Fourth Circuit Preserves Absolute Priority Rule Despite Challenge Th...

By: Andrew Serrao

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In the first appellate decision on the issue, the Fourth Circuit in In re Maharaj[1] held that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) did not abrogate the absolute priority rule’s applicability to individual Chapter 11 debtors.[2] Ganess and Vena Maharaj (the “Debtors”) accumulated a significant amount of debt while owning and operating an auto body repair shop.[3] The Debtors filed a voluntary petition under Chapter 11 in bankruptcy court, and subsequently filed a plan of reorganization (the “Plan”),[4] pursuant to section 1121(a).[5] The Plan provided that the Debtors would continue to own and operate their auto body business, using income from the business to pay general unsecured claims.[6] The Plan also separated creditors into four classes[7]. Class 3 (general unsecured claims) voted to reject the Plan,[8] and the Debtors sought a cram down.[9] If BAPCPA had abrogated the absolute priority rule, the Debtors could have retained their auto body business and crammed down the Plan.[10] However, the Fourth Circuit held that the absolute priority rule had not been abrogated by BAPCPA.[11]

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