In In re Juarez, 2019 Bankr. LEXIS 2639, 603 B.R. 610 (9th Cir. BAP 2019), the Ninth Circuit Bankruptcy Appellate Panel held that the “absolute priority” rule permits individual Chapter 11 debtor to retain exempt property without making a “new value” contribution as to exempt property.

If a class of unsecured claims does not accept a Chapter 11 plan, the court can confirm the plan only if 1) the plan provides for full payment of the dissenting class, or 2) the holder of any claim or interest that is junior to that will not receive or retain any property under the plan on account of its junior claim or interest.  11 U.S.C. §§ 1129(b)(1) and (2).  This is generally known as the “absolute priority” rule.

The BAP identified two exceptions to the absolute priority rule:

1.         An individual Chapter 11 debtor may retain postpetition property and income from postpetition services.  11 U.S.C. § 1129(b)(2)(B)(ii), incorporating 11 U.S.C. § 1115.

2.         Courts also recognize a “new value” exception such that shareholder (or an individual Chapter 11 debtor) could receive a distribution of property under a plan if they offer value to the reorganized debtor that is new, substantial, money or money’s worth, necessary for a successful reorganization, and reasonably equivalent to the value or interest received.

The appellant creditors argued that the new value contribution must be at least equal to the value of the exempt assets as well as the non-exempt assets.  The BAP disagreed for two reasons:

  • First, the BAP held that exempt property was not property that the debtor was retaining under the plan on account of the debtor’s interest.  “[A] debtor does not retain exempt property either ‘under the plan’ or ‘on account of the debtor's interest[.]’”  Juarez, [*21].  Instead, “the debtor retains exempt property due to the exemption statutes.  The debtor would be entitled to the exempt property even if no plan were confirmed; therefore, it cannot be said that the debtor retains the exempt property ‘under the plan’ or ‘on account of the debtor's interest.’”  Juarez, [*21].
  • Second, 11 U.S.C. §§ 522(c) and (k) generally provide that exempt property is not liable for the payment of prepetition claim or administrative expenses, and requiring a debtor to pay for exempt assets by a new value contribution would “effectively make those assets available to creditors.”  Juarez, [*21].

By finding that that the “absolute priority” rule and the “new value” exception do not require a debtor to provide new value for retained exempt property, Juarez offers needed guidance for debtors and creditors.