THE SIXTH CIRCUIT COURT OF APPEALS RULES THAT THE ABSOLUTE- PRIORITY RULE STILL APPLIES IN INDIVIDUAL CHAPTER 11 CASES
The Sixth Circuit Court of Appeals recently issued an opinion reversing the lower bankruptcy court’s holding that the absolute- priority rule no longer applies to individual Chapter 11 cases following the 2005 amendments to the Bankruptcy Code. Ice House America, LLC v. Charles Cardin, Appeal No. 13-5764 (6th Cir. May 13, 2014). The lower court approved the debtor’s plan which violated the absolute-priority rule. The absolute- priority rule provides that every unsecured creditor must be paid in full before the debtor can retain any property under the Plan. 11 U.S.C. § 1129(b)(2)(B)(ii). The debtor sought to retain all property under the plan despite only paying its primary unsecured creditor less than 10 cents on the dollar. In reversing the lower court’s decision, the Court of Appeals noted the expanded definition of “property of the estate” after the 2005 amendments now includes property obtained by the debtor after the commencement of the case. The Court of Appeals further explained that, it is only that property-property acquired after the commencement of the case, rather than property acquired before then- that the debtor may retain when his unsecured creditors are not fully paid. The Court of Appeals held that the 2005 amendment to § 1129(b)(2)(B)(ii) maintains the pre-2005 scope of the absolute-priority rule, thus limiting the rule’s scope to prepetition property, even as the definition of “property of the estate” expands to include postpetition property in § 1115. With its recent ruling, the Sixth Circuit joins the Fourth, Fifth, and Tenth Circuits in finding that the absolute- priority rule is still applicable in individual Chapter 11 cases.
Jamie Harris is an associate attorney with DelCotto Law Group PLLC. Her practice of law focuses on helping business owners hurdle financial obstacles. Jamie is best known for her experience in filing Chapter 7, 11, 12, and 13 bankruptcies. In her Chapter 11 cases, Jamie has represented companies from many different industries including healthcare, nonprofit, trucking, construction, commercial real estate and telecommunications.