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Abstract

Section 1129(b)(2) of the Bankruptcy Code codifies a principle known as the “absolute priority rule.” The absolute priority rule requires that creditors receive payment in full before holders of equity can receive or retain any property under a plan of reorganization. The absolute priority rule ensures that a plan of reorganization will not be used to allow equity to benefit at the cost of higher-priority unsecured debt. If left unchecked, a small number of insiders, whether representatives of management or major creditors, may use the reorganization process to gain an unfair advantage. Chapter 11 cases with individual debtors magnifies this problem. As originally conceived, chapter 11 was never intended for use by individual debtors. Courts have struggled to find the proper balance in applying many of chapter 11’s corporate oriented provisions–including the absolute priority rule–to actual individual debtors.

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). BAPCPA amended chapter 11 by expanding the bankruptcy estate in individual chapter 11 cases to include post-commencement property and earnings. Due to the poor drafting of certain BAPCPA amendments, the exception language in § 1129(b)(2)(B)(ii) is susceptible to two different interpretations. The first, popularly termed the “broad view,” abrogates the absolute priority rule in individual chapter 11 cases. The second, termed the “narrow view,” makes the absolute priority rule apply only to an individual debtor’s pre-petition property.

This article argues that the principles of statutory construction favor the narrow view. First, a plain reading of the statute supports this interpretation. Second, the overall context of the Bankruptcy Code supports the narrow view. The legislative history involved is sparse at best and is generally not helpful in determining Congress’s intent on the issue. As a result, the preexisting bankruptcy practice–the narrow view–should prevail.

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