Posted by on Oct 4, 2013 in Chapter 11 Bankruptcy Issues | 0 comments

People typically think “LA Dodgers Bankruptcy” or “Hostess Bankruptcy” or “General Motors Bankruptcy” when hearing the term Chapter 11 bankruptcy.  But let a California Chapter 11 bankruptcy attorney explain, and you will find that Chapter 11 bankruptcy also applies to people, such as individuals who are sole proprietors, business owners, or wage earners with either secured debt above $1,149,525.00 or unsecured debt beyond $383,175.00.  In such cases, chapter 13 is not available.  For such individuals, a chapter 11 may be the only option.

Creditors usually get to vote in chapter 11 cases.  However, that isn’t necessarily true in individual, non-corporate, chapter 11 cases.

The 9th Circuit Bankruptcy Appellate Panel decided in In Re Friedman (March 19, 2012), that the absolute priority rule does not apply in an individual chapter 11 case. Why the distinction?  Well, 11 U.S.C. Section 1129(b)(2)(B)(ii) says that for a class of unsecured claimants that ”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.”

Typically, the absolute priority rule comes into play if there is one impaired class of claims that does not accept the plan.   That means a chapter 11 plan will not be crammed down on unsecured creditors unless the debtor, as the equity interest holder, gets nothing under the plan.  The reason for this absolute priority rule is to promote fairness.

In Friedman, the court mentioned using “common sense” in determining whether the absolute priority rule applies in individual cases.   The court found that it had to first look at the language within the bankruptcy code to determine whether the absolute priority rule applies.  The court found nothing contrary to hold that the absolute priority rule apply in individual cases based on the language of the applicable statutes.   It also found it incongruous that a chapter 11 individual debtor had to submit equivalent value of 5 years of disposable income under 1129(a)(15) yet have the absolute priority rule still apply.  Moreover, the court noted the semblance of newly added statutes for chapter 11 cases that closely mirrored chapter 13 rules for individual cases.

The Friedman court concluded with this thought: “When decicisions have gone further than exercising a plain reading of the statute, they have entered into speculative analyses that are fatally flawed.”  Thus, at least for now, the 9th Circuit BAP has concluded the absolute priority rule does not apply – however it is unclear whether 9th Circuit Bankruptcy Judges are even bound by BAP opinions so the magnitude of this case has yet to be determined.   Stay tuned.

Attorney Jeffrey C. Hsu handles consumer and small business bankruptcy law.   He can also help you as a California Chapter 11 Bankruptcy Attorney. His experience includes having worked for a former Chapter 7 Trustee, serving as judicial extern to a Los Angeles Bankruptcy Judge, and completing a clinical internship with the U.S. Trustee’s Office.  Mr. Hsu also successfully participated at the 17th Annual Duberstein National Bankruptcy Moot Court Competition.   Call today to schedule your free consultation at 626-999-5959 or email him at    His law office internet website can be found at  

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