.Neb.) is apparently the first decision to end this speculation, at least in his courtroom.

The court in Tegeder held that new 1129(b)(2)(B)(ii) provides an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the “absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115. BAPCPA added the following to 1129(b)(2)(B)(ii) “except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section”. New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition.

The court states that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.

Bullard: Au Contraire SD Florida Gosman Decision

Judge Weil recently issued her decision in the Bullard case on the issue of the absolute priority rule and the retention of exempt property in the context of the confirmation of a chapter 11 plan for an individual debtor. In re Bullard, 358 B.R. 541 (Bankrtcy.D.Conn 2007).

The Court noted that there was a disagreement among the courts concerning whether a chapter 11 debtor may retain his exempt property and still comply with the absolute priority rule. Cases such as In re Gosman, 282 B.R. 45 (Bankr.S.D.Fla.2002) by Chief Judge Paul G. Hyman, held that the retention of exempt property violates the absolute priority rule. Judge Weil held that the better line of authority holds that the debtor’s retention of his exempt property does not violate the absolute priority rule as such retention is not “on account of…[the debtor's] junior interest…” in property.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983