Vol 10 (2013) - Issue 6

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An Absolute Difference of Opinion: The Split of Authority over Whether the ‘Absolute Priority Rule’ Applies in Individual Chapter 11 Cases under the United States Bankruptcy Code

Introduction
The public policy underlying the United States Bankruptcy Code (the 'Code') embodies two sometimes contradictory policies: protecting the rights of creditors on the one hand, and, on the other, affording the honest but unfortunate debtor a 'fresh start' through full or partial relief from his or her debts. How to strike that balance can be an inordinately difficult question as to which reasonable minds in the United States judiciary may, and quite frequently do, differ. One current difference of opinion is over the issue of whether the so-called 'absolute priority rule' under § 1129(b) (2)(B) of the Code, as amended by the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 ('BAPCPA'), applies in chapter 11 cases involving individual debtors.

This article briefly explores the current debate over the applicability of the absolute priority rule in individual debtor chapter 11 cases by: (i) describing the concept of the absolute priority rule; (ii) providing a brief history of the absolute priority rule; (iii) outlining the statutory provisions relevant to determining whether the BAPCPA amendments to the Code in 2005 repealed the application of the absolute priority rule in individual debtor cases; and (iv) detailing the current split in judicial authority over this unresolved issue.

Absolute priority rule
The primary goal of a chapter 11 case is for the debtor to obtain bankruptcy court approval of a plan of reorganisation that provides maximum distributions to creditors. The requirements for confirmation of a plan of reorganisation are generally set out in § 1129 of the Code which provides two separate and distinct paths for successful plan confirmation. First, a plan can be confirmed if the debtor satisfies all of the requirements in paragraphs (1) through (16) of § 1129(a). Of particular note is the requirement of obtaining the consent of each class of impaired creditors as required by paragraph (8) of § 1129(a).