Two years ago this week–February 12, 2015 to be exact–Stone & Baxter launched Plan Proponent. 65 blog posts, 48 email subscribers, and almost 13,000 hits later, here we are. In honor of our 2 year anniversary, we figured we’d revisit one of the topics that started it all for our niche blog: the absolute priority rule in individual Chapter 11 bankruptcy cases. David Cassidy’s Chapter 11 case gave our first ever absolute priority rule post a perfect lead-in, as Cassidy, the star of the 1970s “The Partridge Family,” filed his bankruptcy case in the Southern District of Florida right as Plan Proponent was kicking off.
Our theory back then: Cassidy’s case might provide the “test case” for the Eleventh Circuit to create a split of authority on this important dispute and, thus, necessitate U.S. Supreme Court involvement. The outcome: David Cassidy didn’t get around to filing his Chapter 11 Plan until January 27, 2017. Thus, he has so far only provided us very timely “click bait,” initially in 2015 (that post is our second most popular post ever) and again in 2017 as we hit the 2 year mark.
Therefore, our anniversary post will revisit Mr. Cassidy’s Chapter 11 case and revisit the absolute priority rule.
As a long overdue bonus, we’ve updated our APR Case Chart to include all relevant APR decisions since May of 2014! For those strange folks with zero interest in celebrity bankruptcies, you can skip to the conclusion for bad, but not surprising, news about the absolute priority rule.
It’s Been a Tough, but Productive, Two Years for David Cassidy
The Lead-Up to the Cassidy Chapter 11 Plan
We’re not sure if we should be proud or troubled that Plan Proponent, Daily Mail, and Radar Online are leading the way, internationally, in the coverage of David Cassidy’s Chapter 11 bankruptcy case. In any event, much has happened–most of it kinda sad if you’re a child of the ’70s–over the last 2 years.
Cassidy’s Disclosure Statement indicates that he’s 65 years old; his TV and music royalties have dried-up as a result of SONY not using his likeness as often as it used to; and, as much as Cassidy “still loves performing for his fans,” health issues make it hard for him to travel and perform. Although a long and difficult royalties suit against SONY resulted in a $158K arbitration award for Cassidy, $173K in litigation costs (before the contingent fee) absorbed all of the award. Those circumstances, combined with some troubled Bahamas real estate investments and a nasty divorce, resulted in Cassidy’s early 2015 filing.
When David Cassidy filed, he disclosed assets of $3.7 million and liabilities of $2.1 million.
The $3.7 million in assets consisted of his home in Ft. Lauderdale ($3M), some Wells Fargo IRAs ($523K), a 2009 Corvette and a 2004 Lexus ($42K), a portion of an arbitration award against Sony ($95K) which ended-up being worthless, cash in bank accounts (around $4K), and some miscellaneous household furnishings ($20K+). He also scheduled 2 real estate lots in the Bahamas (originally purchased for $388K each) as having an “Unknown” value.
The $2.1 million in liabilities consisted of Wells Fargo, with a first mortgage of $804K and an equity line of $855K, for a total of $1.66 million. Cassidy also scheduled Ally Financial as having an $11K claim secured by his Corvette. The only unsecured creditors that Cassidy didn’t schedule as “disputed” were American Express ($22K), some medical providers ($1K), some unpaid attorneys’ fees ($18K), and a Wells Fargo personal line of credit ($293K), for total undisputed and unsecured claims of around $334K to go with secured claims of around $1.67M.
Ultimately, Cassidy and his ex-wife, Susan Shifrin, sold their marital home in late 2015 in a court-approved auction for a little bit more than the debt, but for far less than the $3 million that they had hoped for. It appears that the sale also included a large part of their household furnishings.
Cassidy also sold his 2009 Corvette in early 2016 in a bankruptcy court-approved private sale. He received $27,500. Finally, it appears that, as a part of Cassidy’s early 2016 divorce mediation, his ex-wife agreed to take the 2 lots in the Bahamas and assume any related liabilities. They also split Cassidy’s pension interests, IRAs, the modest net proceeds from the home sale, and some of their remaining household items.
Cassidy’s January 2017 Chapter 11 Plan
By auctioning his home, selling his Corvette, abandoning the lots in the Bahamas, and settling his nasty divorce, David Cassidy positioned himself for a simple, straightforward Chapter 11 Plan. In fact, unless there’s something we’re missing, he’s keeping and offering so little that a Chapter 7 conversion seems more appropriate at this point.
Specifically, Cassidy got rid of Wells Fargo on the house and is positioned to get rid of Ally Financial on the Corvette (out of the car’s proceeds). His ex-wife also agreed to be responsible for the Wells Fargo line of credit. Therefore, Cassidy is left with unsecured claims–which he doesn’t intend to dispute–of $216K. Those claims are owed, collectively, to American Express ($22K), various attorneys for unpaid litigation fees ($144K), and a plaintiff who sued Cassidy for a botched eBay sale of Cassidy’s boat and Mercedes (a total claim of $50K).
Cassidy proposes to pay those claims by paying $500 per month (or is it $800?) in disposable income from his “wages” for 60 months, with pro rata distributions to the 4 unsecured creditors. Frankly, his plan documents are kind of a mess of typos, inconsistencies, etc. On the face of the pleadings, though, it appears that Cassidy will make those payments out of his Social Security ($2,142/mo.) and martial portion of his SAG pension ($2,0000/mo). Cassidy claims in his Disclosure Statement that he is retaining “nonexempt assets” with a net liquidation value of $8,757.46.
The hearing on the Disclosure Statement is scheduled for March 22, 2017.
Cassidy is Likely Not the Absolute Priority Rule Test Case After All
In short, Cassidy is proposing to pay his remaining creditors $0.13 on the dollar. On the one hand, he’s violating the absolute priority rule because he is proposing to retain non-exempt, albeit de minimis, personal property without paying unsecured creditors in full. Therefore, short of creditor consent, he can’t confirm a plan.
On the other hand, it doesn’t appear that his newsworthy bankruptcy case will provide the 11th Circuit APR test case that we had hoped for or, at least, joked about, especially given that he owes his bankruptcy attorney at least $70K in attorney’s fees. Creditors might consent, but we can’t imagine Cassidy taking up, or even needing to take up, the absolute priority rule issue.
It’s Also Been a Tough, but Productive,Two Years for the Absolute Priority Rule Issue
Even if David Cassidy had plenty of assets to keep and lots of money to fight the absolute priority rule issue, the law has shifted even more against him since he filed his bankruptcy case in February of 2015.
As we explained originally, all of the Circuit Courts (4th, 5th, 6th, and 10th) that had addressed the APR issue as of Cassidy’s filing adopted the “narrow view” and, thus, concluded that the APR continued to apply in individual Chapter 11 cases. Additionally, we noted that most bankruptcy courts that had addressed the issue as of his filing, especially those addressing it recently, had reached the same conclusion. At most, individual debtors could defend the In re Friedman decision from the 9th Circuit B.A.P. wherein the panel had adopted the “broad view” (i.e., the view that the 2005 BAPCPA changes to the Bankruptcy Code rendered the APR inapplicable in individual Chapter 11 cases). See our other APR posts for background.
Debtors, at least at that time, could also cling to 2 bankruptcy opinions in the 8th Circuit: In re O’Neal (Arkansas) and In re Woodward (Nebraska).
Two years later, though, the 8th Circuit B.A.P. and the 9th Circuit have pulled the rug out from underneath debtors on this issue. Specifically, the 8th Circuit B.A.P. reversed the In re Woodward decision in August of 2015 and, by implication, called In re O’Neal into question. Worse, the 9th Circuit overruled In re Friedman in January of 2016 when it adopted the narrow view in Zachary v. California Bank & Trust. Finally, 10 out of the 10 courts that have addressed the applicability of the APR in individual cases since May of 2013 have adopted the narrow view.
For the Circuit watchers, the 4th, 5th, 6th, 9th, and 10th Circuits have ruled that the absolute priority rule still applies in individual Chapter 11 cases, as has the 8th Circuit B.A.P. That leaves the 1st, 2nd, 3rd, 7th, 11th, and D.C. Circuits as those Circuits who have not yet weighed-in.
We’ll continue to hold our breath for a split. In the mean time, we’ve updated our APR Chart to include all 10 of the recent APR cases.