IN RE ARNOLD

Case No. 2:12-bk-15623-RK.

In re DAVID L. ARNOLD and GRACE E. ARNOLD, Chapter 11, Debtors.

United States Bankruptcy Court, C.D. California, Los Angeles Division.


MEMORANDUM DECISION IN SUPPORT OF CERTIFICATION FOR DIRECT APPEAL AND GRANTING DEBTORS' MOTION FOR CERTIFICATION

ROBERT KWAN, Bankruptcy Judge.

On May 18, 2012, the court entered an Order Denying Approval of Debtors' Disclosure Statement (the "Order") and Memorandum Decision re Denial of Approveal of the Debtors' Amended Disclosure Statement (the "Memorandum Decision"). Docket Nos. 187, 188; In re Arnold, 471 B.R. 578 (Bankr. C.D. Cal. 2012). On May 22, 2012, David L. Arnold and Grace E. Arnold (the "Debtors") filed a Notice of Appeal and an Election to Appeal to District Court. Docket Nos. 196, 197. Also on May 22, 2012, the Debtors filed this Motion to Certify Direct Appeal to the Ninth Circuit Court of Appeals. This matter is still pending before this court pursuant to Federal Rules of Bankruptcy Procedure 8001(f)(2) and 8007(b).

The court determines that the Order is appropriate for certification to the Court of Appeals for the Ninth Circuit. Pursuant to Federal Rule of Bankruptcy Procedure 8001(f)(3)(F), the court issues this memorandum decision in support of the certification of the Order under 28 U.S.C. § 158(d)(1)(A)(i) and (ii).

BACKGROUND

On August 24, 2011, the Debtors filed a Disclosure Statement and a proposed Chapter 11 Plan of Reorganization. A hearing was held on approval of the Disclosure Statement on September 28, 2011. Issues regarding the confirmability of the Plan were raised by creditor U.S. Bank, arguing that the court should not approve the Disclosure Statement because the Plan violated the absolute priority rule. The hearing was continued, and the Debtors filed an Amended Disclosure Statement and proposed Chapter 11 Plan of Reorganization dated and filed on October 14, 2011. On November 16, 2011, the court held a hearing on the Amended Disclosure Statement, where U.S. Bank objected on the same grounds. That hearing was continued to January 18, 2012. Supplemental briefing was filed, and before that hearing, the court vacated the January 18 hearing and took the matter under submission.

While the matter was under submission, the Bankruptcy Appellate Panel ("BAP") of the Ninth Circuit, in a divided 2-1 decision, issued an opinion on March 19, 2012 in Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012), which held that the absolute priority rule does not apply in Chapter 11 bankruptcy cases of individual debtors after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub. L. No. 109-8, 119 Stat. 23 (2005). On March 20, 2012, the court issued an order inviting further briefing from the parties in light of the recent BAP decision. A final hearing on the Debtors' Disclosure Statement was held on April 25, 2012.

Because U.S. Bank holds more than one-third of the allowed claims in Class 5, and because U.S. Bank has voiced its intention to vote against the proposed Plan in the opposing papers, the Debtors' Plan would not satisfy the requirement of 11 U.S.C. § 1129(a)(8) and would therefore need to satisfy the cramdown provisions of § 1129(b). See 11 U.S.C. § 1126. Section 1129(b) states that a plan may be confirmed if it "does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." 11 U.S.C. § 1129(b)(1). As to an impaired dissenting class of unsecured creditors, such as Class 5, the Bankruptcy Code defines "fair and equitable" as follows:

(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, 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.

11 U.S.C. § 1129(b)(2)(B).

The Debtors' Plan would provide for less than 15% of General Unsecured Claims; thus, the Plan must satisfy § 1129(b)(2)(B)(ii) to be confirmed.

Section 1129(b)(2)(B)(ii) codifies the "absolute priority rule" and prohibits "the bankruptcy court from approving a plan that gives the holder of a claim anything at all unless all objecting classes senior to him have been paid in full." Everett v. Perez (In re Perez), 30 F.3d 1209, 1214 (9th Cir.1994); see also Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202, (1988) (the absolute priority 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").

BAPCPA added § 1115 and amended §1129(b)(2)(B)(ii). Following BAPCPA, there has been a split among courts as to whether the absolute priority applies in individual Chapter 11 cases.

In denying approval of the Debtors' Disclosure Statement, the court concluded that the absolute priority rule does apply in individual cases, that the Debtors' Plan violated the absolute priority rule, and the Debtors' Plan was therefore patently unconfirmable. In re Arnold, 471 B.R. at 614.

DISCUSSION

A court of appeals has jurisdiction of appeals from a bankruptcy court if (1) the bankruptcy court1 certifies the order from which the appeal is taken and (2) the court of appeals authorizes the direct appeal of the order. 28 U.S.C. § 158(d). The bankruptcy court must certify that,

(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance; (ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or (iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding in which the appeal is taken

28 U.S.C. § 158(d)(2)(A).

This case involves the question of whether the absolute priority rule applies in individual Chapter 11 cases. The court certifies the Order under § 158(d)(2)(A)(i) and (ii).

I. No Controlling Decision

The Order should be certified because it involves the question of whether the absolute priority rule applies in individual Chapter 11 cases. There is no controlling decision by the Ninth Circuit Court of Appeals or by the Supreme Court. Although a recent majority decision from the BAP concluded that the absolute priority rule does not apply in individual Chapter 11 cases, this court held, along with other courts, that BAP decisions are not controlling on other bankruptcy courts. In re Arnold, 471 B.R. 587-590; see also Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 471 (9th Cir. 1990); In re Grant, 423 B.R. 320 (Bankr. S.D. Cal. 2010); In re Zimmer, 313 F.3d 1220, 1225-1226 (9th Cir. 2002); Rinard v. Positive Investments, Inc. (In re Rinard), 451 B.R. 12 (Bankr. C.D. Cal. 2011).

II. Conflicting Decisions

Courts have reached conflicting decisions regarding the applicability of the absolute priority rule in individual Chapter 11 cases.

A majority of the courts ruling on the issue has ruled that the absolute priority rule applies in Chapter 11 bankruptcy cases of individual debtors. See In re Lively, 467 B.R. 884 (Bankr. S.D. Tex. 2012); In re Tucker, 2011 WL 5926757 (Bankr. D. Or. 2011); In re Borton, 2011 WL 5439285 (Bankr. D. Idaho 2011); In re Lindsey, 453 B.R. 886 (Bankr. E.D. Tenn. 2011); In re Kamell, 451 B.R. 505 (Bankr. C.D. Cal. 2011); In re Draiman, 450 B.R. 777 (Bankr. N.D. Ill. 2011); In re Maharaj, 449 B.R. 484 (Bankr. E.D. Va. 2011); In re Walsh, 447 B.R. 45 (Bankr. D. Mass. 2011); In re Stephens, 445 B.R. 816 (Bankr. S.D. Tex. 2011); In re Karlovich, 456 B.R. 677 (Bankr. S.D. Cal. 2010); In re Steedley, 2010 WL 3528599 (Bankr. S.D. Ga. 2010); In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010); In re Mullins, 435 B.R. 352 (Bankr. W.D. Va. 2010); In re Gbadebo, 431 B.R. 222 (Bankr. N.D. Cal. 2010). In addition to the cases cited, the Court of Appeals for the Fourth Circuit recently held that the absolute priority rule applies in individual Chapter 11 cases. See In re Maharaj, 681 F.3d 558 (4th Cir. 2012). The Fourth Circuit is the first and only circuit court of appeals to have ruled on this issue so far.

A minority of courts has ruled to the contrary that the absolute priority rule does not apply in individual Chapter 11 bankruptcy cases. See Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012); SPCP Group, LLC v. Biggins, 465 B.R. 316 (M.D. Fla. 2011); In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010); In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan. 2007); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007); In re Bullard, 358 B.R. 541, 545 (Bankr. D. Conn. 2007); see also In re Johnson, 402 B.R. 851, 852-853 (Bankr. N.D. Ind. 2009) (dicta that individual Chapter 11 debtor's plan need not satisfy the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii)); In re Hockenberry, 457 B.R. 646, 660-661 & n.14 (Bankr. S.D. Ohio 2011) (collecting cases on issue, but not reaching the issue because case decided on other grounds).

Because the issue of whether the absolute priority rule applies in a Chapter 11 bankruptcy case of an individual debtor will determine the outcome of the bankruptcy case, i.e., whether the debtors may confirm a reorganization plan over the objection of the unsecured creditor class, and the law is uncertain due to the sharp split in opinion among the courts which have decided the issue, including various courts within this circuit, the court concludes that the instant motion should be granted.

CONCLUSION

The court certifies the Order Denying Approval of Debtors' Disclosure Statement (Docket No. 187) to the Court of Appeals for the Ninth Circuit under 28 U.S.C. § 158(d)(1)(A)(i) and (ii).

Counsel for the Debtor shall submit a proposed order consistent with this memorandum decision.

FootNotes


1. If the matter is no longer pending before the bankruptcy court within the meaning of Federal Rules of Bankruptcy Procedure 8001(f)(2) and 8007, then the district court or bankruptcy appellate panel must certify the order. 28 U.S.C. § 158(d)(2)(A); Fed. R. Bank. P. 8001(f)(2)(A).

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