By: J. Ellsworth Summers, Jr. & Scott St. Amand
Although the 2005 BAPCPA amendments appeared to be a boon for creditors, at least with respect to Chapter 7 claims, individual Chapter 11 debtors immediately seized upon a perceived ambiguity in Congress’ language with regards to cramdown, which may ultimately prove costly for creditors.
Generally, a plan of reorganization can be confirmed in one of two ways. If § 1129(a) is satisfied, a plan can be confirmed with the consent of each class of creditor. If the debtor does not have the consent of each class of creditor but satisfies the remainder of the paragraphs of § 1129(a), then the bankruptcy court may still confirm the plan, as long as the plan is, among other things, “fair and equitable.” This latter nonconsensual method is commonly referred to as “cramdown.”
When a plan is crammed down, it is “fair and equitable” so long as it satisfies the Absolute Priority Rule of § 1129(b)(2)(B)(ii) (the “APR”). In other words, a reorganization plan that does not pay an unsecured creditor in full is nevertheless “fair and equitable,” and can be confirmed over the unsecured creditor’s objections, so long as an individual debtor does not retain property – except such property included in the bankruptcy estate under § 1115 . This italicized exception, added in 2005 as part of the BAPCPA amendments, has caused a distinct split in courts throughout the country.
Courts interpreting this new language disagree about the meaning of the phrase “property included in the estate under § 1115,” and thus also disagree as to the extent to which the APR applies to individual debtors after the amendment. A broad interpretation of the amendment would allow an individual debtor’s reorganization plan to be confirmed, while the debtor retains all property and wages acquired both pre-petition and post-petition, even if that plan does not pay an unsecured creditor in full , thus abrogating the APR. A narrow interpretation, on the other hand, would allow the individual debtor to keep only property and wages acquired post-petition .
A recent case out of the Tenth Circuit surveyed relevant post-BAPCPA decisions and found that only one circuit court (the Ninth) and five bankruptcy courts have adopted the broad interpretation. In contrast, the Fourth and Tenth Circuits and seventeen bankruptcy courts have reached the opposite conclusion, holding that the BAPCPA amendments only exempt from the APR that property which § 1115 adds to an individual estate – not the pre-petition property already defined by § 541.