Oct. 14 (Westlaw Journals) - The “absolute priority” rule no longer applies to individual Chapter 11 debtors since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a federal judge in Tampa, Fla., has ruled.
SPCP Group LLC v. Biggins et al., Nos. 10-2381, 10-2384, 10-2386, 11-33 and 11-34, 2011 WL 4389841 (M.D. Fla., Tampa Div. Sept. 21, 2011).
The rule, codified at 11 U.S.C. § 1129(b)(2)(B)(ii), comes into play when an unsecured creditor objects to a so-called “cramdown” plan. It mandates that unsecured creditors receive payment in full before the debtor may retain property of the bankruptcy estate.
But U.S. District Judge Susan C. Bucklew of the Middle District of Florida ruled on appeal from a bankruptcy court decision granting plan confirmation to a group of individual Chapter 11 debtors that the rule no longer applies to them.
The underlying bankruptcy proceedings involve Cypress Creek Assisted Living Residence Inc. and a related company, which own and operate an assisted living facility in Sun City, Fla.
Cypress Creek borrowed $5 million from American Bank in 2007 to fund operations. Several of the company’s individual shareholders agreed to personally guarantee the loan, Judge Bucklew noted in a written order.
Cypress Creek defaulted on the loan the following year and subsequently filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Middle District of Florida, the judge’s order says.
The Bankruptcy Court eventually confirmed a reorganization plan that requires Cypress Creek to repay 100 percent of the loan, plus $36,000 in interest, to SPCP Group LLC, which was assigned the loan from American Bank.
Because the plan calls for the balance owed, together with any accrued interest, to balloon and be fully due and payable 72 months after confirmation, SPCP will be repaid 118 percent of its claim, the order says.
Cypress Creek continues to make repayments under the plan, according to the order. Nevertheless, SPCP brought a state court action to enforce the personal guarantees. SPCP is described in the order as the “debtors' largest unsecured creditor.”
The individual guarantors subsequently filed Chapter 13 petitions, which were later converted to Chapter 11 cases.
SPCP filed a $5.8 million unsecured claim in each of individual’s case and lodged an objection to their reorganization plans.
The proposed plans called for the individuals to retain their ownership of Cypress Creek while not paying any money to SPCP because monthly payments are being made to SPCP by the facility under its confirmed plan. SPCP would retain its right to enforce the guarantees if those payments stop, the order says.
The Bankruptcy Court confirmed the individuals’ plans after a hearing in August 2010. It relied on In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010), which held the “absolute priority” rule no longer applies to individual Chapter 11 debtors after passage of BAPCPA.
On appeal to the District Court, SPCP argued the Bankruptcy Court should have adopted the more narrow view of BAPCPA set forth in In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010).
The narrow interpretation would allow the individual debtor to keep only property acquired post-petition.
Judge Bucklew sided with the Bankruptcy Court and its reliance on the Shat decision.
She said the plain language of BAPCPA permits a bankruptcy court to confirm an individual Chapter 11 debtor’s plan over an unsecured creditor’s objection even when the debtor retains pre- and post-petition property of the estate.
Judge Bucklew acknowledged that her decision conflicts with Gelin, a ruling from her own judicial district, but said that case was factually distinguishable from the one before her.
“The debtors in Gelin proposed to pay their unsecured creditors less than 1 percent of their claims, while SPCP will be repaid 118 percent of its claim,” she wrote.
Appellant (SPCP): Gregg W. McClosky, McClosky D’Anna & Dieterle, Boca Raton, Fla.
Appellees (Debtors): Bernard J. Morse, IV, Morse & Gomez, Riverview, Fla.
(Reporting By Chip Giambrone, Westlaw Journal Bankruptcy)