August 24, 2019

Tenth Circuit: In Case of First Impression, 2005 Amendments to Bankruptcy Code Do Not Exempt Individual Chapter 11 Debtors from the Absolute Priority Rule

The Tenth Circuit issued its opinion in Dill Oil Company, Inc. v. Stephens on Tuesday, January 15, 2013.

Arvin E. Stephens and Karen J. Stephens, f/d/b/a/ Ninnekah Quick Mart, LLC (“Debtors”) owned a chain of convenience stores for which Dill Oil Company, LLC, and Danny and Nancy Dill (“the Dills”) were the primary supplier of gasoline and gas station products. Due to the rising price of gas and a diminishing customer base, Debtors’ stores began operating at a loss. Debtors became liable to the Dills for approximately $1.8 million.

In 2010, Debtors filed for relief under Chapter 11 of the Bankruptcy Code. Pursuant to the plan, the Dills would be paid approximately $15,000 as a secured creditor, but their remaining claim would be considered unsecured. The Debtors would retain possession and control of their property; the Dills would receive a monthly payment for five years, totaling about 1% of their unsecured claim. The Dills objected to confirmation on the ground that the proposed plan violated the absolute priority rule (“APR”), which bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full.  The bankruptcy court entered an order confirming the plan and the Dills appealed.

This appeal presents an issue of first impression for the Tenth Circuit: whether the 2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors from the absolute priority rule.

After examining the divergent interpretations among the Circuits of the statutory language and endeavoring to ascertain Congress’s intent, the Tenth Circuit refused to read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. Here, the statutory language and legislative history lacked any clear indication that Congress intended to erode the absolute priority rule, a pillar of creditor bankruptcy protection.

Accordingly, the Court REVERSED the bankruptcy court’s order confirming the plan and REMANDED for further proceedings.

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