Friedman v. P+P, LLC (In re Friedman)

Citation:
None as of yet
Tag(s):
Ruling:
In a 2-1 decision, the Bankruptcy Appellate Panel for the Ninth Circuit held that the absolute priority rule as set forth under 11 USC Sec. 1129(b)(2)(B)(ii) is inapplicable in individual chapter 11 debtor cases. The majority explained that the plain reading of the Secs. 1129(b)(2)(B)(ii) and 1115, read together, warrants a finding that the proscription of Sec. 1129(b)(2)(B)(ii) on the retention of ownership interests by an individual debtor is not an aspect of the absolute priority rule in individual debtor chapter 11 cases. The use of the terms "included" in Sec. 1129(b)(2)(B)(ii) and "in addition to" in Sec. 1115 essentially created the universe of property of the estate to include pre- and postpetition assets of the individual chapter 11 debtor. The BAP explained further the BAPCPA amendments to individual chapter 11 cases adopted provisions from chapter 13 wherein creditors are not permitted to vote but can object to plan confirmation. According to the BAP, these amendments are an attempt by the drafters to create a symmetry between chapters 11 and 13 for individual debtors. Thus, a plain reading of Secs. 1129 and 1115 demonstrates that to confirm a plan for chapter 11 individual debtors, the application of the absolute priority rule is not required. The dissent adopted the narrow view in interpreting the provisions of Secs. 1129(b)(B)(ii) and 1115 finding that the BAPCPA amendments with respect to chapter 11 individual debtors did not make the absolute priority rule inapplicable. The dissent focused on the interpretation of the term "included" in Sec. 1129(b)(2)(B)(ii) to mean properties that are "added" to the estate under Sec. 1115. Accordingly, the absolute priority rule remains applicable to prepetition property of the estate of an individual chapter 11 debtor and inapplicable only to postpetition assets that are listed under Sec. 1115. This reading avoids the inevitable result created by the majority's "broad" view which renders certain provisions of the Code superfluous.
Procedural context:
These consolidated appeals came from the denial of the Debtors' second amended chapter 11 plan and the order converting the Debtors' case to one under chapter 7. The National Association of Consumer Bankruptcy Attorneys ("NACBA") was granted leave to file an amicus brief. Debtors and the NACBA participated in oral arguments. No party participated in oral arguments as the appellee. The BAP reversed and remanded both orders to the bankruptcy court.
Facts:
Chapter 11 debtors, Gregory and Judith Friedman ("Debtors") commenced their chapter 11 case in October 2007 in Arizona after a junior lienholder, P+P, LLC, . P+P obtained a default judgment in state court validating its lien and attempted to foreclose on the Debtors' property located in Breckenridge, Colorado. In bankruptcy, however, the first lienholder was granted relief from the automatic stay and foreclosed on the Breckenridge property. As a result, P+P's junior lien became wholly unsecured. P+P became the largest unsecured creditor of the Debtors for purposes of their plan. At plan confirmation, P+P voted against Debtors' second amended plan and objected to plan confirmation on the grounds that the plan (1) violated the absolute priority rule because the plan left their ownership interests in "valuable" property untouched while paying unsecured creditors less than 100%; (2) violated the best interests of creditors test; and (3) was filed in bad faith. In response, Debtors modified their second amended plan by increasing the payment to unsecured creditors. At the confirmation hearing, the bankruptcy court focused on the issue of whether the absolute priority rule under Sec. 1129(b)(2)(B)(ii) applies to individual chapter 11 debtors. It found that individual chapter 11 plans must comply with the absolute priority rule and ordered the Debtors to amend their plan further. Instead of amending their plan, the Debtors appealed the bankruptcy court's denial of confirmation. Subsequently, the bankruptcy court issued an order to show cause why the case should not be dismissed or converted. At the OSC hearing, the court converted the Debtors' case. The orders were stayed pending these appeals.
Judge(s):
Hon. Philip H. Brandt, appealed order denying confirmation of the Debtors' plan; Hon. James Marlar, appealed order converting the case to one under chapter 7. BAP: Majoriy decision: Hon. Ralph B. Kirscher and Hon. Scott Clarkson (by designation); Dissent: Hon. Meredith Jury

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