October 13, 2014
by Linda J. St. Pierre
Hunt Leibert — USFN Member (Connecticut)
The U.S. Bankruptcy Court for the District of Connecticut has ruled on an issue of first impression that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) did not eliminate the absolute priority rule in individual Chapter 11 cases. The recent decision stems from a contested confirmation of a single Chapter 11 plan of reorganization in two separate, but jointly-administered, Chapter 11 bankruptcy cases: In re Lucarelli, Case No. 13-30350, and In re Lucarelli’s Executive Answering Service, LLC, (LEAS), Case No. 13-30443.
In the individual case, the debtors sought to retain ownership interests in LEAS, while unsecured creditors would not be paid in full. Confirmation of the individual case was met with an objection by one of the unsecured creditors who was not being paid in full under the plan, asserting a violation of the absolute priority rule. Unless unsecured creditors were paid in full, the absolute priority rule would effectively prevent confirmation of the individual case.
The court followed the analysis taken in In re Maharaj, 681 F.3d at 560, and said that it “must determine the meaning of the Congressional language ‘property included in the estate under section 1115’ found in § 1129(b)(2)(B)(ii) and ‘property of the estate includes, in addition to the property specified in section 541’ found in 1115.” The court’s review wavered on whether the court should adopt, what has otherwise become known as, the “narrow view” or, alternatively, opt for the “broad view.”
Having determined that the statutes held ambiguous, competing interpretations, and having further noted that the canon of statutory construction is a presumption against implied repeal, the court chose to take the narrow view (given adoption of the broad view would amount to an implied repeal of the absolute priority rule in individual Chapter 11 cases). The court stated that “the ambiguity of the statutes, the established canon disfavoring implied repeal, and the lack of any useful legislative history” left no alternative but to adopt the narrow view. Effectively, this view holds that the absolute priority rule applies in individual Chapter 11 cases. Consequently, an individual debtor whose liabilities exceed the Chapter 13 debt limits, and whose creditors will not consent to less than full payment of their claims, is required to undergo the functional equivalent of a liquidation.
In its final remarks, the court in Lucarelli noted that the adoption of the narrow view would serve to make Chapter 11 reorganization far less attractive to individual debtors and would make confirmation of a nonconsensual plan virtually impossible.
The Lucarelli decision provides a powerful tool to many creditors in individual Chapter 11 cases. Servicers should consult with their local counsel to determine whether a plan objection based upon an absolute priority rule violation is viable.
Editor’s Note: The author’s firm was appearing counsel in the Lucarelli case.
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