In re Erickson

Susan V. Kelley

The Debtors are individuals who filed a Chapter 11 petition on May 31, 2012. On May 2, 2013, the Court held a confirmation hearing on the Debtors' Chapter 11 plan. At the hearing, after considering the testimony and evidence submitted, the Court overruled the objection filed by InvestorsBank to the feasibility of the plan, and the Court required the Debtors to make certain modifications to meet other objections by InvestorsBank, including providing tax returns to the Bank's counsel to demonstrate that all of the Debtors' disposable income was dedicated to the plan.

The class of general unsecured creditors did not vote to accept the plan. The Court, on its own, raised the issue of whether the plan was fair and equitable to unsecured creditors under 11 U.S.C. § 1129(b)(2)(B), or whether the absolute priority rule applied to prevent confirmation of the plan. The Debtors' counsel argued that since the only property the Debtors are retaining under the plan is fully exempt property, the plan was fair and equitable and could be confirmed. The U.S. Trustee's counsel tentatively took issue with the Debtors' argument, but in the end, filed a letter stating: "After considerable deliberation and research into whether the absolute priority rule applies to exempt property of an individual in Chapter 11, the United States Trustee has decided not to take a position on this issue."

The Debtors filed a brief citing three cases holding that the absolute priority rule does not prevent confirmation of an individual debtor's plan if the debtor proposes to retain only exempt property. The most persuasive analysis is provided by In re Henderson, 321 B.R. 550 (Bankr. M.D. Fla. 2005), aff'd sub nom. Van Buren Indus. Investors v. Henderson (In re Henderson), 341 B.R. 783 (M.D. Fla. 2006). However, after Henderson was decided, the Fourth Circuit Court of Appeals became the first circuit court to analyze this issue, and ruled that the absolute priority rule does apply to individual debtors trying to confirm Chapter 11 plans. Maharaj v. Stubbs & Perdue, P.A. (In re Maharaj), 681 F.3d 558 (4th Cir. 2012). In Maharaj, the property to be retained was the debtors' auto body business; the decision does not specify whether the property was exempt. However, in order to counter the debtors' "gloom and doom scenario," the Fourth Circuit pointed out: "To the contrary, plan acceptance is still very much a possibility, even within the confines of the absolute priority rule. Debtors may negotiate a consensual plan, pay higher dividends, pay dissenting classes in full, or comply with the [absolute priority rule] by contributing prepetition property." Maharaj, 681 F.3d at 575 (internal quotes and cites omitted). This quote suggests that the absolute priority rule applies whether the debtor proposes to retain exempt or non-exempt property.

Although Maharaj is thoroughly reasoned, it is not binding precedent in this case. Moreover, the Fourth Circuit's decision does not expressly address the situation where a debtor proposes to retain only exempt property. Neither InvestorsBank nor the U.S. Trustee chose to dispute or deny the Debtors' claim that the plan is fair and equitable even though the Debtors are retaining exempt property. The Debtors' arguments and the reasoning of the Henderson court are persuasive. Under these limited circumstances, the Court will determine that the plan is fair and equitable and may be confirmed.

Counsel for the Debtors should submit a proposed Order confirming the plan, including the modifications made at the confirmation hearing.

By the Court:

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Susan V. Kelley

U.S. Bankruptcy Judge