Absolute Priority Rule No Longer Applies in Individual in Chapter 11 per BAPCPA

The pre-BAPCPA Gosman decision held that the retention of exempt property by an individual debtor in a chapter 11 plan violates the absolute priority rule unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002). Some courts disagree with the Gosman decision and hold that a chapter 11 debtor's retention of his exempt property is not subject to the absolute priority rule. See e.g. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor's junior interest in property).

Since the passage of BAPCPA and its amendments to 11 U.S.C. section 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon. Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor's retention of property. The case of In re Tegeder, 369 B.R. 477 (Bkrtcy.D.Neb. 2007)(Saladino, J.) is one of the the first decisions to address this issue.

The court in Tegeder held that the new amendments to 1129(b)(2)(B)(ii) provide an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the "absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115". BAPCPA added the following to 1129(b)(2)(B)(ii) "except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section". New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition. The court stated that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.

It should be noted the Tegeder decision is broader than the Bullard decision as it holds that the absolute priority rule is inapplicable to the retention of all types of property by the chapter 11 debtor. The Bullard case was limited to the retention of exempt property by the chapter 11 debtor.