Back in 2011, Jason posted an update on the applicability of the absolute priority rule to individual Chapter 11 debtors in the Middle District of Florida based upon the Tampa Division’s recent District Court ruling in SPCP Group, LLC v. James John Biggins, 465 B.R. 316 (M.D. Fla. 2011). At that time, individual Chapter 11 debtors breathed a small sigh of relief because Judge Susan C. Bucklew wrote in her decision that the absolute priority rule did not apply to individual Chapter 11 cases and that the language was clear that the rule was intended to be removed during the amendments to the Bankruptcy Code. Judge Bucklew’s opinion was the first Florida district court opinion on the issue.
But in a 2013 Chapter 11 case in Tampa, Judge Michael G. Williamson took up the issue of the absolute priority rule again and held that it does apply to individual Chapter 11 cases in the Middle District of Florida. In re Martin, 497 B.R. 349 (Bankr. M.D. Fla. 2013). Judge Williamson discussed Biggins in his opinion and ruled that the outcome in Biggins did not depend on the Court’s interpretation of the absolute priority rule because the debtor’s plan paid the unsecured class of creditors in full. Therefore, Judge Williamson reasoned that the District Court’s discussion of the absolute priority rule’s general applicability in Biggins was dicta and not controlling precedent. Judge Williamson then concluded that the absolute priority rule does apply to individual Chapter 11 debtors in the Middle District of Florida. While this decision may not be completely controlling in the Orlando or Jacksonville divisions as of today, it is a highly persuasive precedent that the judges are likely to follow. So what exactly is the absolute priority rule and how does it affect individual Chapter 11 debtors trying to confirm a plan of reorganization?
The absolute priority rule is used in bankruptcies to specify the pecking order amongst creditors seeking to receive payment from the assets of the estate. Senior creditors are paid first and shareholders or owners always get paid last if any assets remain. Chapter 11 debtors start the confirmation process by proposing a plan of reorganization that classifies their debts into classes of creditors. Each class of creditors then votes to accept or reject the plan. The absolute priority rule comes into play when a class of creditors does not like the plan and votes against confirmation. When this happens, the Court will only confirm the plan over the objections of the dissenting class if:
1. The class of creditors who voted against the plan will be paid in full; or
2. No one with a claim or interest that is junior to the claims of the class who voted against the plan will get or retain anything under the plan. See 11 U.S.C. § 1129(b)(2)(B)(i) and 11 U.S.C. § 1129(b)(2)(B)(ii).
In plain terms, the absolute priority rule prevents a debtor from confirming their plan if a class of creditors votes against it and any class of creditors with junior liens to the dissenting class receives or retains any property or money under the plan unless the debtor pays the dissenting class 100% of its claim amount. When Judge Williamson applied the absolute priority rule to the plan of reorganization in Martin he found that the plan did not pass. Under Martin’s proposed plan the unsecured creditors were being paid less than 100% of their claim amounts. Since the unsecured class voted against the plan and Martin was keeping non-exempt investment properties under the plan, it failed to satisfy the absolute priority rule and confirmation was denied. It is important to remember that the debtor who retains any non-exempt property under a plan of reorganization is junior to all other creditors of the estate.
Individual chapter 11 debtors in the Middle District of Florida should be familiar with the absolute priority rule and its effects on their plans of reorganizations. Judge Williamson’s decision in Martin means that the rule will almost certainly apply to their case despite the early decision in Biggins from Judge Bucklew.
By: Joshua B. Dawes, Attorney at The Law Offices of Jason A. Burgess, LLC
If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com