United States Bankruptcy Appellate Panel of the Ninth Circuit
In re: UBALDO JUAREZ, Debtor.
UBALDO JUAREZ, Appellee. EDGAR TODESCHI; GEORGINA PONCE, Appellants,
and Submitted on July 18, 2019 at Phoenix, Arizona
from the United States Bankruptcy Court for the District of
Arizona Honorable Brenda Moody Whinery, Chief Bankruptcy
William R. Richardson of Richardson & Richardson, P.C.
argued for appellants
Todeschi and Georgina Ponce; Thomas H. Allen of Allen Barnes
& Jones, PLC argued for appellee Ubaldo Juarez.
Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.
Edgar Todeschi and Georgina Ponce (the "Creditors")
appeal from the bankruptcy court's order confirming
debtor Ubaldo Juarez's amended chapter 11 plan. They argue
(in summary) that Mr. Juarez acted in bad faith and that his
plan violated the "absolute priority rule."
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"
Mr. Juarez's financial arrangement with his
Juarez is a licensed real estate broker. He worked with his
longtime domestic partner, Leticia Arreola,  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.
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.
The loan from the Creditors
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.
Mr. Juarez's bankruptcy petition
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.
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.
disclosed a ninety percent interest in UBLA Properties, LLC
("UBLA"). 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
scheduled liabilities totaling $673, 749.77, of which $414,
682.82 was general unsecured debt. The remainder was largely
state and federal tax liabilities.
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
Creditors filed a proof of claim in the amount of $261,
390.40.Mr. Juarez did not object to the
The initial chapter 11 plans
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
proposed paying the state and federal tax claims over
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.
bankruptcy court approved the disclosure statement and
scheduled a confirmation hearing.
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.
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.
contended that, under § 1129(a)(15), Mr. Juarez was not
committing all of his disposable income to the plan.
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
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.
bankruptcy court held a hearing and a trial on plan
confirmation and denied confirmation of the plan.
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.
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.
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.
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.
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.
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
the court found two fatal flaws with the plan.
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.
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
court easily concluded that the $10, 000 contribution was
"new," because it was funded from an outside source
or Mr. Juarez's exempt assets.
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
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.
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 ...