Zachary v. California Bank & Trust

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amendments only allow individual chapter 11 debtors to acquire property and earnings acquired after the start of the case that would be excludable under § 541(a)(6) & (7).

The Debtors, David K. Zachary and Annmarie S. Snorsky, jointly and voluntarily filed under chapter 11. Under the debtor’s operative plan of reorganization, their largest unsecured creditor, California Bank & Trust (California Bank) was to be categorized in a class of unsecured creditors. The debtors offered to pay California Bank $5,000 on a claim of close to $2,000,000. According to the California Bank, the debts operative plan violated the priority rule of 11 U.S.C. 1129(b)(2)(B)(ii). The bankruptcy judge, however, agreed with California Bank’s objection and held that “the absolute priority rule still prevails” in chapter 11 bankruptcies. The Debtors subsequently appealed. On appeal, the Ninth Circuit reviewed whether the absolute priority rule applies in Chapter 11 reorganization. Confirming a plan of reorganization under chapter 11 can be done in two ways. The first is to file a plan compliant with 11 U.S.C. § 1129(a). The second, it must be “fair and equitable” and a bankruptcy judge may find the plan to be “fair and equitable” to a creditor that objects only if it is in compliance with the absolute priority rule given. According to the absolute priority rule, “… [the rule] provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under a reorganization plan.” In determining whether California Bank’s objection was sufficient, the panel looked at the Post-Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and bankruptcy code case law from other jurisdictions. There was a split in the circuits between a narrow and broad view of the BAPCPA amendments. As a result, the BAPCPA amendments did not repeal the absolute priority rule. Further, the court overruled In re Friedman and adopted a narrow view of the BAPCPA amendments only allows individual chapter 11 debtors to retain property and earnings acquired after the “commencement of the case that would otherwise be excluded under 541(a)(6) & (7).” AFFIRMED.