In re Lee Min Ho Chen

• Decision Date: 09 November 2012
• Docket Number: No. 11–08170 BKT.,11–08170 BKT.
• Citation: 482 B.R. 473
• Parties: In re LEE MIN HO CHEN, Debtor(s).
• Court: U.S. Bankruptcy Court — District of Puerto Rico

482 B.R. 473

In re LEE MIN HO CHEN, Debtor(s).

No. 11–08170 BKT.

United States Bankruptcy Court,

D. Puerto Rico.

Nov. 9, 2012.

Alexis Fuentes Hernandez, Fuentes Law Offices, San Juan, PR, for Debtor.

Monsita Lecaroz Arribas, San Juan, PR, Trustee.

OPINION AND ORDER

BRIAN K. TESTER, Bankruptcy Judge.

The proceeding before the court is Doral Bank's (“Doral”) Opposition to Second Amended Plan of Reorganization [Dkt. No. 190] and Debtor's Reply to Doral Bank's Opposition to Second Amended Plan of Reorganization [Dkt. No. 203]. For the reasons stated below, the confirmation of the Debtor's Second Amended Plan of Reorganization (“Plan”) [Dkt. No. 177] is hereby DENIED.

In its opposition, Doral asserts that Debtor's Plan should not be confirmed, because the Plan contains the same substantive deficiencies and issues as the Debtor's first Plan, filed on May 18, 2012. Their argument is three-fold. First, the Plan violates the absolute priority rule and does not satisfy the cramdown requirements of 11 U.S.C. § 1129(b)(2)(B)(ii) in that it is not fair and equitable to dissenting creditors. Specifically, Doral points out that Debtor proposes to retain almost all of her pre-petition property and pay less than 0.05% of their claims to the general unsecured creditors. Further, the Debtor's Plan does not qualify for the new value exception under the absolute priority rule because the new value does not come from an outside source, but rather from the Debtor herself.¹ Second, the Debtor cannot claim a tacit acceptance of the Plan because a logical and literal reading of 11 U.S.C. § 1129(a)(10) requires an active acceptance of the Plan by unimpaired classes in order to satisfy the cramdown requirements in 11 U.S.C. § 1129(b)(2)(B)(ii). Third, the Plan fails to comply with the confirmation requirements under 11 U.S.C. § 1129(a) because:

(a) [the] Plan's projections are unrealistic and thereby do not reflect the historical reality of Debtor's prior revenues, not accounts, for probable contingencies within the Debtor's business.

(b) the Plan's projections demonstrate that Debtor will not generate sufficient income to satisfy her Plan obligations while retaining her property. More specifically, the Debtor plans to contribute $14,790 monthly rental income generated by her realproperties. However, Doral points out that the majority of the Debtor's income comes from the 100 Fortaleza St. building, which generates only $9,000 per month. The majority of the tenants hold leases for no greater than one (1) year each with the Plan lacking any contemplation on turnover periods between tenants. Yet, the Debtor proposes repayment terms of up to thirty (30) years and thus demonstrates repayment uncertainty. Further, Debtor's projections do not contain a provision for payment of ordinary maintenance and repairs for any of her income producing rental properties.

(c) the Plan includes an additional $2,000.00 in professional services income that was never disclosed to the creditors nor to the court in the previous plan to be approved under 11 U.S.C. § 363(b)(1). Further, Doral points out that the Debtor never supplied concrete evidence demonstrating certainty of such contractual agreement.

(d) the Plan fails to provide to the unsecured creditors at least an amount equal to the Debtor's disposal income during the next five years in accordance with 11 U.S.C. § 1129(a)(15). More specifically, the Debtor proposes to pay unsecured creditors approximately 0.492% of the total claims, yet the Debtor failed to demonstrate that such distribution at least equals the Debtor's disposal income during the next five years.

(e) the Plan failed to comply with additional requirements as mandated by 11 U.S.C. § 1129(a)(1)-(2). More specifically, that the Debtor did not obtain court approval for the use of certain real property outside the ordinary course of business as required by 11 U.S.C. § 363(b)(1) and Fed. R. Bankr.P. 6004. Further, the Debtor seems to request a discharge upon Plan confirmation in violation of 11 U.S.C. § 1141(d)(5), which does not allow a discharge until all Plan payments are complete.

(f) the Plan failed to comply with 11 U.S.C. § 1129(a)(8). More specifically, the Debtor has not filed a § 1129 statement demonstrating acceptances or rejections of the Plan by all unimpaired classes.

Conclusively, Doral requests the court to reject the Plan because it violates the requirements of 11 U.S.C. § 1129(a)(1),(2), (8), (11), (15), and (b)(2)(B).

In her rebuttal, the Debtor contends that the Plan is not speculative because the $14,790 from her real property will come from not only the Fortaleza Street and the Condado Comelot properties, but also properties in Hawaii.² Further, the Debtor contends that the projections included a provision of $700 per month for any necessary repairs and extraordinary maintenance.³ Lastly, her professional service contract is from a life long friend, who had previously offered her such position. Debtor also contends that she complied with the following:

(a) 11 U.S.C. § 1129(a)(15) because she is proposing a 5.64% rather than a 0.492% distribution to unsecured creditors;

(b) 11 U.S.C. § 1129(a)(1)-(2) because Doral's allegations have no merit; ⁴

(c) 11 U.S.C. § 1129(a)(8) because she disclosed in the § 1129 statement that she will be going forward with her Plan under § 1129(b).

The Debtor further contends that the absolute priority rule does not apply to individual chapter 11 cases and even if it does, she is excepted by providing new value. Specifically, the Debtor contends that the court should adopt a broad interpretation of the absolute priority rule as opposed to a narrow interpretation. Under the broad interpretation of the rule, 11 U.S.C. § 1115 includes prepetition property specified in section 541 as well as post-petition earnings. Therefore, the exemption added in 11 U.S.C. § 1129(b)(2)(B)(ii) abolished the absolute priority rule in individual chapter 11 cases. The Debtor further added that even if the court adopts the narrow view, the new value exception applies because she is voluntarily contributing all her valuable exempt assets such as her vehicles and post-petition wages to fund her Plan. Thus, the Debtor is providing new value to the estate in order to contribute to the Plan.

This court joins courts in its sister circuits, in particular the Fourth Circuit ⁵ and the Ninth Circuit,⁶ in adopting the narrow view of the absolute priority rule.

I. Factual Background

On September 26, 2011, Debtor Lee Min Ho Chen filed a voluntary chapter 11 petition for reorganization. Subsequently, on May 18, 2012, Debtor filed her first amended disclosure statement, which was approved by the court on July 20, 2012. On September 24, 2012, the court held a hearing concerning the valuation of Debtor's real property and granted Debtor an extension until October 10, 2012 to file an amended plan of reorganization. On the same day, the court scheduled a hearing on October 31, 2012 to consider the confirmation of the Plan. Debtor filed her second amended plan of reorganization on October 10, 2012. On October 24, 2012, Doral filed its Opposition in support of the denial of Debtor's second amended Plan.

II. Legal Analysis and DiscussionA. Absolute Priority Rule

The arguments presently before the court center on the question of whether the absolute priority rule applies in chapter 11 bankruptcy cases of individual debtors after BAPCPA. Because the approval of the Debtor's second amended Plan hinges on this instant question, the court shall begin its analysis here.

Recognizing the sharp circuit splits on this question, the circuits struggled with two interpretations of the post-BAPCPA code. Some courts held that the rule does not apply to individual chapter 11 debtors based on the so-called “broad” view of property of the estate that an individual debtor may retain under a confirmed plan pursuant to 11 U.S.C. § 1129(b)(2)(B)(ii). See In re Tegeder, 369 B.R. 477, 479–481 (Bankr.D.Neb.2007); In re Roedemeier, 374 B.R. 264, 273–276 & nn. 15–19 (Bankr.D.Kan.2007);In re Shat, 424 B.R. 854, 862–868 (Bankr.D.Nev.2010); SPCP Group, LLC v. Biggins, 465 B.R. 316, 320–324 (M.D.Fla.2011); Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012); see also In re Johnson, 402 B.R. 851, 852–853 (Bankr.N.D.Ind.2009) (dicta that individual chapter 11 debtor's plan need not satisfy the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii)); In re Hockenberry, 457 B.R. 646, 660–661 & n. 14 (Bankr.S.D.Ohio 2011) (collecting cases on issue, but not reaching the issue because case decided on other grounds). While other courts held that the absolute priority rule still applies and thereby adhering to the so-called “narrow” view of property of the estate that an individual debtor may retain in a chapter 11 plan. See In re Arnold, 471 B.R. 578, 587–88 (Bankr.C.D.Cal.2012); In re Gbadebo, 431 B.R. 222, 227–230 (Bankr.N.D.Cal.2010); In re Mullins, 435 B.R. 352, 359–361 (Bankr.W.D.Va.2010); In re Gelin, 437 B.R. 435, 440–443 (Bankr.M.D.Fla.2010); In re Stephens, 445 B.R. 816, 820–821 (Bankr.S.D.Tex.2011); In re Walsh, 447 B.R. 45, 47–49 (Bankr.D.Mass.2011); In re Maharaj, 449 B.R. 484, 491–494 (Bankr.E.D.Va.2011); In re Draiman, 450 B.R. 777, 820–822 (Bankr.N.D.Ill.2011); In re Kamell, 451 B.R. 505, 507–512 (Bankr.C.D.Cal.2011); In re Lindsey, 453 B.R. 886, 891–905 (Bankr.E.D.Tenn.2011); In re Karlovich, 456 B.R. 677, 679–682 (Bankr.S.D.Cal.2010); In re Lively, 467 B.R. 884 (Bankr.S.D.Tex.2012); see also In re Friedman, 466 B.R. at 484–492 (Jury, J., dissenting). Taking both interpretations into consideration, this court finds the reasoning and the logic behind the narrow approach the most compelling. Therefore, this court concludes that the absolute priority rule still applies to individual chapter 11 debtors.

Congress established chapter 11 of the Bankruptcy Code to create a statutory system for business reorganization and thus...