In re Lively

• Decision Date: 21 March 2012
• Docket Number: No. 10–35471.,10–35471.
• Citation: 467 B.R. 884,56 Bankr.Ct.Dec. 63
• Parties: In re Philip Reed LIVELY, Debtor(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

467 B.R. 884

56 Bankr.Ct.Dec. 63

In re Philip Reed LIVELY, Debtor(s).

No. 10–35471.

United States Bankruptcy Court, S.D. Texas, Houston Division.

March 21, 2012.

Marjorie A Payne Britt, Michael Louis Catrett, Marjorie Payne Britt PC, Houston, TX, for Debtor.

Dinorah Gonzalez, Office of David G. Peake, Chapter 13 Trustee, Houston, TX, for Trustee.

U.S. Trustee, Houston, TX.

MEMORANDUM OPINION IN SUPPORT OF CERTIFICATION FOR DIRECT APPEAL

MARVIN ISGUR, Bankruptcy Judge.

The Court has certified its Order denying confirmation of Lively's chapter 11 plan, (ECF No. 115), to the Court of Appeals for the Fifth Circuit under 28 U.S.C. § 158(d)(1)(A)(i) and (ii).

This Memorandum Opinion is issued in support of that certification. See Fed. R. Bankr.P. 8001(f). The issue is whether the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BAPCPA”) abrogated the absolute priority rule in individual Chapter 11 cases.

Factual Background

Philip Reed Lively is an individual chapter 11 debtor.¹ His proposed plan was not approved by all classes of claims entitled to vote on the plan. (ECF No. 99). As a result, his plan must meet the requirements of 11 U.S.C. § 1129(b), known as “cram-down,” in order to be confirmed.²

A nonconsensual plan may be confirmed if it “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). As to an impaired dissenting class of unsecured creditors, the condition that a plan be “fair and equitable” is further defined by § 1129(b)(2)(B):

(i) the plan provides 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

(ii) the holder of 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, subject to the requirements of subsection (a)(14) of this section.

11 U.S.C. § 1129(b)(2)(B).

Lively's proposed plan provided for a forecasted 7.38% payment to his unsecured creditors on their claims. This does not satisfy § 1129(b)(2)(B)(i). Accordingly, to be confirmed, the plan must satisfy § 1129(b)(2)(B)(ii).

Section 1129(b)(2)(B)(ii) is known as the “absolute priority rule.” When it applies, the absolute priority rule prevents debtors from receiving or retaining any property under the plan on account of prior interests unless the impaired dissenting classes of unsecured creditors are paid in full.³

The Bankruptcy Abuse and Consumer Protection Act of 2005 (“BAPCPA”) altered the language of § 1129(b)(2)(B)(ii). These changes have created a split of opinion among courts as to whether the “absolute priority rule” still applies to individual chapter 11 plans.

At confirmation, this Court held that BAPCPA did not abrogate the absolute priority rule for individual Chapter 11 cases. Attached as Exhibit A is this Court's Memorandum Opinion further detailing the Court's reasoning. As the proposed plan allowed Lively to retain property under the plan on account of his prior interests, but failed to pay unsecured creditors in full, this Court denied confirmation of the plan.

Lively appealed this decision and seeks direct certification to the Fifth Circuit Court of Appeals.

Procedural Background

Lively properly made a request for certification within 60 days of the entry of the contested ruling, as required by 28 U.S.C. § 158(d)(2)(E). (ECF No. 125).

Lively's appeal to the District Court has not yet been docketed in accordance with Bankruptcy Rule 8007(b). Therefore, the matter is still pending in the bankruptcy court. Fed. Rule Bankr.P. 8001(f)(2). The bankruptcy court may therefore rule on the request for direct certification under 28 U.S.C. § 158.

Analysis

Section 158(d)(2)(A)(i) [“No Controlling Decision”]

The Order should be certified because it involves the above question of law, as to which there is no controlling decision by the Fifth Circuit Court of Appeals or by the Supreme Court of the United States.

Section 158(d)(2)(A)(ii) [“Conflicting Decisions”]

Although lower courts within the Fifth Circuit have not reached conflicting decisions, there have been conflicting decisions issued by lower courts elsewhere. A decision by the Ninth Circuit Bankruptcy Appellate panel appears to be the only appellate decision.

A majority of courts have ruled that the absolute priority rule still applies in individual Chapter 11 cases. See In re Mullins, 435 B.R. 352 (Bankr.W.D.Va.2010); In re Gelin, 437 B.R. 435 (Bankr.M.D.Fla.2010); In re Gbadebo, 431 B.R. 222 (Bankr.N.D.Cal.2010); In re Karlovich, 456 B.R. 677 (Bankr.S.D.Cal.2010); In re Walsh, 447 B.R. 45 (Bankr.D.Mass.2011); In re Stephens, 445 B.R. 816 (Bankr.S.D.Tex.2011); In re Kamell, 451 B.R. 505 (Bankr.C.D.Cal.2011); In re Maharaj, 449 B.R. 484 (Bankr.E.D.Va.2011).

A minority of courts have ruled that the absolute priority rule no longer applies in individual Chapter 11 cases. See In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan.2007); In re Tegeder, 369 B.R. 477 (Bankr.D.Neb.2007); In re Bullard, 358 B.R. 541 (Bankr.D.Conn.2007); In re Johnson, 402 B.R. 851, 852–53 (Bankr.N.D.Ind.2009). The most extensively researched and in-depth case where a court adopted the minority rule is In re Shat, 424 B.R. 854, 865 (Bankr.D.Nev.2010). Just two days ago, the Ninth Circuit Bankruptcy Appellate Panel issued an opinion joining the minority. Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012) (Jury, J., dissenting)

CONCLUSION

The Court certifies its Order denying confirmation of chapter 11 plan, (ECF No. 115), to the Court of Appeals for the Fifth Circuit under 28 U.S.C. § 158(d)(1)(A)(i) and (ii).

Exhibit A

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

IN RE: PHILIP REED LIVELY, Debtor(s).

Case No. 10–35471

Chapter 11

Judge Isgur

MEMORANDUM OPINION

This Memorandum Opinion concerns whether the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BAPCPA”) abrogated the absolute priority rule for individual Chapter 11 cases. The Court holds that it did not.

Factual Background

There are no material factual disputes. The sole issue is whether BAPCPA abrogated the absolute priority rule for individual Chapter 11 cases.

Philip Reed Lively initially filed a Chapter 13 bankruptcy petition. (ECF No. 1). The case was converted to a Chapter 11. (ECF No. 65). Lively filed his Amended Chapter 11 plan on August 19, 2011. (ECF No. 88). At the confirmation hearing, the Court preliminarily announced that it would deny confirmation of the plan for violating § 1129(b)(2)(B)(ii)—otherwise known' as the absolute priority rule. The Court allowed briefing on the question of whether BAPCPA abrogated the absolute priority rule for individual chapter 11 cases. Lively filed a brief in support of his argument that it did. (ECF No. 104). Having considered the brief and applicable law, the Court now denies confirmation.

Lively's proposed chapter 11 plan provided for payment to his unsecured creditors of a forecast 7.38% distribution. Lively had forecast that his future income to be used to fund the plan would have come from his salary, his social security benefits, income from a mortgage note receivable, income from leasing nine railroad cars and a periodic payment from a recreational boat consignment lot operated by his son. Lively's plan would allow him to retain ownership of the mortgage note receivable, the nine railroad car leases and his interest in the consignment lot.

The railroad car leases serve as collateral for a $234,000 bank loan. The plan proposes for Lively to retain the rail cars and retire the loan with payments over 15 years.

The mortgage note receivable serves as collateral for a $248,000 bank loan. The plan proposes for Lively to retain the mortgage note receivable and retire the loan with payments over the remaining term of the loan.

The recreational boat consignment lot is subject to a lease that will be assumed.

Lively estimates that he owes $731,000 in unsecured claims. These are to be partially paid, pro rata, over 5 years at the rate of $1,000.00 per month. Accordingly, holders of unsecured claims are being asked to lose approximately $670,000, while Lively retains ownership of all of his assets.

Analysis

After careful analysis of Lively's brief, the Bankruptcy Code, and the relevant case law, the Court holds that BAPCPA did not abrogate the absolute priority rule for individual Chapter 11 cases.

Although no creditor objected to confirmation, the Court has a “mandatory independent duty” to determine whether the standards set forth in § 1129 of the Bankruptcy Code have been satisfied. In re Williams, 850 F.2d 250, 253 (5th Cir.1988), quoting In re Holthoff, 58 B.R. 216, 218 (Bankr.E.D.Ark.1985). For the reasons set forth in this opinion, the Court concludes that the requirements of neither § 1129(a) nor § 1129(b) have been met and that confirmation must be denied.

Subsection 1129(b) (“Cram-Down”) Necessary

Although no creditor objected to confirmation,¹ 3 of the 4 holders of unsecured claims voted to reject the plan. Acceptance of a plan is determined by § 1126 of the Bankruptcy Code. Under that section, an impaired class of creditors accepts a plan only if it is approved by two-thirds in amount and a majority in number of the holders of claims who cast votes. 11 U.S.C. § 1126(c). Because three of the four votes rejected the plan, class 6 did not accept the plan. Accordingly, the plan did not meet the requirements of § 1129(a)(8) of the Bankruptcy Code. The plan, if it is to be confirmed, must meet the requirements of § 1129(b)—otherwise known as “cram-down.”

Subsection 1129(b) Requirements

For a plan to be confirmed under...