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Bankruptcy – Debt

Based upon findings of fact and conclusions of law, the Roanoke U.S. Bankruptcy Court denied the debtor’s Third Amended Plan of Reorganization (“Amended Plan”) and Motion to Confirm Plan Notwithstanding Balloting “Cramdown” (“Motion to Confirm”) where one class of impaired creditors did not accept the plan and the discrimination to general unsecured creditors was not unfair but debtor proposed to retain ownership not only of his professional corporation to carry on his dental practice but also his residence, subject to a mortgage debt.

Although the amended plan provides that if (or when) the rental property is sold, its net proceeds will be paid to the unsecured creditors, there is no deadline specific obligation to do so, and even if that happens, any likely benefit to creditors does not appear to be material. Neither is there any obligation, if such property is sold, to use the Debtor’s additional net cash flow resulting from elimination of the mortgage payment and other ownership expenses either to increase the promised distribution to his unsecured creditors or acceler1ate the date by which it will be accomplished.

The burden of proof to establish that a Chapter 11 plan satisfies the statutory requirements for confirmation falls on the plan’s proponent.

Debtor initiated this personal bankruptcy proceeding by filing a Chapter 11 voluntary. The amended plan provides for payment to three classes of secured claims and two classes of unsecured claims, as well as the payment of administrative and priority claims.

This Court has jurisdiction over this proceeding. The consideration of the amended disclosure statement and plan is a core bankruptcy proceeding. One of the requirements for a chapter 11 plan confirmation is that each impaired class of creditors accepts the treatment provided for them in such plan. It is clear that class 3 has not accepted the amended plan. The Court is directed to confirm a plan which has not been accepted by every impaired class if at least one impaired class has accepted the plan and the Court determines that such plan does not discriminate unfairly against and is fair and equitable with respect to each impaired class which has not accepted the plan.

Absence of all discrimination is not required; any discrimination which is proposed is not unfair. The Court concludes that the discrimination as to the general unsecured claims vis-à-vis the unsecured guaranty presented here, while initially troublesome, is not unfair. The fair and equitable prong of the test has been referred to as the absolute priority rule because it generally prohibits any junior class of interests from receiving or retaining any interest if any senior impaired class does not accept the plan.
This requirement was modified, however, by the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) with respect to chapter 11 cases in which the debtor is an individual. The result reached by this Court maintains the absolute priority rule in individual chapter 11 cases with respect to property already owned by the debtor at the time of filing, i.e., property included in the bankruptcy estate under the authority of 11 U.S.C. § 541, but not as to the property brought into the estate by §1115, i.e., post-petition earnings and other property acquired post-petition.

It is neither the Court’s intent nor its desire to frustrate the debtor’s attempts to reorganize his finances and resolve appropriately his obligations to his general unsecured creditors as well as his secured creditors. The proposal he has made in attempting to deal with a mountain of debt is not unreasonable. It should not be a difficult thing for debtor to negotiate with some or all of the dissenting class 3 creditors, just as he did with class 3A creditors, to provide some additional consideration to that class which will make enough of those creditors supporters of a sweetened amended plan and thereby obtain the consent of such class to the treatment provided for them by such plan.

The Court will deny confirmation of the amended plan.

In re Mullins (Stone, J.), June 22, 2010; Case No. 09-70595, USBC at Roanoke, Va. VLW 010-4-004, 15 pp.

VLW 010-4-004

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