United States: Double Whammy: Sixth Circuit Upholds Absolute Priority Rule In Individual Chapter 11

Last Updated: May 29 2014
Article by Brian H. Meldrum

What's the difference between an individual Chapter 11 and a Chapter 13?

In light of the Sixth Circuit's recent Ice House America, LLC v. Cardin (.pdf of the option is here), there are now two major differences:

Difference #1:             Chapter 11 has an absolute priority rule (and Chapter 13 doesn't)

Difference #2:             Individuals will still file Chapter 13 (and they won't be filing Chapter 11 if they can help it)

At issue in Ice House is whether the absolute priority rule applies in individual Chapter 11s.  The debtor, Cardin, owed the dissenting creditor, Ice House, in excess of $1.3 million pursuant to an outstanding judgment.  Cardin could not file a Chapter 13 because his debts exceeded the eligibility limits in Section 109, so he filed a Chapter 11.  He was unable to obtain the affirmative votes of Ice House's class, so endeavored to invoke the cramdown (i.e., the "confirm over the objection of a dissenting class") provisions of Section 1129(b).  One of those requirements is that the plan be "fair and equitable" as to each impaired dissenting class, and in order to be "fair and equitable" to a dissenting unsecured class – at least in corporate Chapter 11s – the plan must satisfy the absolute priority rule.  That rule states that no junior class can retain any property unless the dissenting senior class is paid in full.  That "junior class" here was Cardin himself, who proposed to retain property even though Ice House was not being paid in full.

Cardin's position – which was accepted by the bankruptcy court – is that the 2005 BAPCPA amendments to the Code abrogated the absolute priority rule as it applied to individuals.  The argument is essentially that Congress attempted to make individual Chapter 11s resemble "super-duper" Chapter 13s, which have no absolutely priority rule, but which instead require that the debtor dedicate all of his or her projected disposable income to creditors for a specified period of time.  Did BAPCPA supplant the absolute priority rule with a projected disposable income test in individual Chapter 11s?

There are a couple of specific amendments to examine.  The first is the expansion of the definition of "property of the estate" in Section 1115.  BAPCPA added a new subsection to Section 1115 which, for the first time, expanded the definition of "property of the estate" to include post-petition property and earnings.  The new section's language tracks very closely the language of Section 1306 which makes post-petition property/earnings estate property in a Chapter 13 case.

Congress also changed the language of the absolute priority rule text itself, and only as it applies to individual Chapter 11s.  After the junior-class-may-not-retain-property prohibition, it adds this exception:  "except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of (a)(14)."  See 11 U.S.C. § 1129(b)(2)(B)(ii).

Additionally, Congress added to individual Chapter 11s a requirement that, if any unsecured creditor objects, the plan proponent must contribute all of his or her projected disposable income to pay creditors, very much like the parallel requirement in Section 1325 that applies to Chapter 13s.  See 11 U.S.C. § 1129(a)(15).

Those three changes –  (i) post-petition property of the estate; (ii) which the debtor may retain; (iii) provided the debtor pays all of its projected disposable income to creditors – make the post-BAPCPA statutory regime sound an awful lot like a Chapter 13, where there is no absolute priority rule.  However, in Ice House, the Sixth Circuit reversed the bankruptcy court's determination that the absolute priority rule did not apply.  What made the Sixth Circuit (and every other Court of Appeals) rule that it does apply?

I think the reason is that the amendments are just really poorly drafted.  This issue is the wording of this particular phrase – "the debtor may retain property included in the estate under section 1115" – in See 11 U.S.C. § 1129(b)(2)(B)(ii).  The court adopted the "narrow" view of this language, and construed it to mean that the debtor may retain only that property which section 1115 adds to the property of the estate pile, and not property (namely – pre-petition property) that was already there under Section 541(a).  It is clearly the correct decision based on the text with which the courts are reckoning, but as the Sixth Circuit acknowledges, it hits individual debtors with a "double-whammy" because they have to satisfy both the projected disposable income test (which corporate Chapter 11s do not) and an absolute priority rule (which Chapter 13 debtors do not).

Every bankruptcy law professor has probably explained the conceptual difference between a Chapter 7 and a Chapter 13 to his or her students in this way:  in a Chapter 7, the debtor trades the past (i.e., pre-petition non-exempt assets) to protect the future (i.e., gets a discharge and has no forward-looking obligations).  In a Chapter 13, the inverse is true — the debtor trades the future (i.e., payments into the plan for a specified period of time) to protect the past (i.e., gets to keep certain pre-petition non-exempt assets).

If Congress wants invididual Chapter 11s to resemble Chapter 13s, the absolute priority rule just doesn't fit.  Why would someone file an individual Chapter 11 if it is — by definition – impossible to deliver on the "keep current property in exchange for future income" deal that Chapter 13 offers?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Brian H. Meldrum
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions