LETITIA Z. PAUL, Bankruptcy Judge.
The court has held a hearing on confirmation of the Debtor's Chapter 11 plan (Docket No. 108). The following are the Findings of Fact and Conclusions of Law of the court. A separate Judgment will be entered denying confirmation of the plan. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.
Joseph A. Stephens, Jr. ("Debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code on February 16, 2010.
Debtor operates two businesses; an insurance agency, and a mortgage brokerage business. On Debtor's schedule A, Debtor identified seven parcels of real property, in addition to the property listed as his homestead.
With respect to the property located at 1509 Wentworth Street, Houston, Texas, Debtor scheduled the property with a value of $288,024. Debtor scheduled a debt owed to America's Servicing Co., in the amount of $303,210.65, secured by the property. Debtor scheduled a second mortgage owed to GMAC Mortgage, in the amount of $55,115.63, secured by the property. (Docket No. 1).
With respect to the property located at 4001 Nasa Rd. 1, #110, Seabrook, Texas, Debtor scheduled the property with a value of $108,083. Debtor scheduled a debt owed to various taxing authorities, in the amount of $1,189.85, secured by the property. (Docket No. 1).
In the plan, Debtor proposes to pay taxing authorities' claims in full, over a period of 50 months. (Docket No. 108).
With respect to the property located at 4408 La Branch Street, Houston, Texas, Debtor scheduled the property with a value of $1,239,510. Debtor scheduled a debt owed to FDIC, as receiver for Sanderson State Bank, in the amount of $803,983.29, secured by the property. (Docket No. 1).
In the plan, Debtor proposes to surrender the property, in full satisfaction of the debt. (Docket No. 108).
With respect to the property located at 2522 Binz Street, Houston, Texas, Debtor scheduled the property with a value of $220,000. Debtor scheduled a debt owed to EMC Mortgage Corporation, in the amount of $229,772.63, secured by the property. (Docket No. 1).
With respect to the property located at 2524 Binz Street, Houston, Texas, Debtor scheduled the property with a value of $176,508. Debtor scheduled a debt owed to EMC Mortgage Corporation, in the amount of $236,646.01, secured by the property. (Docket No. 1).
In the plan, Debtor proposes to reduce the value of the properties to $160,000 for each of the two properties located on Binz Street, and to reduce the debt to $160,000 for each of the two properties, to be paid with 5.5 percent interest over 30 years. (Docket No. 108). Debtor and EMC Mortgage have reached agreement on the treatment of EMC Mortgage's secured claims, and that agreement is reflected in two agreed orders. (Docket Nos. 84, 85). Debtor
With respect to the property located at 3507 Tampa Street, Houston, Texas, Debtor scheduled the property with a value of $137,142. Debtor scheduled a debt owed to GMAC Mortgage, in the amount of $212,000, secured by the property. (Docket No. 1).
In the plan, Debtor initially proposed to pay $69,500 to GMAC Mortgage, plus 5.5 percent interest, for 30 years. (Docket No. 108). Debtor subsequently reached agreement with the creditor under which Debtor proposes to surrender the property to the first lienholder. Debtor proposes to treat the second lienholder as unsecured.
With respect to the property located at 4002 Chartres Street, Houston, Texas, Debtor scheduled the property with a value of $270,131. Debtor scheduled a debt owed to Saxon Mortgage, in the amount of $253,101.90, secured by the property. (Docket No. 1).
In the plan, Debtor initially proposed to pay $128,000 to Saxon Mortgage, at 5.5 percent interest, for 30 years. Debtor subsequently reached agreement with Saxon Mortgage under which Debtor proposes to surrender the property to Saxon Mortgage.
In the plan, Debtor proposes to pay $120,000 over 60 months, to be distributed pro-rata on unsecured claims. (Docket No. 108).
In addition to the payments addressed under the plan, Debtor reached an agreement with Amegy Bank, which is set forth in an "Agreed Motion for Authority and Application to Compromise Controversy" (Docket No. 134). Under the proposed compromise, Debtor proposes to pay $120 per month for 60 months to Amegy Bank as part of the distribution to unsecured creditors under the plan. Debtor proposes to pay $800 per month to Amegy Bank for 60 months, following the completion of distribution to creditors under the plan.
The plan provides for the vesting of property of the estate in Debtor on the date the confirmation order becomes final.
At the confirmation hearing, Debtor presented no evidence as to the value of the two properties he proposes to retain without an agreement as to value: the property located at 1509 Wentworth, and the property located at 4001 Nasa Rd. 1. The court finds, for the purpose of considering confirmation of the instant plan, that the values of the two properties are the uncontroverted scheduled values of $288,024 and $108,083, respectively.
Debtor filed a summary of ballots. The ballot summary indicates that two creditors in Class 2 (secured claims), with amounts totaling $291,133.81, voted for the plan. In Class 4, two creditors, with amounts totaling $100,249.03, voted for the plan; one creditor, in the amount of $568,249.15, voted against the plan. (Docket No. 133).
For the purposes of the instant analysis, the court presumes, without deciding, that the plan meets the standards for confirmation under Section 1129(a) of the Bankruptcy Code other than Section 1129(a)(8). That section provides:
11 U.S.C. § 1129(a)(8).
Under Section 1126(c) of the Bankruptcy Code:
11 U.S.C. § 1126(c).
In the instant case, the plan designates classes 2, 3, and 4 as impaired. Class 2 (secured claims), with two votes accepting the plan and no votes rejecting the plan, accepts the plan. Class 4 (unsecured claims), with two votes accepting the plan and one vote rejecting the plan, and the vote rejecting the plan representing approximately 85 percent in amount of the creditors that have accepted or rejected the plan in Class 4, rejects the plan. The court concludes that the plan does not satisfy Section 1129(a)(8).
Section 1129(b) provides in pertinent part:
11 U.S.C. § 1129(b).
Section 1115(a) of the Bankruptcy Code provides:
11 U.S.C. § 1115(a).
Courts are split as to the interpretation of whether Section 1115(a) abrogates the absolute priority rule with respect to individual Chapter 11 debtors. Debtor in this case takes the position that the absolute priority rule is abrogated.
The courts which have held that the absolute priority rule is abrogated have determined that the phrase "included in the estate under section 1115" in Section 1129(b)(2)(B)(ii) includes both "the property specified in section 541" and the two types of property described in Sections 1115(a)(1) and 1115(a)(2). See In re Tegeder, 369 B.R. 477 (Bankr.D.Neb.2007); In re Roedemeier, 374 B.R. 264 (Bankr. D.Kan.2007); In re Shat, 424 B.R. 854 (Bankr.D.Nev.2010).
The courts which have held that the absolute priority rule is not abrogated have determined that the phrase "included in the estate under section 1115" includes the specific property identified in Sections 1115(a)(1) and 1115(a)(2). See In re Gbadebo, 431 B.R. 222 (Bankr.N.D.Cal.2010); In re Mullins, 435 B.R. 352 (Bankr. W.D.Va.2010); In re Gelin, 437 B.R. 435 (Bankr.M.D.Fla.2010); In re Karlovich, ___ B.R. ___, 2010 WL 5418872 (Bankr. S.D.Cal.2010).
This court agrees with the line which holds the absolute priority rule not abrogated. The language "in addition to the property specified in section 541" in the preamble to Section 1115(a) would render surplusage the words "all property of
In the instant case, Debtor proposes to retain non-exempt real property of an aggregate value of $396,107. The court concludes that the plan in the instant case, which provides for the individual Chapter 11 debtor to retain non-exempt property while paying less than 100 percent to a non-accepting class of unsecured creditors, violates Section 1129(b)(2)(B)(ii) of the Bankruptcy Code.
Based on the foregoing, a separate Judgment will be entered denying confirmation of the plan.