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In re Juarez

United States Bankruptcy Appellate Panel of the Ninth Circuit

August 21, 2019

In re: UBALDO JUAREZ, Debtor.

          Argued and Submitted on July 18, 2019 at Phoenix, Arizona

          Appeal from the United States Bankruptcy Court for the District of Arizona Honorable Brenda Moody Whinery, Chief Bankruptcy Judge, Presiding.

          William R. Richardson of Richardson & Richardson, P.C. argued for appellants

          Edgar Todeschi and Georgina Ponce; Thomas H. Allen of Allen Barnes & Jones, PLC argued for appellee Ubaldo Juarez.

          Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.




         Appellants Edgar Todeschi and Georgina Ponce (the "Creditors") appeal from the bankruptcy court's order confirming debtor Ubaldo Juarez's amended chapter 11[1] plan. They argue (in summary) that Mr. Juarez acted in bad faith and that his plan violated the "absolute priority rule."

         The bankruptcy court held three hearings and comprehensively addressed the Creditors' objections to plan confirmation. We do not discern any error in the court's rulings. Accordingly, we AFFIRM. We publish because this appeal presents a question of first impression in this circuit: whether the "absolute priority rule" permits an individual debtor in a chapter 11 case to retain exempt property without making a commensurate "new value" contribution.


         A. Prepetition events

         1. Mr. Juarez's financial arrangement with his girlfriend

         Mr. Juarez is a licensed real estate broker. He worked with his longtime domestic partner, Leticia Arreola, [3] who is a real estate agent and his assistant. Mr. Juarez and Ms. Arreola initially worked at Realty Executives McConnaughay. All commissions that they earned were payable to Mr. Juarez and deposited into the couple's joint bank account. Ms. Arreola periodically withdrew the portion of the commissions that she had earned and deposited it into her personal bank account. In the twenty-two months prior to the petition date, Mr. Juarez or Ms. Arreola transferred over $72, 000 from the joint account to Ms. Arreola.

         Four months prior to the petition date, Mr. Juarez and Ms. Arreola left Realty Executives McConnaughay and began working with Realty Executives in Phoenix. Mr. Juarez managed a team that included Ms. Arreola and had discretion to determine the commissions for his team. During this time, Mr. Juarez and Ms. Arreola received separate paychecks.

         2. The loan from the Creditors

         In 2011, the Creditors loaned Mr. Juarez the principal sum of $200, 000. In or around 2014, the Creditors sued Mr. Juarez in Arizona state court for breach of contract, breach of good faith and fair dealing, unjust enrichment, negligent misrepresentation, fraud, and constructive trust. Mr. Juarez denied the allegations.

         B. Mr. Juarez's bankruptcy petition

         Mr. Juarez filed his chapter 11 petition in June 2017 to address the costly litigation brought by the Creditors and a large federal and state tax liability arising from years of incorrect joint tax returns.

         Mr. Juarez scheduled assets totaling approximately $365, 000. Among his scheduled assets was his residence located in Yuma, Arizona. He reported that the residence was worth $300, 000 and encumbered by a $156, 000 lien. He claimed a $150, 000 exemption in the residence.

         He disclosed a ninety percent interest in UBLA Properties, LLC ("UBLA").[4] He had formed UBLA the day before filing his chapter 11 petition for the purpose of acquiring and holding title to a vacant lot in Yuma. He disclosed UBLA's equitable interest in the vacant lot, valued at $35, 000. In January 2018, Mr. Juarez received a $10, 000 distribution from UBLA, which he disclosed in his monthly operating report.

         He scheduled liabilities totaling $673, 749.77, of which $414, 682.82 was general unsecured debt. The remainder was largely state and federal tax liabilities.[5]

         Mr. Juarez paid some of Ms. Arreola's personal expenses from the debtor-in-possession ("DIP") account postpetition. He also made various cash withdrawals postpetition that he did not explain in the monthly operating reports.[6]

         The Creditors filed a proof of claim in the amount of $261, 390.40.[7]Mr. Juarez did not object to the Creditors' claim.

         C. The initial chapter 11 plans

         Mr. Juarez filed a proposed plan and disclosure statement, followed by a revised plan and disclosure statement. Mr. Juarez proposed to make plan payments of approximately $3, 446 per month. He would fund the plan using post-confirmation commission income.

         He proposed paying the state and federal tax claims over fifty-four months.

         He proposed to pay Class 4 general unsecured creditors a total of $20, 467.44 over five years. He also proposed to pay Class 4 creditors a $10, 000 new value contribution, which would be provided by Ms. Arreola in the third year. If the funding source failed, Mr. Juarez pledged to sell his residence to make the $10, 000 new value contribution.

         The bankruptcy court approved the disclosure statement and scheduled a confirmation hearing.

         The Creditors objected to the plan. They argued that the plan was not proposed lawfully and in good faith under §§ 1129(a)(2) and (a)(3) because they would recover only five percent of their claim, Mr. Juarez's postpetition expenses were excessive, and he failed to explain certain cash withdrawals. They also argued that the plan failed to include Ms. Arreola's income and assets, even though Mr. Juarez held her out as his "wife" and they shared bank accounts and household expenses.

         They argued that the plan did not satisfy the "best interests of the creditors" test under § 1129(a)(7) because a hypothetical chapter 7 trustee would likely include Ms. Arreola's assets in the calculation of estate assets.

         They contended that, under § 1129(a)(15), Mr. Juarez was not committing all of his disposable income to the plan.

         Finally, the Creditors argued that the plan was not fair and equitable under § 1129(b) because it did not satisfy the absolute priority rule or the new value exception. Mr. Juarez proposed to retain property under the plan, even though Class 4 creditors voted to reject the plan. They argued that there was neither "new" value because Ms. Arreola's contribution should be considered property of the estate nor "money's worth" because the contribution was "sufficiently unreliable."

         The Class 4 creditors rejected the plan. Three Class 4 unsecured creditors voted in favor of the plan, but the Creditors, whose vote represented 96.87 percent of the Class 4 votes, voted against the plan.

         The bankruptcy court held a hearing and a trial on plan confirmation and denied confirmation of the plan.

         The bankruptcy court held that the plan was proposed in good faith under § 1129(a)(3). It ruled that Mr. Juarez's stated reasons for filing for bankruptcy protection - to address tax liabilities and costly state court litigation - were not improper on their face.

         It rejected the Creditors' assertion that Mr. Juarez's failure to schedule certain assets amounted to bad faith. It accepted Mr. Juarez's testimony that his omission of a car that he owned - but was driven and maintained by his daughter - was inadvertent. The court also found that Mr. Juarez failed to report prepetition commissions but that he nevertheless deposited those commissions into his DIP account. It stated that the Creditors had provided no evidence in support of their argument that Mr. Juarez had undervalued his interest in a boat.

         The court found that Mr. Juarez had filed all of his monthly operating reports and supplemented them with complete bank statements. It agreed with Mr. Juarez that his failure to disclose what he did with certain cash withdrawals was inadvertent and stated that the Creditors failed to produce any evidence that his use of DIP funds was in bad faith.

         The Creditors contended that Mr. Juarez had used UBLA to avoid bankruptcy court supervision. However, the bankruptcy court stated that Mr. Juarez's prepetition interest in the vacant lot was unclear, that he had properly disclosed his interest in UBLA, and that he had deposited money that he received from UBLA into his DIP account.

         The court found nothing improper with the $72, 000 that Mr. Juarez allegedly gave to Ms. Arreola prepetition. The court found that the transfer represented amounts that Ms. Arreola earned while working at Realty Executives McConnaughay. It further determined that Mr. Juarez should not have paid any of Ms. Arreola's expenses from his DIP account, but there was no evidence that the payments were made in bad faith. It overruled the Creditors' § 1129(a)(3) objection.

         The bankruptcy court held that the plan was feasible under § 1129(a)(11). It found that Mr. Juarez could generate sufficient income to make his proposed plan payments of $3, 446 per month and that his DIP account balance had been rising steadily.

         However, the court found two fatal flaws with the plan.

         First, the bankruptcy court held that the plan did not comply with § 1129(a)(15)'s requirement that Mr. Juarez commit five years' worth of his projected disposable income to his unsecured creditors. The court concluded that Ms. Arreola was not Mr. Juarez's dependent and that her expenses could not be used to reduce the amount that Mr. Juarez was required to commit to the plan.

         Second, the court held that Ms. Arreola's contribution of $10, 000 to the plan in the third year did not satisfy the new value exception to the absolute priority rule under § 1129(b)(2)(B)(ii). The court considered whether the contribution was (1) new, (2) substantial, (3) money or money's worth, (4) necessary for a successful reorganization, and (5) reasonably equivalent to the value or interest received.

         The court easily concluded that the $10, 000 contribution was "new," because it was funded from an outside source or Mr. Juarez's exempt assets.

         The court further found that the proposed contribution was reasonably equivalent to the value or interest received because "all of the Debtor's non-exempt assets are encumbered by a federal tax lien; thus, the Debtor would be retaining encumbered assets in exchange for a $10, 000 contribution."

         The court determined that the proposed contribution was necessary, given that Class 4 creditors rejected the plan and Mr. Juarez needed to satisfy the absolute priority rule or new value exception.

         However, the court concluded that the contribution was not "money or money's worth" because Ms. Arreola did not have the money as of the trial date and would only ...

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