In re Tegeder: Per BAPCPA Absolute Priority Rule No Longer Applicable to the Rentention of Property by Individual Chapter 11 Debtor

As previously mentioned, one Bankruptcy Judge in the Southern District of Florida held in the Gosman decision (pre-BAPCPA) that the retention of exempt property by an individual debtor in a chapter 11 plan violates the absolute priority rule unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002). Also as previously noted, some courts disagree with the Gosman decision and hold that a chapter 11 debtor’s retention of his exempt property is not subject to the absolute priority rule. See e.g. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor’s junior interest in property).

Since the passage of BAPCPA and its amendments to 11 USC 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon. Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor’s retention of property. Judge Saladino’s decision in In re Tegeder, ___ B.R. ____, 2007 WL 1549067 (Bkrtcy.D.Neb.) is apparently the first decision to end this speculation – at least in his courtroom.

The court in Tegeder held that the new amendments to 1129(b)(2)(B)(ii) provide an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the “absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115″. BAPCPA added the following to 1129(b)(2)(B)(ii) “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”. New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition.

The court states that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.

It should be noted the Tegeder decision is broader than the Bullard decision as it holds that the absolute priority rule is inapplicable to the rentention of all types of property by the chapter 11 debtor. The Bullard case was limited to the retention of exempt property by the chapter 11 debtor.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Bullard: Au Contraire SD Florida Gosman Decision

Judge Weil recently issued her decision in the Bullard case on the issue of the absolute priority rule and the retention of exempt property in the context of the confirmation of a chapter 11 plan for an individual debtor. In re Bullard, 358 B.R. 541 (Bankrtcy.D.Conn 2007).

The Court noted that there was a disagreement among the courts concerning whether a chapter 11 debtor may retain his exempt property and still comply with the absolute priority rule. Cases such as In re Gosman, 282 B.R. 45 (Bankr.S.D.Fla.2002) by one Bankruptcy Court Judge from the Southern District of Florida, held that the retention of exempt property violates the absolute priority rule. Judge Weil held that the better line of authority holds that the debtor’s retention of his exempt property does not violate the absolute priority rule as such retention is not “on account of…[the debtor's] junior interest…” The court explained that “[o]nce the exemptions are allowed the properties are no longer part of the Debtor’s estate, and the Debtor does not retain property on account of such interest because he retains it as a matter of right by virtue of recognition of his right to exemptions…”

The Bullard court did not base its decision on an argument that the BAPCPA amendments to 1129(b)(2)(B)(ii) effected a waiver of the absolute priority rule as to individual chapter 11 debtors as the debtor abandoned the argument.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

11th Circuit Rules on Section 1146(c) Stamp-Tax Exemption Issue

On April 18, 2007, the 11th Circuit Court of Appeals issued its decision in In re Piccadilly Cafeterias, Inc., 484 F.3d 1299 (11th Cir. 2007), which was on appeal from the U.S. District Court and the U.S. Bankruptcy Court for the Southern District of Florida. The issue presented was whether the Section 1146(c) stamp-tax exemption may apply to asset transfers made before a Chapter 11 bankruptcy reorganization plan is confirmed.

In this case, the debtor executed an asset purchase agreement before the Chapter 11 bankruptcy case was filed. Subsequently the debtor filed a section 363 motion requesting authorization to sell substantially all of its assets outside of the ordinary course of business and also requested that the bankruptcy court conduct an auction through which the highest bidder would be entitled to purchase the involved assets. As part of the proceedings, the debtor requested an exemption from stamp taxes on the asset sale. The Florida Department of Revenue (“DOR”) objected. The Bankruptcy Court held that the sale was exempt from stamp taxes pursuant to section 1146(c). Subsequently, the debtor filed its Chapter 11 Plan. The bankruptcy court confirmed the debtor’s Amended Plan.

The DOR filed an adversary proceeding seeking a declaration that the transaction was not exempt from stamp taxes under section 1146(c). The bankruptcy court granted summary judgment in favor of the debtor. The bankruptcy court reasoned that the sale of substantially all of the debtor’s assets was a transfer “under” its confirmed plan because the sale was necessary to consummate the plan. The district court affirmed the bankruptcy court.

Section 1146(c) (per BAPCPA re-designated as section 1146(a))exempts from stamp or similar taxes any asset transfer “under a plan confirmed under” section 1129. The 11th Circuit Court of Appeals noted that the Third and Fourth Circuit had previously held that the 1146(c) exemption may not apply to pre-confirmation transfers. The Court noted that although it had yet to squarely address the issue, it addressed a somewhat similar issue involving section 1146(c) in In re T.H. Orlando Ltd., 391 F.3d 1287, 1291 (11th Cir. 2004). That case involved a transaction between two non-debtors that was specifically contemplated by the confirmed chapter 11 plan. The court concluded that “[a] transfer ‘under a plan’ refers to a transfer authorized by a confirmed Chapter 11 plan.” Accordingly the court in T.H. Orlando Ltd. held that the phrase “under a plan refers to a transfer that is necessary to the consummation of a confirmed Chapter 11 plan”.

The court followed the T.H. Orlando Ltd. construction that the phrase “under a plan confirmed” looks not to the timing of the transfer but to the necessity of the transfer to the consummation of a confirmed Chapter 11 plan. The court reasoned that the plain language of section 1146(c) is ambiguous as the statute can plausibly be read to describe eligible transfers to include transfers regardless of when the plan is confirmed or as the DOR argued, to impose a temporal restriction on when the confirmation of the plan must occur. Furthermore, the court reasoned that when Congress wanted to place a temporal restriction in the Bankruptcy Code, it did so expressly–which it did not do in section 1146(c). The Court also reasoned that a strict temporal construction of section 1146(c) would ignore the practical realities of Chapter 11 reorganization cases.

In short, the court held that “section 1146(c)’s tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which at the very least, requires that there be some nexus between the pre-confirmation sale and the confirmed plan.” The court emphasized that the issue of whether the section 1146(c) tax exemption properly applied to the asset sale in this case was not properly before the court and it did not decide the issue. The court left “for another day an attempt to set forth a framework for determining the circumstances under which section 1146(c)’s tax exemption may apply to pre-confirmation transfers”.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983