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Zachary v. California Bank & Trust: 9th Circuit Overrules In re Friedman, 466 B.R. (9th Cir. BAP 2012) - Absolute Priority Rule Applies in Individual Chapter 11s

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 post-petition property.

*This summary constitutes no part of the opinion of the court.  It was prepared by court staff for the convenience of the reader.