Split Continues Over The Interpretation Of The Absolute Priority Rule As Applied To Individual Chapter 11 Debtors

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The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") was enacted almost ten years ago, but the effect of these bankruptcy amendments is still being decided, particularly in the realm of individual Chapter 11 bankruptcy cases. Financially distressed, higher net worth individuals who are precluded from filing bankruptcy under Chapter 13 (as they may have debt in excess of the statutory limits for Chapter 13 debtors) are having to seek protection under Chapter 11 of the Bankruptcy Code. While Chapter 11 is typically associated with big business bankruptcies, a reorganization under this Chapter is equally available to (and may be the only realistic choice for), a debtor with a more complex portfolio.

As the increased number of individual Chapter 11 cases work their way through the court system, the impact of BAPCPA, enacted to ensure that "debtors . . . repay creditors the maximum they can afford," is playing out. Currently, a significant split of authority exists regarding the effect of the BAPCPA amendments on the absolute priority rule in individual Chapter 11 cases. The issue underlying this split is whether the BAPCPA amendments essentially did away with this rule as it applies to individual Chapter 11 debtors, and allows individual debtors to retain certain property interests through the reorganization process over the objection of impaired creditors.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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