At the time of filing his individual Chapter 11 petition, a debtor was liable for a non-dischargeable debt in the amount of $2,000,000.  His proposed plan provided for modest payments on the non-dischargeable debt, but after the five‑year plan term ended, it would have increased to approximately $3,000,000 from interest accruals, with no assurance that the debtor could ever pay it.

The bankruptcy court confirmed the plan, the Ninth Circuit Bankruptcy Appellate Panel reversed the order confirming the plan, and the Ninth Circuit Court of Appeals affirmed the BAP’s order reversing the bankruptcy court’s confirmation order in a split, non-precedential opinion.  Hamilton, et al., v. Elite of Los Angeles, Inc., et al., 2020 U.S. App. LEXIS 8246 (9th Cir. 2020).

There were three confirmation requirements that the Ninth Circuit Court of Appeals held the plan failed to meet:

First, 11 U.S.C. § 1129(a)(11) requires that a proposed plan be feasible, that is, that “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor[.]”  The Ninth Circuit held that the ability to make plan payments alone was not enough, given the difficulty the debtor would likely have in paying the non-dischargeable $3,000,000 debt that would remain after the plan was completed.

Second, 11 U.S.C. § 1129(a)(3) requires that a plan be “proposed in good faith and not by any means forbidden by law.”  To meet this test, a plan must achieve a result consistent with the purposes of the Bankruptcy Code, that is, rehabilitating the debtor and maximizing the value of the estate.  The Ninth Circuit held that because the plan was not feasible, since it was unlikely that the debtor could pay the non-dischargeable debt at the end of the five-year plan period and other unresolved issues, the plan was not proposed in good faith.

Third, 11 U.S.C. § 1129(b)(1) provides that if an impaired creditor objects to the plan, the court can nevertheless confirm the plan if it is “fair and equitable[.]”  A plan can be found “fair and equitable” if it satisfies the absolute priority rule codified at 11 U.S.C. § 1129(b)(2)(B)(ii).  The plan failed to satisfy the absolute priority rule, as the Debtor would retain certain non‑exempt property without paying a creditor holding a higher priority – the holder of the non‑dischargeable debt – in full.  Alternatively, a plan could satisfy the “new value” corollary.  But the Ninth Circuit found that the proposed contribution by the Debtor’s employer would not be “new” value.

While Hamilton is a non-precedential decision, it brings up important issues to carefully consider in crafting a chapter 11 plan where there is non-dischargeable debt.