Ninth Circuit Rules That The Absolute Priority Rule Applies To Individual Chapter 11s

The Ninth Circuit ruled Thursday that the absolute priority rule still applies to individual Chapter 11 reorganizations after the Bankruptcy Code was amended in 2005, overruling a previous decision from the circuit's Bankruptcy Appellate Panel and a 2010 decision by the Nevada Bankruptcy Court.

Under the absolute priority rule in 11 U.S.C. § 1129(b)(2)(B)(ii), debtors seeking to prove a Chapter 11 reorganization plan is fair and equitable to dissenting unsecured creditors have to pay those creditors in full before any junior class can receive property. The rule was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), allowing individual Chapter 11 debtors to retain property included in Section 1115, which expanded the definition of a debtor's estate to include property acquired after the start of bankruptcy proceedings. Following the amendment, courts were split as to a narrow or broad interpretation of BAPCPA. The Nevada Bankruptcy Court in In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010), concluded that the broader interpretation was proper and individual Chapter 11 debtors were able to retain most prepetition and postpetition property and nonetheless cram down plans rejected by a class of unsecured creditors and did not pay such creditors in full.

In Zachary v. Cal. Bank & Trust, the debtors, David K. Zachary and Annmarie S. Snorsky, filed a plan allowing them to retain their home in Carnelian Bay and a rental property in Lake Tahoe but only proposing to pay...