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In re Ahlers, Norwest Bank Worthington v. Ahlers485 US 197, 108 S. Ct. 963, 99 L. Ed. 2d 169 - Supreme Court, 1988 - Google Scholar
485 U.S. 197 (1988)
NORWEST BANK WORTHINGTON ET AL.
v.
AHLERS ET UX.
No. 86-958.
Supreme Court of United States.
Argued January 12, 1988
Decided March 7, 1988
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT
198*198 Gordon B. Conn, Jr., argued the cause for petitioners. With him on the brief were Michael R. Stewart, Dennis M. Ryan, A. Patrick Leighton, and David A. Kastelic.
199*199 William L. Needler argued the cause for respondents. With him on the brief were James C. Truax and Francis E. Stepnowski.[*]
A brief of amici curiae urging affirmance was filed for the State of Arkansas et al. by Phillip L. Kunkel and Raymond T. Nimmer, and by the Attorneys General for their respective States as follows: Steve Clark of Arkansas, Joseph I. Lieberman of Connecticut, Thomas J. Miller of Iowa, Neil F. Hartigan of Illinois, David L. Armstrong of Kentucky, Hubert H. Humphrey III of Minnesota, Mike Greely of Montana, Robert M. Spire of Nebraska, Robert Abrams of New York, Nicholas Spaeth of North Dakota, T. Travis Medlock of South Carolina, Roger Tellinghuisen of South Dakota, and Jim Mattox of Texas.
JUSTICE WHITE delivered the opinion of the Court.
In this case, the Court of Appeals found that respondents' promise of future "labor, experience, and expertise" permitted confirmation of their Chapter 11 reorganization plan over the objections of their creditors, even though the plan violated the "absolute priority rule" of the Bankruptcy Code. Because we find this conclusion at odds with the Code and our cases, we reverse.
I
Respondents operate a failing family farm in Nobles County, Minnesota. Between 1965 and 1984 they obtained loans from petitioners, securing the loans with their farmland, machinery, crops, livestock, and farm proceeds. In November 1984, respondents defaulted on their loan payments to petitioner Norwest Bank Worthington; at the time, 200*200 the aggregate loan balance owed the petitioners exceeded $1 million.
Following the default, Norwest filed a replevin action in Minnesota state court seeking possession of the farm equipment respondents had pledged as security. However, two weeks later respondents obtained an automatic stay of the replevin proceedings, when they filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. See 11 U. S. C. 362(a) (1982 ed. and Supp. IV).
Petitioners filed motions in the Bankruptcy Court for relief from the automatic stay. 11 U. S. C. 362(d) (1982 ed., Supp. IV). After decisions by the Bankruptcy and the District Courts, these motions were ultimately considered by the Court of Appeals, which prohibited petitioners from repossessing any equipment, pending a determination by the District Court of the probability of success of a reorganization plan to be filed by respondents. App. to Pet. for Cert. A-76-A-77. On remand, the District Court found respondents' reorganization plan to be "utter[ly] unfeasibl[e]." Id., at A-86. It therefore affirmed the Bankruptcy Court's initial decision to grant petitioners relief from the automatic stay.
On appeal, the Court of Appeals reversed. It found that respondents could file a feasible reorganization plan. 794 F. 2d 388, 399 (CA8 1986). Consequently, the Court of Appeals remanded the case with instructions that the Bankruptcy Court entertain and confirm a reorganization plan which comported with an outline suggested in a lengthy appendix to the Eighth Circuit's opinion. Id., at 408-414.
In reaching this conclusion, the Court of Appeals rejected petitioners' contention that, because of the "absolute priority rule" in the Bankruptcy Code, 11 U. S. C. 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV), their legitimate objections to any reorganization plan which allowed respondents to retain an interest in the farm property was sufficient to bar confirmation 201*201 of such a plan.[1] Petitioners contended that the absolute priority rule prohibited respondents from retaining their equity interest in the farm, which is junior to the creditors' unsecured claims. But the Court of Appeals, relying on this Court's decision in Case v. Los Angeles Lumber Products Co., 308 U. S. 106 (1939), held that the absolute priority rule did not bar respondents from retaining their equity interest in the farm if they contributed "money or money's worth" to the reorganized enterprise. It further concluded that respondents' "yearly contributions of labor,
experience, and expertise" would constitute a contribution of "money or money's worth," and therefore would permit confirmation of a reorganization plan over petitioners' objections. 794 F. 2d, at 402-403. Judge John Gibson, in dissent, criticized the majority's application of the absolute priority rule and its reading 202*202 of Los Angeles Lumber as "unprecedented, illogical, and unfair." 794 F. 2d, at 406. He concluded that the absolute priority rule barred respondents' retention of an equity interest in the farm over petitioners' legitimate objections.
After the Eighth Circuit sharply divided denied rehearing en banc, id., at 414-415, petitioners sought review by this Court. We granted certiorari to consider the Court of Appeals' application of the absolute priority rule, 483 U. S. 1004 (1987), and now reverse.
II
As the Court of Appeals stated, the absolute priority rule "provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property [under a reorganization] plan." 794 F. 2d, at 401. The rule had its genesis in judicial construction of the undefined requirement of the early bankruptcy statute that reorganization plans be "fair and equitable." See Northern Pacific R. Co. v. Boyd, 228 U. S. 482, 504-505 (1913); Louisville Trust Co. v. Louisville, N. A. & C. R. Co., 174 U. S. 674, 684 (1899). The rule has since gained express statutory force, and was incorporated into Chapter 11 of the Bankruptcy Code adopted in 1978. See 11 U. S. C. 1129(b)(2)(B)(ii) (1982 ed., Supp. IV). Under current law, no Chapter 11 reorganization plan can be confirmed over the creditors' legitimate objections (absent certain conditions not relevant here) if it fails to comply with the absolute priority rule.
There is little doubt that a reorganization plan in which respondents retain an equity interest in the farm is contrary to the absolute priority rule.[2] The Court of Appeals did not 203*203 suggest otherwise in ruling for respondents, but found that such a plan could be confirmed over petitioners' objections because of an "exception" or "modification" to the absolute priority rule recognized in this Court's cases.
The Court of Appeals relied on the following dicta in Case v. Los Angeles Lumber Products Co., supra, at 121-122:
"It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. . . .
"[W]e believe that to accord `the creditor of his full right of priority against the corporate assets' where the debtor is insolvent, the stockholder's participation must be based on a contribution in money or money's worth, reasonably equivalent in view of all the circumstances to the participation of the stockholder."
The Court of Appeals found this language applicable to this case, concluding that respondents' future contributions of "labor, experience, and expertise" in running the farm because they have "value" and are "measurable" are "money or money's worth" within the meaning of Los Angeles Lumber. 794 F. 2d, at 402. We disagree.[3]
204*204 Los Angeles Lumber itself rejected an analogous proposition, finding that the promise of the existing shareholders to pledge their "financial standing and influence in the community" and their "continuity of management" to the reorganized enterprise was "[in]adequate consideration" that could not possibly be deemed "money's worth." 308 U. S., at 122. No doubt, the efforts promised by the Los Angeles Lumber equity holders like those of respondents had "value" and would have been of some benefit to any reorganized enterprise. But ultimately, as the Court said in Los Angeles Lumber, "[t]hey reflect merely vague hopes or possibilities." Id., at 122-123. The same is true of respondents' pledge of future labor and management skills.
Viewed from the time of approval of the plan, respondents' promise of future services is intangible, inalienable, and, in all likelihood, unenforceable. It "has no place in the asset column of the balance sheet of the new [entity]." Los Angeles Lumber, 308 U. S., at 122-123. Unlike "money or money's worth," a promise of future services cannot be exchanged in any market for something of value to the creditors today. In fact, no decision of this Court or any Court of Appeals, other than the decision below, has ever found a promise to contribute future labor, management, or expertise sufficient to qualify for the Los Angeles Lumber exception to the absolute priority rule.[4] In short, there is no 205*205 way to distinguish between the promises respondents proffer here and those of the shareholders in Los Angeles Lumber; neither is an adequate contribution to escape the absolute priority rule.
Respondents suggest that, even if their proposed contributions to the reorganized farm do not fit within the Los Angeles Lumber dicta, they do satisfy some broader exception to the absolute priority rule. Brief for Respondents 23-24. But no such broader exception exists. Even if Congress meant to retain the Los Angeles Lumber exception to the absolute priority rule when it codified the rule in Chapter 11 a proposition that can be debated, see n. 3, supra it is clear that Congress had no intention to expand that exception any further. When considering adoption of the current Code, Congress received a proposal by the Bankruptcy Commission to modify the absolute priority rule to permit equity holders to participate in a reorganized enterprise based on their contribution of "continued management . . . essential to the business" or other participation beyond "money or money's worth." See H. R. Doc. No. 93-137, pt. 1, pp. 258-259 (1973). This proposal
quite similar to the Court of Appeals' holding in this case tely rejected the proposed liberalization of 206*206 the absolute priority rule and adopted the codification of the rule now found in 11 U. S. C. absolute priority rule from the dissenting class on down." See H. R. Rep. No. 95-595, p. 413 (1977). We think the statutory language and the legislative history of 1129(b) clearly bar any expansion of any exception to the absolute priority rule beyond that recognized in our cases at the time Congress enacted the 1978 Bankruptcy Code.
In sum, we find no support in the Code or our previous decisions for the Court of Appeals' application of the absolute priority rule in this case. We conclude that the rule applies here, and respondents' promise of future labor warrants no exception to its operation.
III
Respondents advance two additional arguments seeking to obviate the conclusion mandated by the absolute priority rule.
A
Respondents first advance a variety of "equitable arguments" which, they say, prevent the result we reach today. Respondents contend that the nature of bankruptcy proceedings namely, their status as proceedings in "equity" prevents petitioners from inequitably voting in the class of unsecured creditors, and requires that a "fair and equitable" reorganization plan in the best interests of all creditors and debtors be confirmed. See Brief for Respondents 14-16, 23-24. Similarly, the Court of Appeals found it significant that in its view respondents' wholly unsecured creditors (as opposed to petitioners, who have partially secured claims) would fare better under the proposed reorganization plan than if the farm was liquidated. 794 F. 2d, at 402.
The short answer to these arguments is that whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code. The Code provides that undersecured creditors can 207*207 vote in the class of unsecured creditors, 11 U. S. C. 506(a), the Code provides that a "fair and equitable" reorganization plan is one which complies with the absolute priority rule, 11 U. S. C. 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV), and the Code provides that it is up to the creditors and not the courts to accept or reject a reorganization plan which fails to provide them adequate protection or fails to honor the absolute priority rule, 11 U. S. C. 1126 (1982 ed. and Supp. IV).
The Court of Appeals may well have believed that petitioners or other unsecured creditors would be better off if respondents' reorganization plan was confirmed. But that determination is for the creditors to make in the manner specified by the Code. 11 U. S. C. 1126(c). Here, the principal creditors entitled to vote in the class of unsecured creditors (i. e., petitioners) objected to the proposed reorganization. This was their prerogative under the Code, and courts applying the Code must effectuate their decision.
B
Respondents further argue that the absolute priority rule has no application in this case, where the property which the junior interest holders wish to retain has no value to the senior unsecured creditors. In such a case, respondents argue, "the creditors are deprived of nothing if such a so-called `interest' continues in the possession of the reorganized debtor." Brief for Respondents 19. Here, respondents contend, because the farm has no "going concern" value (apart from their own labor on it), any equity interest they retain in a reorganization of the farm is worthless, and therefore is not "property" under 11 U. S. C. 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV).
We join with the consensus of authority which has rejected this "no value" theory.[6] Even where debts far exceed the 208*208 current value of assets, a debtor who retains his equity interest in the enterprise retains "property." Whether the value is "present or prospective, for dividends or only for purposes of control" a retained equity interest is a property interest to "which the creditors [are] entitled . . . before the stockholders [can] retain it for any purpose whatever." Northern Pacific R. Co. v. Boyd, 228 U. S., at 508. Indeed, even in a sole proprietorship, where "going concern" value may be minimal, there may still be some value in the control of the enterprise; obviously, also at issue is the interest in potential future profits of a now-insolvent business. See SEC v. Canandaigua Enterprises Corp., 339 F. 2d 14, 21 (CA2 1964) (Friendly, J.). And while the Code itself does not define what "property" means as the term is used in 1129(b),
the relevant legislative history suggests that Congress' meaning was quite broad. " `[P]roperty' includes both tangible and intangible property." See H. R. Rep. No. 95-595, at 413.
Moreover, respondents' "no value" theory is particularly inapposite in this case. This argument appears not to have been presented to the Eighth Circuit, which implicitly concluded to the contrary of respondents' position here that the equity interest respondents desire to retain has some value. See 794 F. 2d, at 402-403. Even cursory consideration reveals that the respondents' retained interest under the plan might be "valuable" for one of several reasons. For example, the Court of Appeals provided that respondents would be entitled to a share of any profits earned by the sale of secured property during the reorganization period, id., at 209*209 403, and n. 18 an interest which can hardly be considered "worthless." And there is great common sense in petitioners' contention that "obviously, there is some going concern value here, or the parties would not have been litigating over it for the last three years." Tr. of Oral Arg. 15-16.
Consequently, we think that the interest respondents would retain under any reorganization must be considered "property" under 1129(b)(2)(B)(ii), and therefore can only be retained pursuant to a plan accepted by their creditors or formulated in compliance with the absolute priority rule. Since neither is true in this case, the Court of Appeals' judgment for respondents cannot stand.
IV
In rejecting respondents' position, we do not take lightly the concerns which militated the Eighth Circuit towards its result. As a Bankruptcy Judge commented on the Court of Appeals' decision in this case:
"We understand the motivation behind the majority opinion in Ahlers. Farm bankruptcies are in a state of crisis and we, too, sympathize with the plight of the American farmer. Nevertheless, the solution proposed by the Ahlers majority is contrary to the Bankruptcy Code and a long line of case law." In re Stegall, 64 B. R. 296, 300 (Bkrtcy. Ct. CD Ill. 1986).
Family farms hold a special place in our Nation's history and folklore. Respondents and amici paint a grim picture of the problems facing farm families today, and present an eloquent appeal for action on their behalf.[7] Yet relief from current farm woes cannot come from a misconstruction of the applicable bankruptcy laws, but rather, only from action by Congress.[8]
210*210 The error of the Court of Appeals' approach is further revealed by an examination of a measure Congress has recently enacted to cope with these very same concerns, the Family Farmers Bankruptcy Act of 1986, Pub. L. 99-554, 255, 100 Stat. 3105-3114. The Act creates a new Chapter 12 bankruptcy proceeding, under which family farmers can retain an equity interest in their farms while making loan repayments under a reorganization plan. See 11 U. S. C. 1201 et seq. (1982 ed., Supp. IV).[9]
The legislative history of the Act makes it clear that one of Congress' principal concerns in adopting Chapter 12 was the difficulties farmers encountered in seeking to reorganize under Chapter 11.[10] And yet, as respondents concede, the Court of Appeals' decision here creates a method of proceeding under Chapter 11 which is far more advantageous to farmers than is Chapter 12. See Brief for Respondents 6-9; Tr. of Oral Arg. 23-25. Thus, given respondents' reading of Chapter 11, Congress enacted a relief provision in Chapter 12 211*211 which is less favorable to its intended beneficiaries than is current law. But in adopting Chapter 12, Congress thought it was doing just the opposite.[11] "[W]here, as here, Congress adopts a new law . . . [it] normally can be presumed to have had knowledge of the interpretation given to the [old] law." Lorillard v. Pons, 434 U. S. 575, 581 (1978). We think Congress' understanding of Chapter 11 and its absolute priority
rule and not respondents' is the correct one. We do not believe that Congress created, in Chapter 12, an option for farm reorganizations less accessible to most farmers than current Chapter 11 proceedings.
V
In sum, because we find the decision below to be contrary to the Bankruptcy Code and this Court's previous cases, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
JUSTICE KENNEDY took no part in the consideration or decision of this case.
[*] Briefs of amici curiae urging reversal were filed for the United States by Solicitor General Fried, Assistant Attorney General Willard, Deputy Solicitor General Cohen, and Roy T. Englert, Jr.; for the American Bankers Association by John J. Gill III and Michael F. Crotty; for the American College of Real Estate Lawyers by Robert M. Zinman, Bruce S. Lane, Edward I. Cutler, and David A. Richards; for the American Council of Life Insurance by Phillip E. Stano, Jack H. Blaine, Robert M. Zinman, and Edward J. Zimmerman; and for the Nebraska Bankers Association, Inc., by William B. Brandt.
[1] In relevant part, 11 U. S. C. 1129(b) (1982 ed. and Supp. IV) provides:
"(1) . . . [T]he court . . . shall confirm the plan . . . if the plan . . . is fair and equitable . . . .
"(2) . . . [T]he condition that a plan be fair and equitable . . . includes the following requirements:
.....
"(B) With respect to a class of unsecured claims
"(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
"(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property."
Petitioners contended, and the Court of Appeals agreed, that they must be treated as unsecured creditors for purpose of any reorganization plan because their claims were substantially undersecured. See 794 F. 2d 388, 399 (CA8 1986); 11 U. S. C. 506(a). Petitioners further argued, and the Court of Appeals also agreed, that any reorganization plan for respondents could not comply with 1129(b)(2)(B)(i), because respondents could not possibly provide petitioners with property equal to the allowed amount of their claims. See 794 F. 2d, at 401.
Thus, the Court of Appeals concluded that respondents' reorganization plan would have to comply with 1129(b)(2)(B)(ii) the codification of the absolute priority rule in order to be confirmed. Ibid.
[2] Respondents do not contest this conclusion, but rather, argue (1) that their proposal to retain an equity interest in the farm and equipment is confirmable under an exception to the absolute priority rule, Brief for Respondents 21-25, and (2) that the rule does not (or should not) apply to their reorganization plan for various reasons, id., at 14-21. For reasons we discuss infra, at 204-206, and in Part III, we find these arguments unpersuasive.
[3] The United States, as amicus curiae, urges us to reverse the Court of Appeals' ruling and hold that codification of the absolute priority rule has eliminated any "exception" to that rule suggested by Los Angeles Lumber. See Brief for United States as Amicus Curiae 17-23. Relying on the statutory language and the legislative history, the United States argues that the 1978 Bankruptcy Code "dropped the infusion-of-new-capital exception to the absolute priority rule." Id., at 22.
We need not reach this question to resolve the instant dispute. As we discuss infra, at 204-206, we think it clear that even if the Los Angeles Lumber exception to the absolute priority rule has survived enactment of the Bankruptcy Code, this exception does not encompass respondents' promise to contribute their "labor, experience, and expertise" to the reorganized enterprise.
Thus, our decision today should not be taken as any comment on the continuing vitality of the Los Angeles Lumber exception a question which has divided the lower courts since passage of the Code in 1978. Compare, e. g., In re Sawmill Hydraulics, Inc., 72 B. R. 454, 456, and n. 1 (Bkrtcy. Ct. CD Ill. 1987), with, e. g., In re Pine Lake Village Apartment Co., 19 B. R. 819, 833 (Bkrtcy. Ct. SDNY 1982). Rather, we simply conclude that even if an "infusion-of-`money-or-money's-worth' " exception to the absolute priority rule has survived the enactment of 1129(b), respondents' proposed contribution to the reorganization plan is inadequate to gain the benefit of this exception.
[4] "[P]revious attempts to qualify non-capital equity in the absolute priority context have been unanimously rejected." Koger & Acconcia, In re Ahlers: Capitalizing on Sweat, 42 J. Mo. Bar 455, 458 (1986). See also 794 F. 2d, at 407 (Gibson, J., dissenting); In re Baugh, 73 B. R. 414, 418 (Bkrtcy. Ct. ED Ark. 1987); In re Pecht, 57 B. R. 137, 139-141 (Bkrtcy. Ct. ED Va. 1986).
In support of their position, respondents rely extensively on SEC v. United States Realty & Improvement Co., 310 U. S. 434 (1940). See Tr. of Oral Arg. 31-33, 35-37. However, the relevant portion of that case concerned a chapter of the old bankruptcy statutes under which the absolute priority rule did not apply. See SEC v. United States Realty & Improvement Co., supra, at 453-454. Thus, that case is wholly inapposite here.
[5] See, e. g., Hearings on S. 235 and S. 236 before the Subcommittee on Improvements in Judicial Machinery of the Senate Committee on the Judiciary, 94th Cong., 1st Sess., pt. 2, p. 1044 (1975) (statement of Prof. Vernon Countryman); id., at 710 (statement of Phillip A. Loomis, Jr., Comm'r of the Securities and Exchange Comm'n); Brudney, The Bankruptcy Commission's Proposed "Modifications" of the Absolute Priority Rule, 48 Am. Bankr. L. J. 305, 336-339 (1974).
[6] Respondents note that one Bankruptcy Court has accepted the "no value" theory in a case similar to this one. See In re Star City Rebuilders, Inc., 62 B. R. 983, 988-989 (WD Va. 1986). But even in so doing, the Bankruptcy Court acknowledged that the bulk of authority was to the contrary. See id., at 989; see also In re Modern Glass Specialists, Inc., 42 B. R. 139, 140-141 (Bkrtcy. Ct. ED Wisc. 1984); In re Huckabee Auto Co., 33 B. R. 132, 141 (Bkrtcy. Ct. MD Ga. 1981); In re Landau Boat Co., 8 B. R. 436, 438-439 (Bkrtcy. Ct. WD Mo. 1981).
Petitioners contend that the Star City decision is the only one to accept the "no value" theory. See Tr. of Oral Arg. 16. Respondents did not contest this assertion or provide authority to the contrary.
[7] See Brief for Respondents 8-11; Brief for State of Arkansas et al. as Amici Curiae 1-2.
[8] Even if current farm problems "justified" a judicial modification of the absolute priority rule along the line of the Court of Appeals' opinion, not the least of the problems with the decision below is that there is no way to limit it to family farms, or even to small businesses generally. The shareholders of any corporate debtor might be able to evade the absolute priority rule under the Eighth Circuit's reasoning; such a result surely cannot be squared with the case law or the Code as they are discussed supra.
[9] Respondents apparently cannot qualify for relief under Chapter 12 because they do not meet the requirements that Congress has adopted in defining what is an eligible "family farm" for purposes of Chapter 12. See Tr. of Oral Arg. 23; 11 U. S. C. 101(17) (1982 ed., Supp. IV).
In addition, respondents may be disqualified from filing under Chapter 12 because they had previously filed under Chapter 11. The Bankruptcy Courts are divided on the issue. Compare, e. g., In re Big Dry Angus Ranch, Inc., 69 B. R. 695, 699-701 (Mont. 1987), with, e. g., In re B. A. V., Inc., 68 B. R. 411, 412-413 (Colo. 1986).
[10] See 132 Cong. Rec. 28592 (1986) (statement of Sen. Thurmond); id., at 28593 (statement of Sen. Grassley). Congress seemed particularly aware of the specific obstacle that the absolute priority rule posed to farm reorganizations. See Anderson, An Analysis of Pending Bills to Provide Family Farm Debtor Relief Under the Bankruptcy Code, reprinted in 132 Cong. Rec. 28593, 28599 (1986).
[11] "Under this new chapter, it will be easier for a family farmer to confirm a plan of reorganization." Joint Explanatory Statement of the Committee of Conference, reprinted in 132 Cong. Rec. 28143, 28144 (1986).
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In re Shatt
424 B.R. 854 (2010)
In re Martin SHAT and Anjanette Shat, Debtors.
No. BK-S-08-23136-BAM.
United States Bankruptcy Court, D. Nevada.
February 22, 2010.
856*856 Christopher G. Gellner, Jeffrey A. Cogan, Jeffrey A. Cogan, Esq., Ltd., Las Vegas, NV, for Debtors.
OPINION ON ABSOLUTE PRIORITY RULE
BRUCE A. MARKELL, Bankruptcy Judge.
Martin and Anjanette Shat ("Debtors") filed for bankruptcy protection under chapter 11 on November 5, 2008. On August 20, 2009, they filed their Third Amended Plan of Reorganization ("Plan"),[1] which the court orally confirmed on October 13, 2009.
The only contested issue at the confirmation hearing was whether the "absolute priority" rule of 11 U.S.C. 1129(b)(2)(B)(ii) applies to individual chapter 11 debtors after passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8 (2005) ("BAPCPA"). This court holds that it does not.
I. FACTS
The Debtors run a dry cleaning business, known as Flair Cleaners, which they own as a sole proprietorship. It is profitable. They also invested in several residential rental properties. Those are not so profitable.
The Debtors' Plan classifies their creditors into eight classes. Three of these classes are for creditors holding unsecured claims: one for a prior domestic support obligation; one for mortgage lenders' deficiencies; and one for creditors holding credit card claims.
Seven of the eight classes either 857*857 accepted the plan or did not vote.[2] The eighth class was Class V, which the Plan labeled as "Miscellaneous General Unsecured Creditors (Credit Card Creditors), With Claims Totaling to Approximately $85,000." Under the Plan, creditors in this class were to be paid "10% of their allowed claims without interest over 5 years." Only one member of this class voted, and it rejected the plan.[3] This dissenting unsecured creditor did not make any objection under 11 U.S.C. 1129(a)(15) or file any other objection to the Plan.[4]
The Plan provided that, upon confirmation, "the Debtors shall be revested with their assets, subject only to outstanding liens which are not modified or avoided by the Debtors...."
II. "FAIR AND EQUITABLE" AND THE ABSOLUTE PRIORITY RULE
A. Confirmation Generally
As a general matter, a plan of reorganization can be confirmed in one of two ways. If all sixteen paragraphs of Section 1129(a) are satisfied, a plan can be confirmed consensually under Section 1129(a).[5] If, however, a plan proponent satisfies all paragraphs of Section 1129(a) other than the voting requirement of paragraph (8), then the court may still confirm the plan as long as the plan is, among other things, "fair and equitable."[6] This 858*858 second, nonconsensual, method of confirmation is colloquially referred to as "cramdown."[7]
B. Historic Treatment of Individual Chapter 11 Debtors and Confirmation
Given Class V's rejection, the Debtors bore the burden of proving that the Plan was "fair and equitable" in order to confirm their Plan. Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1358 (9th Cir.1986). Before 2005, the Bankruptcy Code provided that a plan was "fair and equitable" as to unsecured creditors if it met the following test:
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. 1129(b)(2)(B) (before taking into account changes made by BAPCPA).
Before BAPCPA, most courts applied this provision equally to individual and nonindividual debtors;[8] that is, courts held that these provisions applied to humans and corporations alike. See, e.g., Unruh v. Rushville State Bank, 987 F.2d 1506, 1508 (10th Cir.1993); Computer Task Group, Inc. v. Brotby (In re Brotby), 303 B.R. 177, 195 (9th Cir. BAP 2003) (assuming applicability for purposes of analysis); In re Gosman, 282 B.R. 45, 48 (Bankr. S.D.Fla.2002); Davis v. Davis (In re Davis), 262 B.R. 791, 797 (Bankr.D.Ariz. 2001).
For some, this uniform application effectively meant that no individual debtor could ever confirm a chapter 11 plan. See, e.g., In re Gosman, 282 B.R. 45 (Bankr. S.D.Fla.2002) (may not use homestead as "new value" contribution; exempt property must be devoted to creditors' claims in chapter 11 plan). See also Ralph A. Peeples, Staying In: Chapter 11, Close Corporations and the Absolute Priority Rule, 63 AM. BANKR.L.J. 65 (1989); Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1068-82 (1987). This reasoning had the effect of preventing individual debtors from keeping a business under a chapter 11 plan if they did not pay their unsecured creditors in full. Accordingly, had the Debtors filed their case before 2005, their Plan likely could not have been confirmed.
859*859 C. BAPCPA Amendments to 11 U.S.C. 1129(b)(2)(B)(ii)
As part of BAPCPA, however, Congress amended Section 1129(b)(2)(B)(ii) with respect to individual chapter 11 debtors. The statute now reads as follows, with the provisions added by BAPCPA in italics:
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.
This clause obviously modifies the absolute priority rule stated in subparagraph (ii). The question is, how extensive is this modification? Specifically, may the Debtors in this case retain their dry cleaning business without paying their unsecured creditors in full? To answer these questions requires an examination of the history of the BAPCPA amendment, and an examination of the role of the absolute priority rule in individual chapter 11 reorganizations.
1. History of the 2005 Amendments Relating to Individual Chapter 11 Debtors[9]
BAPCPA origins are in the National Bankruptcy Review Commission created by the 1994 Bankruptcy Reform Act.[10] That Commission delivered its report in 1997,[11] although Congress had begun the process of reform even before the report had been finally issued.[12] The principal purpose of the legislation was to change the rules related to an individual's eligibility for bankruptcy, particularly in chapter 7, by linking the availability of bankruptcy relief to a debtor's income and other means.[13] The initial "means-testing" provisions did not purport to make any changes to chapter 11.
This changed in 1999, when the Senate was considering the then-current bankruptcy reform bill, S. 625. At that time, the Senate Judiciary Committee added Section 321 to the bill. That amendment provided as follows:
SEC. 321. TREATMENT OF CERTAIN EARNINGS OF AN INDIVIDUAL DEBTOR WHO FILES A VOLUNTARY CASE UNDER CHAPTER 11.
Section 541(a)(6) of title 11, United States Code, is amended by inserting "(other than an individual debtor who, in accordance with section 301, files a petition to commence a voluntary case 860*860 under chapter 11)" after "individual debtor".[14]
The section-by-section portion of the Senate Report accompanying the bill as ultimately passed by the Senate simply stated that "[t]his section provides that post-petition income will become property of the bankruptcy estate in individual consumer cases under chapter 11."[15]
The amendment did not go without comment. Senators Leahy, Kennedy, Feingold, and Schumer added the following in their Minority Views section of the Senate Report:
At the Judiciary Committee markup, Senator Grassley successfully introduced an amendment to include post-petition earnings for individual chapter 11 debtors as `property of the estate.' This so-called `super-rich' amendment, which would have been considered rather controversial had it been vetted among the bankruptcy community, is undoubtedly a significant change to bankruptcy law but is not the direct or most effective method of controlling higher income debtors and in any event is not responsive to our concerns regarding the disparate effects of the bill.[16]
At the same time the Senate debated S. 625, the House was considering a companion bill, H.R. 833.[17] H.R. 833 passed the House on May 5, 1999.[18] The bill as received in the Senate did not have any provisions for individual chapter 11 debtors.[19] During its consideration in the Senate, however, the Grassley amendment from S. 625 was inserted into H.R. 333.
More importantly, it was also expanded. As a result, when the Senate ultimately passed H.R. 333,[20] Section 321 contained not only the original provision regarding personal service income (which had been changed from an amendment to Section 541 to the inclusion of a new Section 1115), but it also contained additional amendments which applied only to individuals in chapter 11. The list is short, but significant:
is or her postpetition service and other income as necessary to implement the plan;
as new paragraph (14);[21]
861*861 An individual's discharge was delayed until the completion of plan payments; and
There was one final change. The bill included a proposed change to Section 1129(b)(2)(B)(ii) consisting of the language italicized above.[23]
Congress passed the substance of H.R. 833 after the 2000 elections, but President Clinton refused to sign the bill, and it was thus "pocket-vetoed."[24] Bankruptcy reform thus had to be reintroduced in the 107th Congress.
Reintroduction came soon. On January 31, 2001, H.R. 333 was introduced in the House.[25] This version contained the expanded version of Senator Grassley's Senate amendments related to individuals that had passed both the House and the Senate a year earlier.[26] After some minor changes to the overall bill,[27] the House issued a report,[28] and promptly passed it.[29]
H.R. 333 ultimately went to a House and Senate conference in 2002. At conference, the House agreed to the Senate's text, and issued a conference report that contained a description of the expanded amendments related to chapter 11 individuals. It is almost word-for-word the text used in the earlier House Report.[30] This treatment, though somewhat extensive, is purely descriptive.[31] There is no discussion of the policy behind, or purposes of, these changes. And such silence was a hallmark of all successive versions of the bill, none of which altered the text of Section 321.[32] BAPCPA thus inserted into the Bankruptcy Code the changes for individual debtors Congress debated in 1999-2002.
862*862 2. The General Effect of the 2005 Amendments on Individual Chapter 11 Debtors
This analysis indicates that, although not entirely free from doubt, it appears that Congress inserted the individual chapter 11 provisions to ensure no easy escape from means testing. The template for this effort was to adopt and adapt as much of chapter 13 as possible with respect to individual debtors in chapter 11. Again, these changes to chapter 11 were:
5 along the lines of property of the estate under Section 1306;
3(a)(8) to resemble Section 1322(a)(1);
129(a)(15);
as in Section 1328(a);
d pursuant to Section 1141(d)(5), similar to the hardship discharge of Section 1328(b); and
lan even after substantial consummation for purposes similar to Section 1329(a).
See 5 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY 368.1 at pp. 368-1 to 368-5 (3d ed. 2000 & Supp.2006) (correlating new chapter 11 provisions with corresponding chapter 13 provisions). See also Markell, supra at 75-79.
Although the Senate minority who opposed the provisions when they were first offered characterized these provisions as for the "super-rich," that strength of that categorization dissolved as the bill proceeded towards enactment. What remains is a sort of hybrid chapter 13, in which many of the provisions of chapter 13 sit uneasily in chapter 11.[33]
III. ANALYSIS OF AMENDED SECTION 1129(B)(2)(B)(II)
As indicated above, before 2005, the authorities were pretty much in agreement that the absolute priority rule applied to individuals in chapter 11. That meant that a individual debtor could not retain any property if his or her creditors were not paid in full. After 2005, however, this changed. By the process outlined above, Congress decreed that, even in cramdown, an individual "debtor may retain property included in the estate under Section 1115, subject to the requirements of subsection (a)(14) of this section."
A. The Scope of the Amendment
This shifts the focus to the meaning of this added language, and that inquiry starts with Section 1115. Section 1115, also added in 2005, in turn provides that property of the estate is different for an individual chapter 11 debtor than other chapter 11 debtors. Section 1115 states:
(a) In a case in which the debtor is an individual, property of the estate includes, 863*863 in addition to the property specified in section 541(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
Section 1115 thus defines property of the estate for an individual chapter 11 debtor via a two-step process. Initially, Section 1115 creates a baseline estate of all the property covered by Section 541. It then adds to that one class of property excluded for other chapter 11's by Section 541(a)(6): postpetition income from services.
So far, so good. But other than postpetition income from services, what else, if anything, changes? That depends on what the meaning of the ambiguous phrase in Section 1129(b)(2)(B)(ii) that an individual debtor may retain "property included in the estate under section 1115."[35]
If "included" means only property which is added by Section 1115, then Section 1129(b)(2)(B)(ii) has a very narrow meaning: it refers only to postpetition income from servicesand not to property originally specified in Section 541. Section 1115, however, itself includes Section 541(a) property. Thus, "included" could refer to all property Section 1115 itself references, and this would then be a reference to the superset of Section 541(a) property and the debtor's postpetition service income. Put another way, if Section 1115 entirely supplants Section 541 by specifically incorporating it and adding to it, the "included" has a very broad meaning, essentially exempting individuals from the absolute priority rule as to unsecured creditors.
The narrowness of the narrow reading is underscored by other changes made at the same time as the addition of Section 1129(b)(2)(B)(ii) and which were outlined above. One of those changes, Section 1123(a)(8), requires the following:
(8) in a case in which the debtor is an individual, provide for the payment to creditors under the plan of all or such portion of earnings from personal services performed by the debtor after the commencement of the case or other future income of the debtor as is necessary for the execution of the plan.
11 U.S.C. 1123(a)(8). In addition, as also indicated above, BAPCPA added paragraph (15) to Section 1129(a) which now reads as follows:
(15) In a case in which the debtor is an individual and in which the holder of 864*864 an allowed unsecured claim objects to the confirmation of the plan
(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325()(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.
11 U.S.C. 1129(a)(15). While the rejected creditor here has not objected to the plan by filing an objection or otherwise making any election under paragraph (15), see note 4 supra, the existence of the paragraph must be taken into account when construing Section 1129(b)(2)(B)(ii).[36] When read together, the intent seems to be that there will be cases, perhaps constituting the majority, in which an unsecured creditor will reject a plan and then object to it separately so that the debtor will be forced to commit value equal to five-years' worth of earnings to the planearnings that are property of the estate under Section 1115.
This changes the role of Section 1129(b)(2)(B)(ii). A debtor can't really be said to "retain" property or income that the Code requires to be committed to plan payments. Thus, if Section 1129(b)(2)(B)(ii) is read narrowly, it only covers the debtor's income starting five years after confirmation. As this court has said in another context, "[t]he reader is left with two widely different results: miserly post-fifth-year income on one side, and generous designation of all estate property on the other."[37]
B. Statutory Interpretation Principles
This issue thus raises significant questions of statutory interpretation.[38] In this court's view, the starting point is the presumption is that Congress intended the accepted and plain meaning of the words it used. As the Supreme Court has said:
The starting point in discerning congressional intent ... is the existing statutory text ... and not the predecessor statutes. It is well established that when the statute's language is plain, the sole function of the courtsLamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000)) (internal quotation marks omitted), in turn quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), in turn quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917).
In determining the appropriate sense of the words Congress chose, it is 865*865 appropriate to investigate the context in which English and the Bankruptcy Code employs the same or similar words. Rousey v. Jacoway, 544 U.S. 320, 326-27, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005) (looking at use of "on account of" in provisions of the Bankruptcy Code other than the one at issue). Put another way, the meaning of statutory language is best revealed by examining not only the general usage in English of the chosen words, but also through a coordinate review of any specialized use of those terms in the code in which they are found. Id.; see also John F. Manning, What Divides Textualists From Purposivists?, 106 COLUM. L.REV. 70, 79-80 (2006).
In conjunction with this general examination, as indicated above, a court should also examine, in the case of an integrated and cohesive statute such as the Bankruptcy Code, how that code uses or employs the words or phrase in dispute. "[T]he words of a statute must be read in their context and with a view to their place in the overall statutory scheme.... Our goal in interpreting a statute is to understand the statute `as a symmetrical and coherent regulatory scheme' and to `fit, if possible, all parts into a ... harmonious whole.'" Am. Bankers Ass'n v. Gould, 412 F.3d 1081, 1086 (9th Cir.2005) (quoting Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000)). See also Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989) ("[S]tatutory language cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute
must be read in their context and with a view to their place in the overall statutory scheme."); Florida Dep't of Revenue v. Piccadilly Cafeterias, Inc., ___ U.S. ___, 128 S.Ct. 2326, 2336, 171 L.Ed.2d 203 (2008) (finding to placement and arrangement of statute to be informative of the proper interpretation).
C. Narrow or Broad Interpretation?
Given the relatively straightforward reading of the statute supporting the broader reading, and the general rehabilitative aim of chapter 11, the court understands the phrase "in addition to the property specified in section 541" to mean that Section 1115 absorbs and then supersedes Section 541 for individual chapter 11 cases. This construction, in turn, leads to the position that Section 1129(b)(2)(B)(ii)'s exception extends to all property of the estate, including such things as prepetition ownership interest of nonexempt property. This conclusion is supported by the revisions in 2005 to bring individual chapter 11's more in line with chapter 13.[39] It is also supported by the few cases to examine the topic.
1. Case Law
One of the first reported cases to review the effect of Section 1129(b)(2)(B)(ii) was In re Bullard, 358 B.R. 541 (Bankr. D.Conn.2007). There, a life insurance agent filed for chapter 11. He proposed a plan under which his unsecured creditors were to receive a dividend of approximately 11.9%. Id. at 542. The plan also called for him to retain all his postpetition income and an automobile acquired postpetition.[40] The unsecured creditor class rejected the 866*866 plan, but did not file any objection to confirmation.
The court analyzed the amendments to Section 1129(b)(2)(B)(ii) and the addition of Section 1115. It then found that the property intended to be kept by the debtor was "within the purview of Section 1115(a) and the Debtor's retention of the same is not an impediment to Plan confirmation under Section 1129(b)(2)(B)(ii)." Id. at 544. In reaching this conclusion, it relied on the Norton treatise. See 358 B.R. at 544 n. 10 (quoting 4 WILLIAM L. NORTON, JR., NORTON BANKRUPTCY LAW AND PRACTICE 84A:1 (2d ed.2006)). In short, the court found that the broader reading was a natural reading of the statute.
Another early case finding abrogation of absolute priority is In re Tegeder, 369 B.R. 477 (Bankr.D.Neb.2007). There, the debtors owned two businesses, and filed for chapter 11 protection. Their plan did not provide for payment in full of unsecured creditors' debts. It also did not provide for payments to start until near the end of a ten-year plan payout period, although if debtor's projections were correct, the unsecured creditors would receive close to 95% of their claims. Id. at 480-81. The unsecured creditor class rejected the plan.
Relying on the plain reading of Section 1129(b)(2)(B)(ii), the court concluded that "[s]ince 1115 broadly defines property of the estate to include property specified in 541, as well as property acquired post-petition and earning from service performed post-petition, the absolute priority rule no longer applies to individual debtors who retain property of the estate under 1115." 369 B.R. at 480. It thus confirmed the plan. Again, the court relied on a natural reading of the statute in following the broad interpretation.
Relying on Tegeder, In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan.2007) also found that Congress eliminated the absolute priority rule for individual chapter 11 debtors. Roedemeier was a dentist who had filed for chapter 11. His filing was caused by overhanging guaranty liability he incurred in an earlier dental partnership. Id. at 266. Throughout the case, Roedemeier's income derived from an employment contract with a wholly-owned limited liability dental company he had earlier formed. Id.
Roedemeier proposed a plan that used the income from his wholly-owned company to pay his creditors; the plan, however, did not provide for payment in full to unsecured creditors. Id. at 268. Indeed, it only proposed to pay unsecured creditors approximately 3% of their claims. Id. at 274. An unsecured creditor holding a guaranty from the debtor objected.[41]
The court examined both the narrow and the broad readings of Section 1129(b)(2)(B)(ii). As does this court, Roedemeier concluded that "the narrow reading of the new exception in 1129(b)(2)(B)(ii) would have little impact of this Debtor's (and probably most other individual debtors') ability to reorganize in Chapter 11." 374 B.R. at 275. This point is consistent with the view that "[t]he principal purpose of the Bankruptcy Code ... to grant a `"fresh start"' to the `"honest but unfortunate debtor."'" Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).
867*867 The court then noted that "[t]he broader view of the exception, on the other hand, helps to explain why a number of changes, including the exception, were made to Chapter 11, namely, so that it could function for individual debtors much like Chapter 13 does." 374 B.R. at 275. These other amendments, the court observed, would be meaningless unless the broad reading were adopted. As the court stated:
If a class of unsecured creditors who are not to be paid in full under an individual Chapter 11 debtor's plan can bar the debtor from keeping any prepetition property (which will nearly always include the debtor's interest in whatever business the debtor engages in) by rejecting the plan and invoking the absolute priority rulethat is, if the new exception in what purpose these other, related amendments can serve.
374 B.R. at 276. From this, the court concluded "that Congress intended for the new exception to absolute priority rule for individual chapter 11 debtors to be read broadly." Id. See also In re Johnson, 402 B.R. 851, 852-53 (Bankr.N.D.Ind.2009) (Stating in dicta that "An individual debtor's plan does not need to satisfy the absolute priority rule, 11 U.S.C. 1129(b)(2)(B), and, even though unsecured creditors will not be paid in full, can be confirmed over their objection so long as the plan satisfies the disposable income test of 1325(b)(2).").
2. Rejection of the Narrow Interpretation
Although relatively straightforward, and uniformly adopted by courts, the broad reading is not without problems. It essentially reads the absolute priority rule out of individual chapter 11 cases, but does so in a convoluted mannerarguably indicative that Congress did not fully appreciate the effect of the language it chose.[42] This is especially true given that the addition of provisions requiring provision of the value of future labor[43] effectively overruled Norwest Bank Worthington v. Ahlers[44] without any mention of that case in the legislative history.
But counterarguments to these objections are powerful. While "the absolute priority rule has long been a feature of American bankruptcy law," Bank of New York Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 244 (5th Cir. 2009), it is not sacrosanct. Chapter 13 has no absolute priority rule,[45] and as noted 868*868 above, most of the changes effected by BAPCPA to individual chapter 11 debtors were part of an overall design of adapting various chapter 13 provisions to fit in chapter 11.[46] The broader view also saves Section 1129(b)(2)(B)(ii) from an almost trivial reading; if the narrow view is taken, the section protects only the value of aggregate postpetition earnings payable after the fifth anniversary of plan confirmation.[47] This interpretation is thus consistent with the Ninth Circuit's requirement that "the words of a statute must be read in their context and with a view to their place in the
overall statutory scheme. . . . Our goal in interpreting a statute is to understand the statute `as a symmetrical and coherent regulatory scheme' and to `fit, if possible, all parts into a . . . harmonious whole.'" Am. Bankers Ass'n v. Gould, 412 F.3d 1081, 1086 (9th Cir.2005) (quoting Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000)). As the Court said in a nonbankruptcy context, "statutory language cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme." Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). See also Florida Dep't of Revenue v. Piccadilly Cafeterias, Inc., ___ U.S. ___, 128 S.Ct. 2326, 2336, 171 L.Ed.2d 203 (2008) (finding to placement and arrangement of statute to be informative of
the proper interpretation).
Here, given the host of change to chapter 11 with respect to individuals, all made with the goal of shaping an individual's chapter 11 case to look like a chapter 13 case, and the relatively simple wording used in both Section 1129(b)(2)(B)(ii) and Section 1115, this court concludes that the broader interpretation is the proper one.
IV. CONCLUSION
Although the Plan was rejected by a class of unsecured creditors, and does not pay such creditors in full, it may still be confirmed. Changes in 2005 to 11 U.S.C. 1129(b)(2)(B)(ii) modified the absolute priority rule as set forth above to allow these Debtors to keep their business. Accordingly, the Plan is confirmed. The court will enter a separate order confirming the Plan using Official Form 15.
[1] The Debtors filed their plan pro se. Previously, the court had denied their requested employment of attorney because of a conflict of interest the attorney had, and because of concerns about his competence to represent individual chapter 11 debtors. That order was appealed and has since been affirmed. See Shat v. Kistler (In re Shat), 09-1092-MoDK (B.A.P. 9th Cir., Nov. 25, 2009).
[2] Class IV contained seven subclasses, each containing a separate secured claim against the Debtors. Before confirmation, the Debtors had reached agreement with each secured creditor, including each of their mortgage lenders, as to treatment under the Plan.
[3] The creditor rejecting the Plan was Discover Financial Services. It held an unsecured claim of $10,683.09. Its solitary negative vote meant that Class V rejected the Plan, because Section 1126(c) requires creditors holding "at least two-thirds in amount and more than one-half in number of the allowed claims of such class" to vote in favor in order to accept. 11 U.S.C.
[4] A plan proponent need only satisfy the disposable income test of Section 1129(a)(15) if "the holder of an allowed unsecured claim objects to the confirmation of the plan...." Id. (emphasis supplied). Here, the dissenting creditor simply cast a ballot rejecting the Plan. It did not file any other document or pleading. This is insufficient to invoke Section 1129(a)(15).
Doing nothing more than casting a rejecting ballot might indicate an objection to the plan, but it is also consistent with the belief that the plan is legally sufficient, coupled with an acknowledgment by the creditor that it will be bound by the decision of a majority of creditors in its class or by an appropriate cramdown.
In contrast, an objection requires moreat a minimum, the objector must affirmatively take a position the plan proposed is objectionable on some legal ground; for example, that it is not proposed in good faith, or that the proposed payment does not return to the creditor its statutory entitlement. As a result, Section 1129(a)(15) does not apply in this case because the dissenting creditor did not also file or otherwise assert any objection to the Plan. See In re Roedemeier, 374 B.R. 264, 271 (Bankr.D.Kan.2007); In re Berger, 376 B.R. 42, 47 (Bankr.M.D.Ga.2007).
[5] There is an additional, uncodified, requirement. Section 1228(b) of BAPCPA provides: "The court shall not confirm a plan of reorganization in the case of an individual under chapter 11 or 13 of title 11, United States Code, unless requested tax documents have been filed with the court." Pub.L. No. 109-8, 1228(b), 119 Stat. 23, 183 (2005). While the scope of this requirement is unclear, 7 COLLIER ON BANKRUPTCY 1129.03[17] (Alan Resnick & Henry Sommers, eds., 15th rev ed.2009), there was no request made in this case.
[6] "f all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." 11 U.S.C.
[7] Courts use "cramdown" and "cram down" and "cram-down" interchangeably to refer to nonconsensual confirmation. Indeed, Justice Douglas once combined different forms in the same paragraph. Blanchette v. Connecticut Gen. Ins. Corps., 419 U.S. 102, 167, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974) (Douglas, J., dissenting). The hyphenated version appears to have been the first locution used by a court. New England Coal & Coke Co. v. Rutland R.R. Co., 143 F.2d 179, 189 n. 36 (2d Cir.1944). The earliest print references to the term use either the two-word or the hyphenated form. Compare Robert T. Swaine, Present Status of Railroad Reorganizations And Legislation Affecting Them, AM. BAR ASS'N, PROCEEDINGS OF THE SECTION ON COMM. LAW 15, 15 (1940) (two-word form) and Warner Fuller, The Background and Techniques of Equity and Bankruptcy Railroad ReorganizationsA Survey, 7 LAW & CONTEMP. PROBS. 377, 389, 390 (1940) (hyphenated form).
[8] Along the way, however, it took a Supreme Court decision to decide definitively that individual debtorsthat is, debtors made of flesh and bloodcould even file under chapter 11. Toibb v. Radloff, 501 U.S. 157, 160-61, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991).
[9] The best and most detailed history of this legislation is Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM. BANKR.L.J. 485, 533-39 (2005). In another context, this court has previously explored the treatment of individual chapter 11 debtors after BAPCPA. See Bruce A. Markell, The Sub Rosa Subchapter: Individual Debtors in Chapter 11 after BAPCPA, 2007 U. ILL. L.REV. 67. See also Sally S. Neely, How BAPCPA Changes Chapter 11 Cases for Individualsfor ALI-ABA COURSE OF STUDY: CHAPTER 11 BUSINESS REORGANIZATIONS 433-68 (May 14-16, 2009).
[10] Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 601-10 (1994).
[11] NATIONAL BANKRUPTCY REVIEW COMM'N, REPORT OF THE NATIONAL BANKRUPTCY REVIEW COMMISSION (Oct. 20, 1997), available at http://govinfo. library.unt.edu/nbrc/reporttitlepg.html.
[12] H.R. 2500, 105th Cong. (as introduced, September 18, 1997). A companion Senate Bill was introduced the day after the Commission issued its report. S. 1301, 105th Cong. (as introduced, October 21, 1997).
[13] H.R. 2500, 105th Cong. 101 (1997); S. 1301, 105th Cong. 102 (1997).
[14] S. 625, 106th Cong., 321 (as reported by S. Comm. on the Judiciary, May 11, 1999). The provision was not in the bill as introduced in the Senate. S. 625, 106th Cong. (as introduced in the Senate on March 16, 1999).
[15] S.REP. No. 106-49, at 33 (1999). The report indicates that the amendment was offered by Senator Grassley of Iowa, and that it passed by a vote of 12-5, with Senators Leahy, Kennedy, Biden, Kohl, and Feingold voting nay. Id. at 17.
[16] Id. at at 114 n. 43.
[17] H.R. 833, 106th Cong. (as introduced in the House, Feb. 24, 1999).
[18] The bill passed on May 5, 1999, by a 313-108 vote. 145 CONG. REC. 8629-30 (1999).
[19] H.R. 833, 106th Cong. (as received in the Senate, May 12, 1999).
[20] The bill as passed by the Senate was nominally H.R. 833. Earlier, however, the Senate had struck the text of H.R. 833, and inserted the text of S. 625 in its place. 146 CONG. REC. 532 (2000). The version passed contained the Grassley amendment as expanded. See 146 CONG. REC. 712-13 (2000).
[21] This became current Section 1129(a)(15). The change in designation from paragraph (14) to paragraph (15) was made in the next session of Congress. H.R. 333, 107th Cong., 321(c)(1) (1999).
This redesignation, however, introduced a disconnect in the cross-reference. As originally introduced in H.R. 833, the cross-reference in Section 1129(b)(2)(B)(ii) was to then-paragraph (14)the paragraph which has since been become paragraph (15). In the next session of Congress, however, H.R. 333 changed paragraph (14)'s designation to paragraph (15). See H.R. 333, 107th Cong., 321(c)(1). The bill did not, however, change the cross-reference in proposed Section 1129(b)(2)(B)(ii); it continued to refer to paragraph (14). H.R. 333, 321(c)(2). This is not an entirely absurd mixup. Paragraph (14) as added and as ultimately adopted requires a plan proponent to ensure that all postpetition domestic support obligations are current as of confirmation. One could easily assume that Congress wished to protect domestic support creditors by not allowing a debtor to keep any postpetition earningsa form of Section 1115 propertyso long as any domestic
support obligation was not current.
Although there may be cases in which this erroneous cross-reference may matter, this is not one. The rejecting creditor here did not raise an object under existing Section 1129(a)(15), see note 4, infra, and thus the issue is not presented on this record.
[22] H.R. 833, 106th Cong., 321 (engrossed amendment as agreed to by Senate, Feb. 2, 2000).
[23] H.R. 833, 106th Cong., 321(c)(2) (engrossed amendment as agreed to by Senate, Feb. 2, 2000).
[24] For a detailed history, see Jensen, supra at 533-39.
[25] H.R. 333, 107th Cong. (as introduced in the House, Jan. 31, 2001).
[26] Id. 321.
[27] The bill was amended in committee to add what is now Section 1115(b), which allows the chapter 11 debtor to remain in possession of all property of the estate, including post-petition service income. See 147 CONG. REC. 2578 (2001).
[28] H.R.REP. NO. 107-3, 107th Cong., 1st Sess. (2001). The report contains the first extended discussion of the expansion of Senator Grassley's amendment. Id. at 53-54.
[29] 147 CONG. REC. 2632 (2001).
[30] H.R. 107-617, 107th Cong., 2d Sess. 220-21 (2002).
[31] Id.
[32] Section 321(c) of BAPCPA is essentially identical to Section 321(c) as it was amended in 2002. See Pub.L. No. 109-8, 321(c) (2005).
[33] A good example is the addition of the disposable income test in Section 1129(a)(15). In chapter 13, the disposable income test is a protection designed to overcome objections that creditors may not vote on a chapter 13 plan; one rationale is that if a debtor is providing all of his or her projected disposable income to the payment of his or her debts, no rational creditor could object. But when this test was imported into chapter 11, the plan proponent was not excused from also balloting its unsecured creditors under Section 1129(a)(8). So a plan proponent faces the possibility that it can have an accepting class of unsecured creditors, but still have to meet the disposable income test of paragraph (15) due to the objection of just one of those creditors.
[34] "The commencement of a case ... creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held ... Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. 541(a).
[35] Section 1115(a)(1) also added "all property of the kind specified in Section 541 that the debtor acquires after the commencement of the case," but this would seem to be at least partially duplicative of Sections 541(a)(6) and (7), which already add "proceeds, products, offspring, rents or profits of property of the estate" and "[a]ny interest in property that the estate acquires after commencement of the case." An argument exists that Section 1115(a)(1) brings into the estate gifts to the debtor (as opposed to the estate) through the language including "all property of the kind specified in Section 541 that the debtor acquires after the commencement of the case...."
[36] Congress introduced the two provisions together, and only a scrivener's error separates them in the current statutes. See note 21, infra.
[37] Markell, supra at 90.
[38] This court has previously attempted to use standard tools of interpretation to construe the confusing text of BAPCPA. See, e.g., In re Slusher, 359 B.R. 290, 295-96 (Bankr.D.Nev. 2007); In re Trejos, 352 B.R. 249, 254-259 (Bankr.D.Nev.2006), aff'd, 374 B.R. 210 (9th Cir. BAP 2007); In re Kane, 336 B.R. 477 (Bankr.D.Nev.2006).
[39] See LUNDIN, CHAPTER 13 BANKRUPTCY, supra (correlating new chapter 11 provisions with corresponding chapter 13 provisions).
[40] The debtor also retained exempt assets, and the court permitted that relying on In re Henderson, 321 B.R. 550, 559-60 (Bankr. M.D.Fla.2005), aff'd, 341 B.R. 783 (M.D.Fla. 2006). See 358 B.R. at 545.
[41] Actually, it appears that the creditor did not receive a ballot, and the court adopted the debtor's suggestion that it assume that the creditor would have voted against the plan. This meant that the "class of unsecured creditors must be deemed to have rejected the plan." 374 B.R. at 270.
[42] As stated by one commentator in a related context, "Congress appears to have thought about the problem in its amendment to Bankruptcy Code 1129(b)(2)(B)(ii) although it may not have thought about the problem enough." Richard I. Aaron, Bankruptcy Law Fundamentals 12.23.1 (2009).
[43] Section 1123(a)(8) requires an individual chapter 11 debtor to include in the plan all postpetition earnings from services as is necessary to fund the plan. Section 1129(a)(15) then requires, as a condition of confirmation, the provision of value equal to at least five years' worth of projected disposable earnings to the plan if the holder of an allowed unsecured claim objects to the plan.
[44] 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). Ahlers held that if the new value exception to the absolute priority rule survived the enactment of the Bankruptcy Code in 1978, new value could not be satisfied by promised contributions of labor.
[45] Chapter 13 has no "fair and equitable" requirement for confirmation. 11 U.S.C. 1325(b)(1). The same is true for chapter 12. Id. 1225(b)(1).
Before 1952, individual debtors under chapter XI of the Bankruptcy Act had to propose plans that were "fair and equitable." H.R. REP NO. 82-2320, at 21 (1952). Congress deleted the "fair and equitable" requirement from chapter XI in 1952. Act of July 7, 1952, Pub.L. No. 82-456, 35, 66 Stat. 420, 433 (1952). As the accompanying House Report stated, "the fair and equitable rule . . . cannot be realistically applied in a Chapter XI [action]. . . . Were it so applied, . . . no corporate debtor where the stock ownership is substantially identical with management could effectuate an arrangement except by payment of the claims of all creditors in full." H.R.REP. NO. 82-2320; see also S. REP. NO. 82-1395, at 11-12 (1952).
[46] See note 39 supra.
[47] Markell, supra at 90.
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431 B.R. 222 (2010)
In re Michael A. GBADEBO, Debtor-in-Possession.
No. 09-42526 T.
United States Bankruptcy Court, N.D. California.
April 16, 2010.
224*224 Lawrence L. Szabo, Law Offices of Lawrence L. Szabo, Oakland, CA, for Debtor-in-Possession.
MEMORANDUM OF DECISION RE CONFIRMATION OF PLAN
LESLIE TCHAIKOVSKY, Bankruptcy Judge.
The Modified First Amended Plan of Reorganization (the "Plan") of the above-captioned debtor (the "Debtor") came on for an evidentiary confirmation hearing. The hearing was necessitated by the objection and negative vote on the Plan by Abraham Oshuntola ("Oshuntola"), a judgment creditor.[1] At the conclusion of the hearing, the Court took the matter under submission. For the reasons stated below, the Court now concludes that the Plan may not be confirmed.
A. BACKGROUND
The Debtor is a licensed professional engineer. He is the sole shareholder and Chief Executive Officer of ITC Engineering Services, Inc. ("ITC"), which operates an electrical engineering and testing and consulting laboratory located in Sunol, California. The Debtor owns the real property on which ITC operates (the "Sunol Property"). He also owns a residence in Dublin, California (the "Debtor's House").
According to the Debtor's Disclosure Statement, the Debtor filed the chapter 11 case after Oshuntola obtained a judgment against him and attempted to levy a writ of execution against his stock in ITC. Oshuntola has also recorded an abstract of judgment in Contra Costa County, creating junior liens against the Debtor's real property (the "Real Property Judgment Liens").
The Plan proposes that the Debtor will retain his equity interest in the estate unaltered. It proposes to strip the Real Property Judgment Liens off his real property on the ground that they are unsupported by any value and to treat the underlying debt as a general, unsecured 225*225 claim. It proposes to pay the holders of general, unsecured claims $100 per month for 60 months for a total of $6,000. The Disclosure Statement estimates that this will provide the holders of general, unsecured claims with approximately 2.6 percent of their claim amounts. The size of Oshuntola's claim, as compared to the holders of other general, unsecured claims, makes Oshuntola's vote on the Plan determinative of the class vote. Oshuntola, and thus the class of general, unsecured claims, Class 8, voted against confirmation of the Plan. As stated above, Oshuntola also filed an objection to the Plan.
B. OSHUNTOLA'S OBJECTIONS[2]
Oshuntola's raises four principal objections to confirmation.[3] First, he contends that the Debtor has undervalued the Sunol Property. He contends that, if the Sunol Property were properly valued, the Real Property Judgment Lien could not be stripped off this property, at least not in its entirety. Second, he contends that, in any event, he has a secured claim against the Debtor's personal property by virtue of his service of an order of examination on the Debtor on March 30, 2009. See Cal. Civ.Proc.Code 708.110(d). Third, he contends that the Plan is not being proposed in good faith. Fourth, he contends that the Plan does not satisfy 11 U.S.C. 1129(a)(15). For the reasons set forth below, the first two objections will be overruled. The third and fourth objections will be sustained.
The Debtor testified that the value of the Sunol Property was approximately $850,000. He based this opinion on the fact that a similar property in the vicinity had been listed for some time at a price in this range. As an owner, he is competent to testify as to the value of the Sunol Property. Kestenbaum v. Falstaff Brewing Corp., 514 F.2d 690, 699 (5th Cir.1975). The Court found the basis for his opinion reasonable.
Oshuntola presented no evidence on the value of the Sunol Property. However, he noted that an appraisal obtained in early 2006 valued the Sunol Property at approximately $1.9 million. He argued that it was not credible that the value of the property would have declined so dramatically. The Court does not agree. The Court is regularly confronted by comparable declines in value in the last few years on its relief from stay calendar. This phenomenon is sufficiently well known and beyond dispute that it is a fact of which the Court may take judicial notice. See Fed.R.Evid. 201(b).
Oshuntola also objected to the Plan's failure to classify his secured claim against the Debtor's personal property: 226*226 i.e., the Debtor's stock in ITC and a $700,000 debt owed to the Debtor by ITC. Oshuntola based his secured claim against the Debtor's personal property on his service of an order of examination on the Debtor on March 30, 2009. See Cal.Civ. Proc.Code d. However, the lien created by 708.110(d) only lasts for one year unless extended by the court. Thus, the lien has now expired.[4]
Oshuntola also contended that the Plan was not filed in good faith, because the Debtor proposed to pay over $1,200 per month for two vehicles and over $6,000 on his home mortgage while paying only $100 per month to the holders of general, unsecured claims. This objection is overruled in part and sustained in part. The Court is persuaded that the payments on the Mercedes are reasonable. The Debtor testified persuasively that he maintained the Mercedes primarily for business purposes and that it generated income substantially in excess of the proposed monthly payment.
However, the Court finds the proposed payments on the Jetta and the Debtor's House unreasonable, at least given the minimal payment proposed to the holders of general, unsecured claims. The Debtor's House is a four bedroom house, in which the Debtor now lives alone and in which he has no equity. He testified that he would like to retain it because he has owned it a long time, he raised his children there, and he finds it useful for entertaining his European clients. The Court finds these reasons insufficient given the minimal amount of the proposed payment to the holders of general, unsecured claims.
The proposed payments on the Jetta are also in bad faith. The Debtor testified that the Jetta was being driven by his college-age daughter who would graduate soon and would then begin making the payments herself. Yet, the Plan proposed that the Debtor would make payments on this car for 60 months. The Debtor also testified that he had been paying $700 per month for his daughter's apartment and that this payment would soon cease. Presumably, this expense was used to calculate the Debtor's disposable income. If these payments were eliminated, the Debtor would be able to increase the monthly payments to the Class 8 creditors to $1,000 per month, resulting in a dividend of 26 percent, rather than 2.6 percent. As presently formulated, the Court finds the Plan in bad faith.
Finally, the Court also finds persuasive Oshuntola's contention that the Plan cannot be confirmed because the Debtor has manipulated his reported income. Section 1129(a)(15) provides that, if the holder of a general, unsecured claim objects to the plan, the plan must either pay the claim holder in full, or the debtor must pay all creditors an amount equal to the value of his projected disposable income for a five year period.
The Debtor correctly notes that this requirement goes to the amount paid to all creditors under the Plan, not just to the Class 8 creditors or just to the creditor who objects to the plan. He notes that his statement of income and expenses showed a negative number. However, in order to find that 11 U.S.C. 1129(a)(15) has been satisfied, the Court must be persuaded that the Debtor's financial information is credible. The Court is unable to do so.
The Debtor's testimony at trial persuaded the Court that the Debtor uses ITC as his personal "piggy bank," drawing money from it or causing it to pay his personal 227*227 expenses as needed and failing to maintain its corporate separateness. Thus, the Court believes that the Debtor's calculation of his income and expenses is unreliable at best. The Debtor bears the burden of proof on this issue and has failed to satisfy it. As a result, for this reason as well, the Plan may not be confirmed.
C. THE "ABSOLUTE PRIORITY" RULE AFTER BAPCPA
The Court also concludes that the Plan may not be confirmed because it does not satisfy the "absolute priority" rule pursuant to 11 U.S.C. 1129(b)(2)(B).[5] In reaching this conclusion, the Court differs with the views expressed in several recent decisions and by several learned treatises. The Court does not do so lightly.
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), 11 U.S.C. 1129(b)(2)(B) stated that, if an impaired class of unsecured claims voted against a plan, the plan could not be confirmed unless the court found that it was "fair and equitable." "Fair and equitable" meant, at a minimum, that either the class would receive property with a present value equal to its claim or no one with a claim or interest junior to the class of unsecured claims would retain any property.[6] This provision applied to both individual debtors and debtors that were entities. This provision is generally referred to as the "absolute priority" rule.
BAPCPA modified the "absolute priority" rule as applied to individual debtors. Section 1129(b)(2)(B)(ii) now states that a plan may be "fair and equitable" even though the debtor retains "property included in the estate under section 1115...."[7] 11 U.S.C. 1129(b)(2)(B)(ii) (emphasis added). Section 1115 is a new provision, also added by BAPCPA. It states as follows:
(a) In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541
(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
(b) Except as provided in section 1104 or a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.
11 U.S.C. 1115 (emphasis added).
Three bankruptcy courts have issued decisions concluding that 1129(b)(2)(B)(ii) and 1115 should be read to have eliminated the "absolute priority" rule for individual 228*228 chapter 11 debtors. See In re Tegeder, 369 B.R. 477 (Bankr.D.Neb.2007); In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan. 2007) and, most recently, In re Shat, 424 B.R. 854 (Bankr.D.Nev.2010). The first case, Tegeder, does not contain an extensive analysis of the issue. After quoting the language of 11 U.S.C. 1129(b)(2)(B) and 1115, the Tegeder court merely stated that, because 1115 makes reference to 541, 1129(b)(2)(B) clearly means that a debtor can retain both pre- and post-petition property under a plan rejected by his unsecured creditors. In reaching this conclusion, the Tegeder court appears to have relied primarily on the conclusions espoused in several bankruptcy law treatises. See In re Tegeder, 369 B.R. at 480.[8]
The Roedemeier court found the language of 11 U.S.C. 1115 ambiguous. It observed that the statutory language could be interpreted either narrowly, permitting the debtor to retain only property acquired post-petition (the "debtor's post-petition property"), or broadly, to permit the debtor to also retain property owned when he filed his bankruptcy petition (the "debtor's pre-petition property"), thus eliminating the "absolute priority" rule as applied to individual debtors. To resolve this ambiguity, the Roedemeier court attempted to determine the intent of Congress. In re Roedemeier, 374 B.R. at 274.
The Roedemeier court found no relevant legislative history. It noted that the Supreme Court's ruling on "new value" in Ahlers made it particularly difficult for an individual debtor to confirm a chapter 11 plan over the negative vote of its unsecured creditors. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202-06, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). It also noted that BAPCPA had made a number of changes to chapter 11 "so that it could function for individual debtors much like Chapter 13 does." Roedemeier, 374 B.R. at 264. In chapter 13, there is no "absolute priority" rule. It opined that the other changes made by BAPCPA would make no sense if 1115 is read to permit the vote of unsecured creditors to prevent confirmation of an individual debtor's plan. For that reason, it concluded that the intent of Congress was that the statutory language of 1129(b)(2)(B)(ii) and 1115 be read broadly. Id. at 264-65.
The Shat case contained an even lengthier analysis. It began with a detailed examination of BAPCPA's legislative history. Like the Roedemeier court, it found nothing helpful there. It noted several references to Congress's intent to include an individual debtor's post-petition income in the bankruptcy estate, but no references to its intent to eliminate the "absolute priority" rule as applied to individuals. In re Shat, at 859-60. It then summarized the changes to chapter 11 made by BAPCPA that were designed to make an individual chapter 11 case more like a chapter 13 case. Id. at 860-62.
The Shat court then turned to the relevant statutory language of iguous the following phrase contained in 1129(b)(2)(B)(ii): i.e., "property included in the estate under section 1115." It noted that, if "included" means added to the bankruptcy estate already established by 541, then 1115 should be read narrowly, as permitting the debtor only to retain 229*229 post-petition property.[9] However, it opined that "included" could also mean "referenced." Id. at 862. Section 1115 references the debtor's pre-petition property in the phrase "in addition to the property specified in section 541." As a conceptual matter, the Shat court theorized that 1115 "absorbed" and then "superseded" section 541, so that both pre- and post-petition property were "included" in the bankruptcy estate by 1115. Id. at 864-65. As a result, the "absolute priority" rule was eliminated for
individual chapter 11 debtors. Id. at 862.[10]
The Shat court acknowledged that this reading of 1129(a)(2)(B)(ii) and 1115 was convoluted. However, it considered the argument in favor of this reading to be powerful. This argument was that Congress intended to make individual chapter 11 cases more like chapter 13 cases and that there is no "absolute priority" rule in chapter 13 cases.
Notwithstanding the thorough and thoughtful analysis by the Shat court, the Court is unable to agree with its conclusion. If the Court were writing on a clean slate, it would view the language of 1129(b)(2)(B)(ii) as unambiguous. The Court would read the phrase "included in the estate under section 1115" to be reasonably susceptible to only one meaning: i.e., added to the bankruptcy estate by 1115.
Section 103(a) provides that 541 applies in a chapter 11 case, including an individual chapter 11 case. Section 541 provides that, when a petition is filed, a bankruptcy estate is created, consisting of the debtor's pre-petition property. Section 1115 provides that, in an individual chapter 11 case, in addition to the property specified in 541, the estate includes the debtor's post-petition property. If the clause referring to stated that an individual chapter 11 debtor's estate included post-petition property, the argument could have been made that an individual chapter 11 debtor's estate did not include his pre-petition property.
The Court does not find the other provisions added by BAPCPA, designed to make individual chapter 11 cases mores like chapter 13 cases, persuasive evidence that Congress intended to eliminate the "absolute priority" rule as to individual debtors. Each one of these new provisions appears designed to impose greater burdens on individual chapter 11 debtor's rights so as to ensure a greater payout to creditors. This was a frequently expressed overall purpose of BAPCPA: i.e., to ensure that debtors who can pay back a portion of their debts do so. H.R.Rep. No. 109-31, pt. 1, at 2 (2005). No one who reads BAPCPA as a whole can reasonably conclude that it was designed to enhance the individual debtor's "fresh start."
The Shat court asserts that the "absolute priority" rule makes it virtually impossible for an individual chapter 11 debtor to confirm a plan that does not provide for payment in full to the holders of unsecured claims. To the contrary, such a plan may be confirmed if the holders of such claims vote in favor of the plan. They are likely to do so if a reasonable dividend is proposed, 230*230 and they conclude that they will receive no dividend in a chapter 7 case.
Finally, if 1129(b)(2)(B)(ii) and 1115 are read to eliminate the "absolute priority" rule for individual chapter 11 debtors, the Court is faced with a procedural anomaly. If the plan proposes to pay them anything, the debtor is required to send them a ballot. Yet, their vote can be ignored. This makes no sense. The Court reads 1129(b)(2)(B)(ii) and 1115 to eliminate the "absolute priority" rule only as to an individual chapter 11 debtor's post-petition property. It bases this conclusion on both the language of the statute, both in isolation and viewed in the context of the Bankruptcy Code as a whole. It finds this reading most consistent with the intent of Congress as expressed in the legislative history.
CONCLUSION
The Plan may not be confirmed. Oshuntola's objections to feasibility, to the valuation of the Sunol Property, and to the Debtor's failure to classify his claim as a claim secured by the Debtor's personal property are overruled. His objection to confirmation on good faith grounds is sustained in part and overruled in part. Oshuntola's objection to the Debtor's failure to satisfy 11 U.S.C. 1129(a)(15) is also sustained. Finally, the Court concludes that, based on its reading of 11 U.S.C. 1129(b)(2)(B)(ii) and 1115, the Plan does not satisfy the "absolute priority" rule, which still applies to some extent to individual chapter 11 debtors. Counsel for Oshuntola is directed to submit a proposed form of order in accordance with this decision.
[1] One of the Debtor's secured creditors, Wachovia Commercial Mortgage, Inc. ("Wachovia"), also filed an objection to confirmation of the Plan and voted against it. However, at the preliminary confirmation hearing, counsel for Wachovia stated that Wachovia and the Debtor were close to resolving their differences and that the Court could treat its objection as withdrawn and its negative vote changed to an affirmative one if counsel did not appear at the evidentiary hearing. Counsel for Wachovia did not appear at the evidentiary hearing. As a result, the Court finds that Wachovia has withdrawn its objection and voted in favor of the Plan. Thus, the Debtor has satisfied the requirement that at least one impaired class of creditors affirmatively vote in favor of the Plan. See 11 U.S.C. 1129(a)(10).
[2] Oshuntola filed an objection to confirmation on October 26, 2009. Thereafter, the Debtor amended both the Plan and Disclosure Statement. Oshuntola filed a supplemental objection to confirmation on January 15, 2010. Some of the original objections went to the adequacy of the disclosure. The amendments to the Disclosure Statement may have resolved these objections. In any event, the Court is satisfied with the adequacy of disclosure and overrules any remaining objections on that count.
[3] Oshuntola also contended that the Plan was not feasible and was likely to be followed by a liquidation. He noted that the Debtor's projected disposable income was only $100 per month. He argued that this was too small a "cushion to survive the vicissitudes of the economy." This objection is not persuasive. Based on the evidence presented at the evidentiary hearing, the Court is persuaded that the Plan is feasible. Moreover, under the present law, the Debtor will not receive a discharge unless he completes performance of the Plan. 11 U.S.C. 1141(d)(5). Thus, if the Debtor were unable to perform the Plan, Oshuntola would suffer little prejudice from its having been confirmed.
[4] The Court does not read 11 U.S.C. 108 as extending this period.
[5] Oshuntola did not object to confirmation on this ground. However, the Court has an independent duty to confirm a plan only if satisfies the requirements of the Bankruptcy Code. In re Great Northwest Recreation Center, Inc., 74 B.R. 846, 852 (Bankr.D.Mont.1987).
[6] Courts differed as to whether an individual debtor could retain exempt property without violating the "absolute priority" rule. See In re Bullard, 358 B.R. 541, 544-45 (Bankr.D.Conn.2007)(holding that the debtor could retain exempt property because it was not property of the estate).
[7] The modification concludes with the phrase "subject to the requirements of subsection (a)(14) of this section." Subsection (a)(14) deals with domestic support obligations. This limitation has no relevance to the instant case.
[8] The commentators cited by the Tegeder court are Hon. William L. Norton, Jr., 4 Norton Bankruptcy Law & Practice 2d 84A:1; Hon. W. Homer Drake, Jr. Bankruptcy Practice for the General Practitioner 12:27 n. 28; and Rosemary E. Williams, 3 Bankruptcy Practice Handbook 14:152 n. 1 (2d ed.). In re Tegeder, 369 B.R. at 480.
[9] The Shat court observed that this narrow reading of 1129(b)(2)(B)(ii) is even narrower than it first appears. While the debtor is permitted to retain his post-petition income, he is also required to devote his post-petition income to making plan payments. See 11 U.S.C. 1123(a)(8); In re Shat, at 863-64.
[10] The Shat court then discusses the "plain meaning" doctrine. The relevance of this decision is unclear since the Shat court appears to acknowledge, both before and after this discussion, that the language is ambiguous.
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