Thursday, December 9, 2010

The Absolute Priority Rule and Individual Chapter 11 Bankruptcy

The Absolute Priority Rule and Individual Chapter 11 bankruptcy is a hot newer topic that is finally working its way through Florida and the United States.  Judge Jenneman in Orlando made a recent decision that may ultimately impact the usefulness of Chapter 11 as it relates to individuals.
                Her recent decision in In re Gelin, 437 B.R. 435 (Bankr. M.D.Fla.2010) applied the Absolute Priority Rule very strictly.  She stated that in order for the Debtor to retain any pre-filing property that the Debtor had to pay 100% to unsecured creditors.  This is of course very difficult for individuals in bankruptcy.
                Prior to the 2005 amendments there was no argument that the APR applied to individual cases because there was no specific rules relating to individual chapter 11 cases.  However this all changed in 2005 when Congress amended Chapter 11 to specifically deal with individuals that had to file Chapter 11.  These amendments made it more feasible for individuals to actually make it in and out of bankruptcy and brought the individual Chapter 11 more in line with a Chapter 13.
                There is case law on both sides of the table on this issue.  Early on after the amendments the cases were coming down in favor of a more favorable view of the APR in individual cases.  However now the pendulum seems to have moved to the other side and the Gelin decision is just the most recent decisions that could destroy the individual Chapter 11.

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