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Sixth Circuit Holds Individual Chapter 11 Debtors Remain Subject to the Absolute Priority Rule

In a direct appeal from the bankruptcy court, the Sixth Circuit reversed the bankruptcy court’s confirmation of an individual’s chapter 11 plan of reorganization and held that the plan must satisfy the absolute priority rule. Ice House Am. v. Cardin, ___ F.3d ___, 2014 U.S. App. LEXIS 8882, Case No. 13-5764 (May 13, 2014). The absolute priority rule, as applied in an individual chapter 11 case, requires that the debtor may retain property of the estate after confirmation of a plan only if all classes of unsecured creditors consent, or if all non-consenting classes are to be paid in full under the plan. 11 U.S.C. 1129(b)(2)(B)(ii). The Court determined that a 2005 revision to section 1129 of the Bankruptcy Code does create an exception to the absolute priority rule, but ruled that this exception is limited to the debtor’s post-petition earnings referenced in section 1115 and does not extend to any assets the debtor owned before the bankruptcy filing. The Sixth Circuit now joins the Fourth, Fifth, and Tenth in holding that individual chapter 11 debtors remain subject to the absolute priority rule. The Sixth Circuit acknowledged that this ruling places individual chapter 11 debtors at a disadvantage compared to chapter 13 debtors who are not subject to the absolute priority rule, but refused to permit this policy argument to influence its interpretation of Congress’ language.

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