Debtor Does Not Have to Pay For Exempt Property to Comply With Absolute Priority Rule

In Todeschi v. Juarez (In re Juarez), BAP No. AZ-19-1028-FLB, published on August 21, 2019, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") decided a split in the lower courts concerning whether a debtor must pay for its exempt property in order to comply with the absolute priority rule (Bankruptcy Code Section 1129(b)(2)(B)). The BAP said no. The BAP reasoned that exempt property is not property of the bankruptcy estate and as such, exempt property is not included in the phrase "any property" in the requirement of Section 1129(b)(2)(B)(ii) that a debtor (or a junior class of claims) "will not receive or retain any property." Put simply, a debtor may retain exempt property without having to make a new value contribution. Good news for Chapter 11 debtors, but not a surprising decision.

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