Fifth Circuit Affirms Absolute Priority Rule in Individual Chapter 11 Cases
May 29, 2013 | In In re Lively, the Fifth Circuit affirmed the absolute priority rule in individual Chapter 11 Cases, adopting the “narrow view” established by other Circuits. In re Lively, 2013 WL 2347045 (5th Cir. 2013).
Most of the cases that have interpreted BAPCPA’s modification of the absolute priority rule have found the amendatory language ambiguous and have gone on to examine unenlightening legislative history and extrinsic interpretive factors to arrive at either a “narrow” or “broad” interpretation. The “narrow” interpretation holds that the absolute priority rule was amended so that individual debtors could exclude from its reach only their post-petition earnings and post-petition acquisitions of property, i.e., only property that was not already included in the Chapter 11 estate by § 541.3 The “broad” interpretation holds that the exception’s (§ 1129(b)(2)(B)(ii)) reference to property “included in” the individual debtor’s estate “under” § 1115 subsumes or supersedes the § 541
definition completely, thus effecting abrogation of the absolute priority rule.
The Court held, “The absolute priority rule, in particular, has been a cornerstone of equitable distribution for Chapter 11 creditors for over a century. We must presume Congress was well aware of that rule and, in the absence of a clearer directive, modified § 1129(b)(2)(B)(ii) in order to refine it, not reverse it, for individual debtors.”
