In re Tegeder: Per BAPCPA Absolute Priority Rule No Longer Applicable to the Rentention of Property by Individual Chapter 11 Debtor

As previously mentioned, one Bankruptcy Judge in the Southern District of Florida held in the Gosman decision (pre-BAPCPA) that the retention of exempt property by an individual debtor in a chapter 11 plan violates the absolute priority rule unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002)(Hyman, J.). Also as previously noted, some courts disagree with the Gosman decision and hold that a chapter 11 debtor’s retention of his exempt property is not subject to the absolute priority rule. See e.g. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor’s junior interest in property).

Since the passage of BAPCPA and its amendments to 11 USC 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon. Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor’s retention of property. Judge Saladino’s decision in In re Tegeder, ___ B.R. ____, 2007 WL 1549067 (Bkrtcy.D.Neb.) is apparently the first decision to end this speculation – at least in his courtroom.

The court in Tegeder held that the new amendments to 1129(b)(2)(B)(ii) provide an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the “absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115″. BAPCPA added the following to 1129(b)(2)(B)(ii) “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 subsection (a)(14) of this section”. New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition.

The court states that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.

It should be noted the Tegeder decision is broader than the Bullard decision as it holds that the absolute priority rule is inapplicable to the rentention of all types of property by the chapter 11 debtor. The Bullard case was limited to the retention of exempt property by the chapter 11 debtor.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

What, Me Worry?

The uninitiated might have thought that Deutsche Bank was facing a huge financial loss in the current subprime mortgage meltdown as its name is quite ubiquitous as a plaintiff in so many of the mortgage foreclosures in South Florida. In fact, the Miami Review reports that Deutsche Bank has filed over 2,100 foreclosure actions in South Florida year to date (mid-2007) in an attempt to pursue $507 million in mortgage loans. Deutsche Bank’s foreclosures represent about 17% of pending foreclosures.

One need not cry for Deutsche Bank and the many other banks who are similar players. It is reported that Deutsche Bank is merely the trustee or custodian of the mortgage loans and most have been securitized and sold on the bond market to investors. It is the investors who face the losses.

Besides not facing exposure to loss on the mortgage foreclosures, Deutsche Bank is reportedly earning fees to represent the investors in foreclosure proceedings. This is addition the the fees they presumably charged to package and originate the mortgage backed securities on the front end.

As if making money coming and going were not enough, Deutsche Bank has apparently found another way to profit from the subprime mortgage meltdown. The Financial Times recently reported that Deutsche Bank’s fixed income desk entered into short positions in late 2006 in the ABX index which is a derivative based on high-risk mortgages and home equity loans. The ABX index represents a basket of credit default swaps on high-risk mortgages and home equity loans and provides a type of insurance against default of a specific security. By doing so, the bank bet that the US mortgage market would weaken. Upon the subprime mortgage market correction and near collapse in March, 2007, Deutche Bank profited handsomely. In contrast to some of its peers, the German bank reported record first-quarter earnings in this sector.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Non-Rented Partially Detached Unit Held Part of Exempt Homestead

In reviewing the recent decision of In re Ensenat, Case No. 06-15979 (Isicoff, J.)(Bankr. S.D. Fla. May 24, 2007), one is reminded how fact specific may be the determination of the extent of a Florida homestead exemption under Article X, Section 4(a)(1) of the Florida Constitution. The case involved a parcel of real property with two buildings. The first building was the debtors’ home and the second building was a partially detached unit that was occupied by the debtors’ niece, her son, and her boyfriend. The partially detached unit, which had its own kitchen and utility meters, was attached to the main house by a covered patio. The Court found that there was no payment of rent, but that the boyfriend paid their separate water and electric bill, mowed the lawn, and made various contributions, including the buying of groceries.

The Chapter 7 trustee argued that the second building was not part of the Debtors’ “residence” and that the Debtors’ niece (actually “half-niece”) was not a member of the Debtors’ “family.” Article X, Section 4(a)(1) limits the homestead exemption to that of the residence of the owner or his family.

The Court stated that a separate structure on what is otherwise homestead property is not disqualified merely because it is a separate structure. The Court cited a 1917 Florida Supreme Court decision that observed that the homestead exemption would “doubtless include outhouses, barns, wagon houses, wood or coal sheds, chicken houses, fences, etc. as were appurtenant and subsidiary to and used in connection with the residence as conveniences and auxiliaries.” Armour & Co. v. Hulvey, 74 So. 212 (Fla. 1917). Such improvements would be protected as “improvements” to the homestead. The Court also cited another decision that held that the homestead included a garage and overhead apartment used for storage and laundry. White v. Posick, 150 So. 2d 263, 265 (Fla. 2d DCA 1963).

The Court observed that “to the extent court have found abandonment or waiver of the homestead exemption in a separate structure it was because the homeowner at some time used that portion of the property to generate income.” But the Court further noted that if the business purpose ceases, the homestead status may be regained.

After noting that Florida law recognizes “families-at-law” and “families-in-fact”, the Court held that it was not clear whether or not the niece, son, and boyfriend qualified as the Debtors’ “family” under the Article X Section 4(a)(1) of Florida Constitution. But the Court concluded that whether are not these persons qualified as the Debtors’ “family”, the debtors were entitled to claim the entire parcel as exempt homestead as the second structure was not used for a business purpose.

One might query how the holding may have been different had the court found the boyfriend’s payment of the electric bill, mowing of the lawn, and various contributions, including the buying of groceries to be a form of constructive rent. Apparently this would have rendered the second structure to be considered as used for a business business and therefore non-exempt.

One may also note that the Trustee had initially argued that the two structures constituted a duplex, but at trial acknowledged that they were actually two separate structures joined by a roofed patio. Perhaps, the Court’s decision would have been the same even if the two structures constituted a duplex as long as the second unit was not rented out. The majority of the bankruptcy courts in Florida would not allow an exemption for a side of a duplex that is rented out. In re Bornstein, 335 B.R. 462 (Bkrtcy. M.D. Fla. 2005, In re Dudeney, 159 B.R. 1003 (Bankr.S.D.Fla. 1993).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983