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Zachary v. California Bank & Trust

United States Court of Appeals, Ninth Circuit

January 28, 2016

DAVID K. ZACHARY; ANNMARIE S. SNORSKY, Debtors-Appellants,
v.
CALIFORNIA BANK & TRUST, Respondent-Appellee

Argued and Submitted October 21, 2015, Stanford Law School, California

Page 1192

Appeal from the United States Bankruptcy Court for the Eastern District of California. D.C. No. 2:11-bk-42866. Thomas C. Holman, Bankruptcy Judge, Presiding.

SUMMARY[*]

Bankruptcy

Affirming the bankruptcy court's order sustaining an objection to a chapter 11 plan of reorganization, the panel held that the absolute priority rule in 11 U.S.C. § 1129(b)(2)(B)(ii)--providing that a dissenting class of unsecured creditors must be provided for in full before an individual debtor can retain any property under a reorganization plan--continues to apply following the amendments to the Bankruptcy Code enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act.

Following other circuits, the panel overruled In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012), and adopted the " narrow view" that the BAPCPA amendments merely have the effect of allowing individual chapter 11 debtors to retain property and earnings acquired after the commencement of the case that would otherwise be excluded under § 541(a)(6) & (7). Thus, an individual debtor may not " cram down" a plan that would permit the debtor to retain prepetition property that is not excluded from the estate by § 541, but may cram down a plan that permits the debtor to retain only postpetition property.

Gregg W. Koechlein (argued), Reno, Nevada, for Debtors-Appellants.

Matthew D. Murphey (argued), Penelope Parmes, Martin W. Taylor, Meghan Canty Sherrill, Troutman Sanders LLP, Irvine, California, for Respondent-Appellee.

Before: Richard A. Paez, Mary H. Murguia, and Andrew D. Hurwitz, Circuit Judges.

OPINION

Page 1193

Andrew D. Hurwitz, Circuit Judge.

This case presents an arcane but important question of first impression in this Circuit: Does the absolute priority rule continue to apply in individual chapter 11 reorganizations after the amendments to the Bankruptcy Code enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (" BAPCPA" )? We hold that it does.

I. Factual and Procedural Background

In September 2011, David K. Zachary and Annmarie S. Snorsky (" Debtors" ) filed a joint voluntary individual chapter 11 petition. The Debtors' operative plan of reorganization placed their largest unsecured creditor, California Bank & Trust (" California Bank" ), into its own class of unsecured creditors and proposed to pay it $5,000 on its claim of nearly $2,000,000. California Bank's claim was thus " impaired under the plan." 11 U.S.C. § 1129(a)(8)(B).

California Bank objected, arguing that the plan violated the so-called absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii). The bankruptcy judge, disagreeing with the Ninth Circuit Bankruptcy Appellate Panel (" BAP" ) opinion in In re Friedman, 466 B.R. 471 (B.A.P. 9th Cir. 2012), sustained the objection, holding that " the absolute priority rule still prevails" in individual chapter 11 bankruptcies after the enactment of BAPCPA.[1]

Debtors filed a timely notice of appeal of the bankruptcy court's order sustaining California Bank's objection to their plan. The bankruptcy court certified the appeal, and this Court authorized ...


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