On May 29, 2013, the Fifth Circuit Court of Appeals issued its decision in In re Lively, affirming an order on appeal from the U.S. Bankruptcy Court for the Eastern District of Texas and holding that the absolute priority rule, 11 U.S.C. § 1129(b)(2)(B)(ii), as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), applies in individual chapter 11 cases.1 The ruling resolves a question of first impression in the Fifth Circuit, taking the "majority view" approach on a controversial issue that bankruptcy courts have grappled with of late.2
In In re Lively, the individual debtor's chapter 13 case was converted to a chapter 11 when a creditor's claim caused the debtor's scheduled debts to exceed the statutory limit for chapter 13 cases.3 Proceeding with a chapter 11 plan, the debtor proposed to retain all of his property while paying unsecured creditors a small amount that exceeded the liquidation value of his assets.4 Although no competing plans or objections to confirmation were filed, the bankruptcy court cited its "mandatory and independent duty" to determine whether the "cramdown" requirements of 11 U.S.C. § 1129(b) were met after a majority of the class of unsecured creditors voted to reject the plan.5 At the confirmation hearing, the bankruptcy court preliminarily announced its intention to deny plan confirmation for violating the absolute priority rule and invited the parties to submit briefs on this issue.6 Only one brief was filed: The debtor filed a brief in support of his argument that BAPCPA abrogated the absolute priority rule for individual chapter 11 cases.7 The debtor adopted the "broad view" espoused by several courts, arguing that the language of § 1129(b) (2) (B)(ii) provides that an individual chapter 11 debtor may retain "all property" that is included within the definition of property of the estate under 11 U.S.C. § 1115.8 The debtor further argued that the "narrow view," interpreting § 1129(b)(2) (B) (ii) as excepting property "included in" or "added to" the estate under § 1115, renders the exception trivial.9 The bankruptcy court disagreed.10
The bankruptcy court first noted that the plan failed to satisfy the requirements of 11 U.S.C. § 1129(b)(2)(B)(i) because it did not provide for payments equal to the allowed amount of the claims of the impaired dissenting classes of unsecured creditors.11 Accordingly, the bankruptcy court proceeded to examine § 1129(b) (2) (B) (ii) to determine whether confirmation was warranted. The bankruptcy court cited to the language added to § 1129(b) (2) (B)(ii) by BAPCPA, noting the split of authority regarding what property is included in the estate under § 1115.12 Finding that the plain language of § 1115 is unambiguous and that the exception fits coherently and consistently into the overall scheme of reorganization under chapter 11, the bankruptcy court ruled that the absolute priority rule applies in individual chapter 11 cases, held that the debtor's plan did not satisfy § 1129(b)(2)(B)(ii) and denied confirmation.13 Thereafter, and recognizing no controlling decisions by the Fifth Circuit Court of...
