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 Judge Brandt issued the order denying confirmation of the *

plan, BAP No. 11-1105. Judge Marlar issued the order converting

the case to chapter 7, BAP No. 11-1149.

ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP Nos. AZ-11-1105-JuKiCl

) AZ-11-1149-JuKiCl

GREGORY A. FRIEDMAN and ) (Consolidated)

JUDITH MERCER-FRIEDMAN, )

) Bk. No. 07-02135

Debtors. )

______________________________)

)

GREGORY A. FRIEDMAN; JUDITH )

MERCER-FRIEDMAN, )

)

Appellants, )

v. ) O P I N I O N

)

P+P, LLC, )

)

Appellee. )

______________________________)

Argued and Submitted on January 18, 2012

at Phoenix, Arizona

Filed - March 19, 2012

Appeal from the United States Bankruptcy Court

for the District of Arizona

Honorable Philip H. Brandt, Bankruptcy Judge, Presiding

Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding*

____________________________

Appearances: Scott D. Gibson, Esq., of Gibson, Nakamura &

Green, PLLC, argued for appellants Gregory A.

Friedman and Judith Mercer-Friedman; 

Daniel Mark Press, Esq., argued for National

Association of Consumer Bankruptcy Attorneys, as

amicus curiae, by special leave of the Panel,

supporting the appellants’ position.

____________________

FILED

MAR 19 2012

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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 Hon. Scott C. Clarkson, Bankruptcy Judge for the Central **

District of California, sitting by designation.

 Unless otherwise indicated, all chapter and section 1

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 

“Rule” references are to the Federal Rules of Bankruptcy

Procedure and “Civil Rule” references are to the Federal Rules

of Civil Procedure.

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Before: JURY, KIRSCHER, and CLARKSON, Bankruptcy Judges. **

CLARKSON, Bankruptcy Judge:

Chapter 11 debtors, Gregory Friedman (“Gregory”) and Judith

Mercer-Friedman (“Judith”) (collectively, the “Friedmans” or

“Debtors”), appeal the bankruptcy court’s orders denying

confirmation of their second amended plan (BAP No. 11-1105) and

converting their case to chapter 7 (BAP No. 11-1149).

These consolidated appeals raise the issue whether the

absolute priority rule embodied in § 1129(b)(2)(B)(ii) applies 1

to individual chapter 11 debtors. We granted leave to the

National Association of Consumer Bankruptcy Attorneys (“NACBA”)

to file an amicus brief in support of Debtors’ position that the

rule does not apply to them. Both the Appellants and the NACBA

participated in the oral arguments before us. No party has

participated as an appellee in this appeal. For the reasons

stated, we hold that the absolute priority rule does not apply

in individual debtor chapter 11 cases and REVERSE the bankruptcy

court’s order denying confirmation of their second amended plan

(BAP No. 11-1105). We also REVERSE the bankruptcy court’s order

converting the Debtors’ chapter 11 case to chapter 7 (BAP No.

11-1149). We REMAND these matters to the bankruptcy court for
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 Debtors’ record on appeal is far from complete. In their 2

brief, they cite to docket numbers of pleadings filed in the

bankruptcy court, but do not provide us with citations to any

particular page number or lines in the pleadings in violation of

Rule 8010(a)(1)(D). As a result, we were left to search the

pleadings cited for the relevant facts and procedural background

of this case. We take judicial notice of the relevant pleadings

which were docketed and imaged in Debtors’ underlying bankruptcy

case as well as those filed in Debtors’ business bankruptcy

cases in the District of Colorado (Bankruptcy Nos. 01-19986 and

04-19246). Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),

293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

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further action consistent with this opinion.

I. FACTS2

The Friedmans are technology entrepreneurs who founded and

operated several internet-related businesses. Several of those

businesses suffered financial difficulties and had filed for

protection under chapter 11 of the United States Bankruptcy

Code. Eventually, however, those businesses were unable to

reorganize and their bankruptcy cases were dismissed, leaving

the Friedmans with significant tax liabilities and unpaid

secured and unsecured business debts.

A. The Prior Corporations’ Bankruptcy Events

The Friedmans founded Netbeam, Inc. (“Netbeam”), a company

that provided high speed wireless internet services to customers

in Summit County, Colorado. On July 10, 2001, Netbeam filed a

voluntary petition for chapter 11 relief in the Colorado

bankruptcy court (Bankruptcy Case No. 01-19986). Two days prior

to Netbeam’s filing, the Friedmans formed Peak Speed

Communications, Inc. (“Peak”). Ten days after Netbeam’s filing,

the Friedmans, as officers of Peak, entered into an Operating

and Merger Agreement between Netbeam and Peak. Although this
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agreement was not disclosed to the bankruptcy court, the

Friedmans implemented its terms. At some point, the undisclosed

agreement surfaced and an examiner was appointed.

Netbeam eventually confirmed a plan which effectively

merged Netbeam and Peak. In accordance with the confirmed plan,

Peak, the successor, closed a loan from First United Bank (the

“Bank”) in the approximate amount of $600,000. P+P, LLC (“P+P”)

pledged $200,000 to guarantee the loan. The loan was secured by

all of Peak’s assets and a second deed of trust on the

Friedman’s real property located in Breckenridge, Colorado (“the

Breckenridge Property”), which they used as a rental property

and a part-time residence.

During Netbeam’s bankruptcy, significant amounts of

employment taxes went unpaid. Eventually, Netbeam ceased making

its quarterly payments to the U.S. Trustee and was unable to

make other payments required under the plan. On August 22,

2006, the bankruptcy court dismissed Netbeam’s case.

A few years earlier, on May 3, 2004, Peak filed a

chapter 11 petition in the Colorado bankruptcy court (Bankruptcy

Case No. 04-19246). During the course of Peak’s bankruptcy, P+P

purchased the Bank’s loan to Peak. In the process, P+P stepped

into the Bank’s shoes with respect to the Bank’s security

interest in virtually all of Peak’s assets and the second deed

of trust on the Breckenridge Property. P+P then acquired and

later sold Peak’s assets.

In 2007, P+P commenced an action in the Colorado state

court against the Friedmans, seeking a declaration that it had a

valid lien on the Breckenridge Property and the right to
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 At the time of Debtors’ filing, their primary residence 3

was in Arizona.

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foreclose. The state court entered a default judgment in favor

of P+P which began foreclosure proceedings on the Breckenridge

Property.

B. The Friedmans’ Bankruptcy Events

On October 27, 2007, the Friedmans filed their chapter 11

petition in the Arizona bankruptcy court, thus staying the

foreclosure. Their Schedule A valued the Breckenridge Property 3

at $750,000 and Schedule D showed the property was

overencumbered with three liens. Washington Mutual Home Loans

(“Washington Mutual”) had a first lien in the amount of

$578,000. P+P had a second lien in the amount of $556,000. 

Finally, a painting company held a third lien in the amount of

$2,500.

Debtors’ Amended Schedule B showed personal property

consisting of household goods and vehicles. It also showed that

Debtors (1) were the sole members in AZCI NET, LLC (“AZCI”), a

wireless internet service provider located in Arizona City,

Arizona; (2) owned 100% of the stock of Blue River Networks,

Inc. (“Blue River”), a technology and management consulting and

support company located in Arizona City, Arizona; (3) were

partners in a family trust named JGF Family LLP, the purposes of

which were resort rental management services and family trust;

and (4) held stock or had an interest in Peak, a wireless

broadband engineering company located in Breckenridge, Colorado. 

Debtors assigned a zero value to their interests in all these
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(continued...)

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entities.

Schedule E showed priority unsecured debt consisting of

substantial amounts owed to the Colorado Department of Revenue

and the Internal Revenue Service for employment taxes by Netbeam

or Peak, and for personal income taxes. Schedule F showed debt

owed on equipment leases and vehicles for Netbeam. Those

amounts, along with credit card and other miscellaneous

unsecured debt, totaled $359,000.

Finally, Debtors’ Amended Schedule I showed combined

average monthly income as $15,094. Of that amount, $9,000 was

attributed to income from their businesses and $3,000 was

attributed to income from rentals on the Breckenridge Property. 

Amended Schedule I also reflected that both debtors were

collecting social security income and Gregory was receiving a

pension from IBM of $594 a month. Amended Schedule J showed

average monthly expenses of $13,698, which included $6,730.18

towards the debt on the Breckenridge Property. Debtors’ monthly

net income was reflected at $1,395.84.

P+P immediately moved for relief from stay on the

Breckenridge Property. Washington Mutual later filed a similar

motion.

C. Debtors’ Initial Plan

Debtors’ initial plan provided for, among other things,

payments to satisfy their mortgage and other debt related to the

Breckenridge Property, with the exception of the claims of P+P. 

Debtors stated their belief that they had paid P+P in full.4
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(...continued) 4

judgment against them in the state court.

 From our review of the docket, it does not appear that a 5

hearing on this plan ever took place. Presumably, this plan was

withdrawn when Debtors filed their second amended plan.

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Under the heading “Implemention of the Plan”, the plan provided:

Upon confirmation, all of the assets of the Debtors’

estate shall be vested in the Debtors and the Debtors

shall continue to work in their consulting and

business management company. Debtors shall pay all

expenses of their personal life, including taxes and

insurance costs, on a current basis. The Debtors’

disposable income shall be deposited into the Plan

Fund and distributed as provided herein.

D. Debtors’ First Amended Plan

After a status conference on this plan, Debtors filed a

first amended plan which provided for P+P’s claim in the event

the state court default judgment against them was upheld. The

plan also provided that to the extent P+P’s claim was unsecured,

its claim would be paid pro rata with the other general

unsecured claims. Debtors proposed to pay $634 per month to

unsecured creditors.5

Before any hearing took place on Debtors’ first amended

plan, the bankruptcy court granted P+P’s motion for relief from

stay on the Breckenridge Property by order entered on September

12, 2008. The bankruptcy court later granted Washington

Mutual’s relief from stay motion on the Breckenridge Property by

order entered on April 9, 2009. Eventually, Washington Mutual

foreclosed on the Breckenridge Property. Due to the collapse of

the real estate market, P+P’s secured claim against the

Breckenridge property became entirely unsecured.
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 Debtors’ second amended plan separately classified 6

Washington Mutual’s secured claim against the Breckenridge

Property in Class 3 and provided for P+P’s secured claim against

the Breckenridge Property in Class 5. Most likely, Washington

Mutual foreclosed on the property after Debtors had filed this

latest version of their plan.

 The Internal Revenue Service and the U.S. Trustee also 7

objected to the second amended plan on various grounds.

-8-

E. Debtors’ Second Amended Plan

In early February 2010, Debtors filed their second amended

plan. For confirmation purposes, this plan only needed to

address the priority and secured claims of the taxing

authorities and Debtors’ general unsecured claims, including the

claims of P+P. Debtors’ proposed statement of implementation 6

of the plan remained the same; i.e., upon confirmation, their

assets, including their equity interests in their businesses,

would revest in Debtors and they would continue to work and

contribute all their disposable income to the plan. The

proposed payment of $634 a month to unsecured creditors was not

altered.

According to Debtors’ second amended disclosure statement,

their combined monthly income went from $15,094 to $6,297. The

$6,297 figure consisted of $2,000 income from Debtors’

businesses with the remaining amounts attributed to Gregory’s

IBM pension and Debtors’ combined social security income.

P+P, Debtors’ largest unsecured creditor, voted against the

second amended plan and filed an objection on the grounds that 7

it (1) violated the absolute priority rule because Debtors’ plan

left their ownership interests in “valuable” property untouched
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 P+P’s objection also implicated § 1129(a)(15) because it 8

complained that Debtors’ expenses were unreasonable. Section

1129(a)(15) states:

In a case in which the debtor is an individual and in

which the holder of 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 § 1325(b)(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. 

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while paying unsecured creditors only $634 a month; (2) violated

the best interests of creditors’ test under § 1129(a)(7) because

Debtors had not properly disclosed the value of their business

interests in AZCI and Blue River; and (3) was filed in bad

faith. In connection with its objection, P+P offered the opinion

of an expert that ACZI had a value of $605,000 to $662,500 as of

the date of the petition.8

F. The Debtor’s Modification to their Second Amended Plan

On June 3, 2010, Debtors filed a modification to their

second amended plan. The modification increased the payments to

unsecured creditors on a monthly basis following the effective

date, based on anticipated growth in Debtors’ business ventures.

The bankruptcy court conducted a hearing on Debtors’ second

amended plan and only addressed the applicability of the

absolute priority rule found in § 1129(b)(2)(B)(ii). The
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 When the bankruptcy court converted Debtors’ case, the 9

order denying confirmation of their second amended plan became a

final order. See Giesbrecht v. Fitzgerald (In re Giesbrecht),

429 B.R. 682, 687 (9th Cir. BAP 2010); see also Rosson v.

Fitzgerald (In re Rosson), 545 F.3d 764, 770 (9th Cir. 2008)

(order converting case from chapter 13 to chapter 7 is a final

order).

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bankruptcy court, recognizing the split of authority throughout

the nation, concluded that the absolute priority rule applied to

individual chapter 11 plans. On February 17, 2011, the

bankruptcy court entered the order denying confirmation of

Debtors’ second amended plan. In the order, Debtors were

instructed to filed a third amended plan and disclosure

statement by March 1, 2011.

Debtors did not further amend their plan. Instead, they

filed an appeal of the order denying confirmation of their

second amended plan. On March 7, 2011, the bankruptcy court

conducted a show cause hearing as to why Debtors’ case should

not be dismissed or converted. The court issued a Memorandum

Decision and converted the case to chapter 7, finding that

(1) Debtors failed to comply with an order of the court,

(2) there was an absence of a reasonable likelihood of

rehabilitation, and (3) Debtors failed to file a disclosure

statement, or file or confirm a plan within the time fixed by

order of the court, § 1112(b)(4)(J). The bankruptcy court

entered the order converting Debtors’ case on March 11, 2011.9

Debtors moved for a stay pending appeal. On March 29,

2011, the bankruptcy court granted the motion in a Memorandum

Decision, staying the proceedings pending the adjudication of

this appeal. The bankruptcy court again recognized the split of
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 The order simply stated: “IT IS ORDERED GRANTING the 10

Appellants’ Motion for Stay Pending Appeal, IT IS FURTHER

ORDERED STAYING the Chapter 7 Conversion Order of this Court

Dated February 17 and March 10, 2011.” It is possible that the

court and the parties contemplated that the chapter 7 would

proceed with respect to Debtors and their discharge, but that

the liquidation of their estate was stayed until this appeal

concludes.

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authority on the issue of whether the absolute priority rule

applied to individual chapter 11 debtors and, therefore, found

Debtors had a chance of success on appeal. In addition, the

bankruptcy court found that Debtors would suffer irreparable

injury if no stay was granted because their businesses could be

sold in chapter 7, leaving them without the ability to earn a

living. The bankruptcy court also found that the harm to the

IRS and P+P was merely delay. Finally, the bankruptcy court

stated that as a policy question, the public interest would be

advanced by obtaining a ruling from this Panel on the

applicability of the absolute priority rule in an individual

chapter 11 case. The bankruptcy court entered the order staying

the conversion of Debtors’ case on March 29, 2011. Despite the

stay, Debtors received their chapter 7 discharge on September

22, 2011.10

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding

under 28 U.S.C. §§ 1334 and 157(b)(2)(L). We have jurisdiction

under 28 U.S.C. § 158.

III. ISSUE

Does the absolute priority rule in § 1129(b)(2)(B)(ii)
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 We do not reach Debtors’ second issue of whether they 11

could avoid a strict application of the absolute priority rule

by contributing “new value” into a plan of reorganization in the

form of exempt assets for two reasons. First, the bankruptcy

court did not make any findings on this issue. Second, it is

not readily apparent from the record whether Debtors had exempt

assets which were not encumbered by the IRS’s liens. Thus,

Debtors appear to be seeking an advisory opinion on this issue. 

However, we lack jurisdiction to render advisory opinions. See

Kittel v. Thomas, 620 F.3d 949, 951 (9th Cir. 2010); see also

Computer Task Group, Inc. v. Brotby (In re Brotby), 303 B.R.

177, 195-96 (9th Cir. BAP 2003) (noting that when bankruptcy

court did not make the requisite factual findings that debtor

had satisfied the new value corollary, it was unnecessary to

decide if debtor, who was individual, could invoke the exception

in chapter 11 case).

 The Bankruptcy Abuse Prevention and Consumer Protection 12

(continued...)

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apply to chapter 11 debtors who are individuals?11

IV. STANDARD OF REVIEW

This appeal raises a statutory interpretation question

which we review de novo. AMB Prop., L.P. v. Official Creditors

(In re AB Liquidating Corp.), 416 F.3d 961, 963 (9th Cir. 2005). 

A de novo review allows us to examine the interpretation and

application of the relevant statutes independent of the

bankruptcy court’s determination.

V. DISCUSSION

A. The Absolute Priority Rule

The absolute priority rule, and issues within its realm,

are significant mainstay topics for most bankruptcy

practitioners and jurists of the last quarter of the 20th and

early 21st centuries. Once only held closely in the hearts and

minds of commercial and business reorganization counsel, since

the passage of the 2005 BAPCPA the absolute priority rule, as 12
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(...continued) 12

Act of 2005, Public Law 109-8, 119 Stat. 23.

 There is no doubt that the absolute priority rule was a 13

necessary feature to be considered in individual debtors’

chapter 11 plans of reorganization prior to the enactment of

BAPCPA. However, Congress has not significantly increased the

outer limits of eligibility for chapter 13 debtors and a

combination of the present day national economic climate, the

amendment to § 1129(b)(2)(B)(ii) and the addition of the new

§ 1115 has presented consumer bankruptcy lawyers with growth

opportunities in the individual debtor chapter 11 practice.

 The absolute priority rule was codified at 14

§ 1129(b)(2)(B)(ii) with the enactment of the Bankruptcy Code in

1978.

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amended, has now crossed over to the general consumer bankruptcy

practice world.13

The absolute priority rule initially was a judicially

created concept, arising from a series of early

twentieth-century railroad cases including N. Pac. Ry. Co. v.

Boyd, 228 U.S. 482, 508 (1913). The U.S. Supreme Court adopted

the absolute priority rule to prevent deals between senior

creditors and equity holders that would impose unfair terms on

unsecured creditors. 

An interesting feature of the absolute priority rule, even

before enactment of the BAPCPA amendment to

§ 1129(b)(2)(B)(ii) , is that the rule has never been absolute. 14

For instance, the U.S. Supreme Court in Kansas City Terminal Ry.

Co. v. Cent. Union Trust Co., 271 U.S. 445, 455 (1926), albeit

in dicta, recognized that a new, substantial, and necessary

contribution could allow an old equity holder to retain an

interest in the reorganized debtor. This contribution was
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 The U.S. Supreme Court stated that the shareholders had 15

to do more than just continue to participate in the debtor’s

business to retain their equity. Instead, they must contribute

money or money’s worth. 308 U.S. at 122. In other words, they

must contribute new value to the debtor. With this, the new

value corollary was indeed crystallized.

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commonly called the “new value corollary.” Later, in Case v.

Los Angeles Lumber Products Co., 308 U.S. 106 (1939), the U.S.

Supreme Court considered an offer by shareholders to continue

their participation in the company’s business after confirmation

of the plan of reorganization, which finally confirmed and

clarified the new value corollary.15

The absolute priority rule (as it pertained to unsecured

creditors) was eventually codified in 1978, within

§ 1129(b)(2)(B)(ii). Interestingly, and despite years of case

law by that time, no reference was made to “absolute priority”

or “new value” in that codification. The words “absolute

priority” or “new value” do not appear anywhere in § 1129.

Other nuances with respect to the absolute priority rule

developed following its codification, with courts finding other

“exceptions” besides the new value corollary that do not appear

in the text of the statute. For instance, in 2001, the 9th

Circuit Court of Appeals in Security Farms v. Gen. Teamsters,

Warehousemen and Helpers Union, Local 890 (In re Gen. Teamsters,

Warehousemen & Helpers Union, Local 890), 265 F.3d 869, 874 (9th

Cir. 2001), found that the absolute priority rule did not apply

to organizations where their members did not hold “equity

interests” in the entity (even though the term “equity interest”

does not appear in § 1129(b)(2)(B)(ii)).
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 Courts almost universally found that individuals could 16

reorganize and that the absolute priority rule applied to their

plan prior to the enactment of BAPCPA.

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In that case, the Ninth Circuit, relying on the Seventh

Circuit’s case of In re Wabash Valley Power Ass’n, 72 F.3d 1305,

1315 (7th Cir. 1995), agreed that the term “interest” in

§ 1129(b)(2)(B)(ii) meant equity interest in a for-profit

corporation. These cases undertook a historical review of the

absolute priority rule, delving into the fact that the “absolute

priority rule” had (at least) one specific mission - to

undermine corporate shareholders’ advantages over unsecured

creditors.

Prior to the enactment of BAPCPA, an individual debtor’s

plan needed to meet the requirements of the absolute priority

rule. “Interest” as it appears in § 1129(b)(2)(B)(ii) has 16

various meanings, and the individual debtor’s ownership rights

in estate property, as that property is defined from time to

time by the Bankruptcy Code and judicial interpretations, are

perfectly harmonized within the absolute priority rule, both

prior to and after BAPCPA’s enactment.

Two points are to be drawn here. First, courts have always

reviewed § 1129(b)(2)(B)(ii) through the lens of common sense

and have approached legislative interpretation in a way to

facilitate the goals of the statute. Second, simply because

words may have alternative meanings, ambiguities do not

necessarily arise. The words, all of them, should be read in

context with the sentence, the paragraph, and the entire text of

the statute (in this case, the Bankruptcy Code). As in the case
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of “interest” in § 1129(b)(2)(B)(ii), words have various

meanings depending on their underlying required usages, but no

real reasonable ambiguity is created simply because of those

various usages.

B. The Methodology of Statutory Interpretation

How do we endeavor to understand the parts of

§§ 1129(b)(2)(B)(ii) and 1115 as they relate to the

applicability of the absolute priority rule to individual

chapter 11 debtor plans? We are first guided by primary

principles.

“The interpretation of the Bankruptcy Code first begins

with the language itself. See In re Griffith, 206 F.3d 1389,

1393 (11th Cir. 2000); United States v. Ron Pair Enters., 489

U.S. 235, 241 (1989). If the language is plain and unambiguous,

then the Court must enforce the Bankruptcy Code according to its

terms. Id.” In re Gosman, 282 B.R. 45, 48 (Bankr. S.D. Fla.

2002).

The U.S. Supreme Court in Lamie v. U.S. Trustee, addressed

this point directly:

The starting point in discerning congressional intent

is the existing statutory text, see Hughes Aircraft Co. v.

Jacobson, 525 U.S. 432, 438 (1999), and not the predecessor

statutes. It is well established that “when the statute’s

language is plain, the sole function of the courts--at

least where the disposition required by the text is not

absurd--is to enforce it according to its terms.” Hartford

Underwriters Ins. Co. v. Union Planters Bank, N.A., 530

U.S. 1, 6 (2000) (internal quotation marks omitted)

(quoting United States v. Ron Pair Enterprises, Inc., 489

U.S. 235, 241 (1989), in turn quoting Caminetti v. United

States, 242 U.S. 470, 485 (1917)).

Lamie, 540 U.S. 526, 534 (2004).

In interpreting the Bankruptcy Code, the U.S. Supreme Court
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 See Kenneth N. Klee, All You Ever Wanted to Know About 17

Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J. 133

(1979).

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has held “as long as the statutory scheme is coherent and

consistent, there generally is no need for a court to inquire

beyond the plain language of the statute.” BFP v. Resolution

Trust Corp., 511 U.S. 531, 566 (1994).

Thus, we look to the statutory language at issue.

C. The Plain Meaning of the Absolute Priority Provisions

The requirements for confirmation of a plan of

reorganization are generally set out in § 1129, which provides

two separate and distinct paths for successful confirmation. 

The first path is mapped out in the sixteen paragraphs of

§ 1129(a). If a plan proponent can demonstrate to the

satisfaction of the court that each and every requirement

contained in paragraphs (1) through (16) of § 1129(a) has been

met, a plan can be confirmed. Of particular note is the

requirement of obtaining the consent of each class of creditor

as required by paragraph (8) of § 1129(a).

A second path to confirmation is established pursuant to

§ 1129(b), where absent consent of each class of creditor (as

required by § 1129(a)(8)), a plan may still be confirmed by the

bankruptcy court if (1) the fifteen remaining paragraphs of

§ 1129(a) are met, and (2) the plan is, among other things,

“fair and equitable.” This nonconsensual method of confirmation

is referred to as “cramdown.” The burden of demonstrating that 17

the plan is “fair and equitable” in order to obtain confirmation

falls on the plan proponent.
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 The BAPCPA amendments of 2005 added the emphasized 18

portion of § 1129(b)(2)(B)(ii), appearing above.

 Section 1115 reads as follows: 19

Section 1115. Property of the estate

(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–

(continued...)

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The Bankruptcy Code provides guidance as to whether a plan

is “fair and equitable” as to unsecured creditors. Section

1129(b)(2)(B)(ii), known as the “absolute priority rule”,

provides that a plan is “fair and equitable” if:

(B) With respect to a class of unsecured claims—

. . .

(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.

11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added).18

Simply put, a plan not paying an unsecured creditor in full

is nevertheless “fair and equitable” (and can be crammed down

over the unsecured creditor’s objections), so long as an

individual debtor does not retain property except property

included in the bankruptcy estate under § 1115.

Therefore, one must now consider the companion section to

§ 1129(b)(2)(B)(ii), § 1115, to determine what property was

included in the bankruptcy estate when the debtor is an

individual.

We believe that § 1115 plainly identifies an individual 19
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(...continued) 19

(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.

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chapter 11 debtor’s estate as

(1) Property specified in § 541 (i.e., “property of the

estate includes, in addition to the property specified

in section 541”) (emphasis added);

(2) All property of the kind specified in § 541 that the

(individual) debtor acquires after the commencement

(but before the closure, dismissal or conversion) of

the case; and

(3) 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.

Application of “plain-meaning analysis” has been set out in

the recent 9th Circuit BAP decision Barnes v. Belice (In re

Belice), 461 B.R. 564 (9th Cir. BAP 2011). In that opinion, the

BAP was critical of the bankruptcy court’s application of the

plain-meaning analysis.
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Without considering the relationship of the phrase in

question to the contextual statutory scheme or the logical

impact of their broad interpretation on that scheme, they

improperly emphasize one meaning of the words to the

exclusion of all other considerations. See Corley v.

United States, 129 S. Ct. 1558, 1567 n.5 (2009).

Belice at 577.

With this guidance in mind, we consider here, and later in

our opinion, our plain-meaning interpretation of the language

contained in §1129(b)(2)(B)(ii) and § 1115 within the contextual

statutory scheme and logic of plan confirmation requirements of

Chapter 11.

First, we observe that there are no conflicting provisions

within Chapter 11 relative to our view that the absolute

priority rule does not apply in individual chapter 11 cases. We

find no anomalies, inconsistencies or conflicts created by this

interpretation. More importantly, we find significant

contextual concordance with the other requirements for plan

confirmation, including those previously described, including

but not limited to (1) the new requirement for dedication of all

of debtor’s disposable income for five years, (2) the straightforward best interest of creditors test, and (3) the delay of

issuance of discharge until the plan has been fully consummated. 

Including the § 541 property within the universe of property

contained in § 1115, as we believe a plain-meaning

interpretation requires, does no violence to the logical impact

of the reorganization process or scheme established in chapter

11. Indeed, especially combined with the new additional

requirement of five years of debtor’s disposable income, it is

illogical to thereafter remove the debtor’s means of production
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(continued...)

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of debtor’s disposable income by maintaining the absolute

priority rule in an individual’s case.

The dissent argues that the rule of statutory construction

guides that, where possible, one must avoid rendering any parts

superfluous. (Citing TRW Inc. v. Andrews, 534 U.S. 19, 31

(2001)). The dissent further argues that “the broad

construction the Panel advocates causes parts of the Code to

become superfluous. For example, § 103(a) makes § 541, which

states that an estate is created upon the filing of a petition,

applicable in chapter 11 cases. Section 103(a) was not amended

by BAPCPA. But the broad view makes § 103(a) inapplicable in

individual chapter 11’s.” However, the argument proves too much

and is incongruent with the reality of the Bankruptcy Code. 

Section 1115 mirrors § 1306 which was part of the 1978 Code

concurrent with enactment of § 103(a). Nobody, ever, has argued

that § 1306 made § 103(a) surplusage, and there is no reason for

this Panel to do so with respect to § 1115. To do otherwise

would create an indefensible discontinuity between § 1115 and

§ 1306.

Section 1115’s identification of estate property consists

of the property contained in § 541 and the two post-petition

acquired assets - newly acquired property and income. The socalled disputes over what “included” means in

§ 1129(b)(2)(B)(ii) and “in addition to” in § 1115 arise from

misinterpretation of the words. “Included” is not a word of

limitation. To limit the scope of estate property in §§ 1129 20
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(...continued) 20

Surety Co. v. Marotta, 287 U.S. 513, 517 (1933) in which the

U.S. Supreme Court presents in that bankruptcy setting a

definitive explanation for the use and meaning of the word

“include.” See also Kenneth N. Klee, Bankruptcy and the Supreme

Court, at 22 and n.70, 35-36,(Lexis/Nexis 2008).

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and 1115 would require the statute to read “included, except for

the property set out in Section 541” (in the case of

§ 1129(b)(2)(B)(ii)), and “in addition to, but not inclusive of

the property described in Section 541” (in the case of § 1115).

A plain reading of §§ 1129(b)(2)(B)(ii) and 1115 together

mandates that the absolute priority rule is not applicable in

individual chapter 11 debtor cases. Accord SPCP Group, LLC v.

Biggins, ___ B.R. ___, 2011 WL 4389841, at *3-5 (M.D. Fla. Sept.

21, 2011) (declined to follow In re Gelin, 437 B.R. 435 (Bankr.

M.D. Fla. 2010), which followed the narrow view based on an

ambiguity analysis); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb.

2007) (following a plain meaning analysis); In re Shat, 424 B.R.

854 (Bankr. D. Nev. 2010) (following the broad view based upon

an ambiguity analysis).

D. Analysis of Legislative History, Congressional Intent,

or other Speculations

Much time has been spent by jurists and scholars on the

legislative history, congressional intent, and other

speculations surrounding the applicability of the absolute

priority rule in individual debtor chapter 11 cases. We have

reviewed a myriad of lower court decisions and articles replete

with seemingly endless analyses of possible congressional

intentions and various outcomes depending on the “narrow” or
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“broad” view adopted by the author.

While certainly not exhaustive in scope, these decisions

and articles have undertaken a titanic effort to frame their

outcomes on what may be a very weak universe of original

resources. However the Bankruptcy Code, as the main resource,

does provide significant assistance. For instance, Congress in

adopting BAPCPA’s individual debtor chapter 11 provisions

borrowed provisions from chapter 13. Section 1123(a)(8) was

added to the Bankruptcy Code, providing that, to be confirmable,

an individual debtor’s plan must provide for the payment to

creditors of all or such portion of earnings from personal

services or other future income of the debtor – resembling

§ 1322(a)(1). Section 1129(a)(15) was added, giving dissenting

unsecured creditors who are not being fully paid under the plan

absolute veto power over the plan unless the debtor contributes

an amount equal to all of his projected disposable income over

the longer of five years or the plan payment period - resembling

§ 1325(b). Section 1141(d)(5)(A) was added, delaying the

discharge until completion of all plan payments - resembling

§ 1328(a). Section 1141(d)(5)(B) was added, permitting a

discharge for cause before all payments are completed -

resembling the hardship discharge of § 1328(b). And, Section

1127(e) was added, permitting modification of a plan even after

substantial consummation - resembling § 1329(a).

Finally, a plain reading of §§ 1129 and 1115 demonstrates

that, just as in chapter 13, to confirm a plan does not require

the application of an absolute priority rule. As in Chapter 13,

the disposable income requirement insures that the individual
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debtor is required to dedicate all of his or her disposable

income over a designated time period (three or five years in

Chapter 13, at least five years in chapter 11) to plan payments

directed to unsecured creditors.

When decisions have gone further than exercising a plain

reading of the statute, they have entered into speculative

analyses that are fatally flawed.

As an example, the bankruptcy court in In re Gbadebo, in

determining that the absolute priority rule continued to exist

in individual debtor chapter 11 cases, found a so-called

“anomaly” that made “no sense.” The bankruptcy court said:

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.

In re Gbadebo, 431 B.R. 222, 230 (Bankr. N.D. Cal. 2010).

The above passage challenges the abrogation of the absolute

priority rule in individual cases (with respect to pre-BAPCPA

§ 541 estate property) based on an apparent procedural anomaly

that the debtor must solicit votes but can ignore them. No

anomaly exists; those votes are not ignored. The analysis is

incomplete. If the class votes yes, § 1129(a)(8) is satisfied. 

If the class votes no, its vote is not ignored. If the plan

provides distributions of property equal to the allowed amount
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of the unsecured claim, both §§ 1129(a)(15)(A) and

1129(b)(2)(B)(i) are met, and the court may confirm the plan if

it is fair and equitable under § 1129(b)(1). If the plan

provides for less than satisfaction in full on a present value

basis and the impaired class votes no, then it may be confirmed

as long as § 1129(a)(15)(B) and (b)(1) are satisfied. In

essence, Congress affirmatively amended the law so that

§ 1129(a)(15)(B) would trump § 1129(b)(2)(B)(ii) in individual

debtor cases. Thus, § 1129(b)(2)(B)(ii)’s proscription on the

retention of ownership interests by an individual debtor is not

an aspect of the absolute priority rule in individual debtor

chapter 11 cases. In this instance, recourse to legislative

history and spirited analytics is unnecessary in light of the

plain meaning of this particular statute.

The Dissent disagrees with the Panel’s point, stating that

for one reason or another, creditors may vote against a plan

without filing an objection. However, clearly, the drafters of

§ 1129(a)(15) tried to create symmetry between chapters 11 and

13 for individual debtors. Of course in chapter 13, unsecured

creditors do not get to vote on the plan. They can only object

to confirmation under § 1325(b)(1). The BAPCPA amendment to

§ 1129(a)(15) mirrors this treatment in chapter 11 where

creditors holding claims in impaired classes have the right to

vote on the plan as well as to object to confirmation. The

drafter’s failure to anticipate this nuance does not provide a

reason to destroy the symmetry between chapters 11 and 13. The

possibility that all unsecured creditors voting against the plan

would simultaneously fail to object to confirmation is a
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theoretical figment squarely opposed to reality. We will not

interpret a statute to destroy a sensible interpretation based

on such a conjecture.

VI. CONCLUSION

We hold that the absolute priority rule does not apply in

individual debtor chapter 11 cases for the reasons stated above. 

Therefore, we REVERSE the orders denying confirmation of

Debtors’ second amended plan and converting their case to

chapter 7, and REMAND the matter to the bankruptcy court for

further action consistent with this opinion.

JURY, Bankruptcy Judge, dissenting:

Addressing an issue that has confronted and confounded

innumerable bankruptcy courts around the country and resulted in

a significant number of published opinions from those courts

which split demonstratively in their results, the Panel rules

that the words of the post-BAPCPA statutes about the absolute

priority rule in individual chapter 11’s are “plain” and subject

to only one simple reading. The Panel premises this simplistic

outcome on its conviction that Congress intended to align

individual chapter 11’s almost entirely with chapter 13’s

because of some alterations in the Bankruptcy Code by BAPCPA

which made the two previously divergent proceedings more

similar.

I disagree — not only with the holding, but also with the

underlying assumptions which drive the decision. The majority’s

analysis would have us conclude that the definition of property

of the estate found in § 541 and made applicable to all chapters
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by § 103(a) has no meaning in individual chapter 11’s. They

would further have us conclude that one of the significant

differences between chapter 11’s and 13’s — that classes of

creditors are entitled to vote for or against confirmation in

chapter 11’s whereas no class vote exists in chapter 13’s — has

little or no importance in an individual chapter 11. Finally,

their narrow reading of the meaning of the terms “included” and

“in addition to” by focusing solely on §§ 1129(b)(2)(B)(ii) and

1115 causes them to overlook one of the key tenets of statutory

construction: that we are to read the statute as a cohesive

whole, giving all sections their due place and not creating an

island of words that floats independently of the integrated

continent.

Taken in this context the meaning of the words is not

plain. There can be more than one cogent interpretation of

their meaning and intent and I believe they do not write the

absolute priority rule out of individual chapter 11’s.

In addition to my disagreement with the statutory

construction elements of the majority decision, I believe my

colleagues have lost sight of two important policies — one of

which has been an underpinning of chapter 11 determinations

since the enactment of the Code in 1978 and the other of which

was the primary purpose of the BAPCPA amendments in 2005. The

long standing purpose behind chapter 11, as stated by the

Supreme Court, is to strike a balance between a debtor’s

interest in reorganizing and restructuring its debts and the

creditors’ interest in maximizing the value of the bankruptcy

estate. See Toibb v. Radloff, 501 U.S. 157, 163 (1991). The
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majority’s approach loses sight of this balance, allowing the

reorganized individual debtor to retain all his or her assets

while disenfranchising the vote of unsecured creditors who seek

more value.

More recently, the policy behind the enactment of BAPCPA

was to enhance the return to creditors. As observed by many

courts, “BAPCPA has been read to tighten, not loosen, the

ability of debtors to avoid paying what can reasonably be paid

on account of debt.” In re Kamell, 451 B.R. 505, 508 (Bankr.

C.D. Cal. 2011) (citing In re Gbadebo, 431 B.R. at 229); In re

Lindsey, 453 B.R. 886, 904 (Bankr. E.D. Tenn. 2011) (observing

that the primary purpose of BAPCPA is “‘to improve bankruptcy

law and practice by restoring personal responsibility and

integrity in the bankruptcy system and ensure that the system is

fair for both debtors and creditors.’”).

The Panel’s ruling eviscerates these recognized motives

behind the original Code and its revisions when applied in the

individual chapter 11 proceeding. Based on both of these

considerations, I respectfully dissent.

I.

Section 1129 sets forth the requirements for the

confirmation of a chapter 11 plan. The focus of this case is on

§ 1129(b)(2)(B)(ii) which contains the “fair and equitable”

requirement. That section, which is referred to generally as

the “absolute priority rule,” was amended in 2005 with the

enactment of BAPCPA, and provides that a plan is fair and

equitable if:

(B) With respect to a class of unsecured claims —
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(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 . . . . (Emphasis added).

It is the statute’s use of the word “included” and its cross

reference to § 1115 which has caused interpretive problems.

Namely, what property is “included” in the estate by § 1115 that

an individual chapter 11 debtor may retain? Section 1115(a)

provides the following definition of property of the estate for

individual chapter 11 debtors:

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.

(Emphasis added).

Here, the key phrase for interpretation is contained in the

preamble of the statute: “property of the estate includes, in

addition to the property specified in section 541.”

A.

Before proceeding with the application of any interpretive

rule, a brief review of the current state of the bankruptcy

court caselaw in the Ninth Circuit is warranted. Two basic

interpretations of §§ 1129(b)(2)(B)(ii) and 1115 have emerged.

Under what is called the broad view, the bankruptcy court

in In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010) construed the
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 Under this reading, when § 1129(b)(2)(B)(ii) says “the 21

debtor may retain property included in the estate under section

1115” it means “the debtor may retain all property of the

estate.” Why did it not just say that?

 These changes, also relied upon by the majority, 22

included: (1) redefining property under § 1115 along the lines

of property of the estate under § 1306; (2) changing the

mandatory contents of a plan pursuant to § 1123(a)(8) to

resemble § 1322(a)(1); (3) adding the disposable income test of

§ 1325(b) to § 1129(a)(15); (4) delaying the discharge until

completion of all plan payments as in § 1328(a); (5) permitting

discharge for cause before all payments are completed pursuant

to § 1141(d)(5), similar to the hardship discharge of § 1328(b);

and (6) the addition of § 1127(e) to permit the modification of

a plan even after substantial consummation for purposes similar

to § 1329(a). In re Shat, 424 B.R. at 862.

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phrase “in addition to the property specified in section 541”

contained in § 1115 to mean that “[s]ection 1115 absorbs and

then supersedes [s]ection 541 for individual chapter 11 cases.” 

Id. 865. In turn, the court reasoned that if

§ 1129(b)(2)(B)(ii) excepts from the operation of the absolute

priority rule that property “included” in § 1115, then the

“exception extends to all property of the estate.” Id. Thus, 21

in essence, In re Shat holds that the absolute priority rule

does not apply in individual chapter 11 cases. Id. at 867. In

reaching its decision, the Shat court relied upon the numerous

revisions in BAPCPA which make individual chapter 11’s more like

chapter 13 and also the few cases which had addressed the 22

issue. Id. at 865-66. Nonetheless, the court acknowledged that

its broad reading of § 1115 was “not without problems.” Id. at

867.

Other bankruptcy courts, in equally well-reasoned

decisions, have narrowly interpreted § 1115 to supplement § 541
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by adding only the debtor’s postpetition earnings and other

property acquired after the commencement of the case. See In re

Tucker, 2011 WL 5926757 (Bankr. D. Or. 2011); In re Borton, 2011

WL 5439285 (Bankr. D. Idaho 2011); In re Kamell, 451 B.R. 505;

In re Karlovich, 456 B.R. 677 (Bankr. S.D. Cal. 2010); In re

Gbadebo, 431 B.R. 222. Under the narrow view, the absolute

priority rule still applies to individual chapter 11 debtors

with respect to their prepetition property, but postpetition

property is not subject to its strictures. Notably, the Panel

mentions only one of these well-reasoned decisions.

Not surprisingly, Debtors and NACBA advocate adoption of

the broad view and echo an analysis similar to that in In re

Shat. My colleagues accepted those arguments, but I am not

persuaded. Instead, I think numerous statutory interpretive

tools favor the narrow construction camp. Even if in the end of

my endeavor no clear answer emerges after application of these

tools, then I ask a further question not addressed by the Panel: 

What purpose consistent with generally recognized policies would

a broad reading of the relevant statutes serve? Nowhere does

the Panel address the answer to that question.

B.

I start my analysis with a review of the basic statutory

rules by which I am bound. If the statutory language is clear,

I must apply it by its terms unless to do so would lead to

absurd results. United States v. Ron Pair Enters., Inc.,

489 U.S. 235, 241–42 (1989). I do not recite this tenet of

statutory interpretation idly. Examining the language of a

statute in the context in which it is used is always the
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starting point.

In addition, I am instructed to construe a statute, if

possible, so that “no clause, sentence or word” is rendered

“superfluous, void, or insignificant.” TRW Inc. v. Andrews,

534 U.S. 19, 31 (2001); see also, Conn. Nat’l Bank v. Germain,

503 U.S. 249, 253 (1992) (“[C]ourts should disfavor

interpretations of statutes that render language superfluous.”). 

Another basic tenet of statutory construction is that courts

should interpret a law to avoid absurd or bizarre results. 

Demarest v. Manspeaker, 498 U.S. 184, 191 (1991) (applying

statute’s terms where the result was not “so bizarre that

Congress could not have intended it”); Griffin v. Oceanic

Contractors, Inc., 458 U.S. 564, 575 (1982) (“It is true that

interpretations of a statute which would produce absurd results

are to be avoided if alternative interpretations consistent with

the legislative purpose are available.”). Finally, I engage in

statutory interpretation by taking a holistic approach that

strives to implement the policies behind the enactment of BAPCPA

and harmonize the provisions of the Code. See Drummond v.

Wiegand (In re Wiegand), 386 B.R. 238, 241 (9th Cir. BAP 2008). 

Of course, underlying all these interpretive tools is the tenet

that “aids to interpretation can be used only to resolve

ambiguity and never to create it.” 2A Norman J. Singer and J.D.

Shambie Singer, Statutes and Statutory Construction § 46:4 (7th

ed. 2007). Keeping this in mind, I now apply the rules.

C.

There is no serious debate about whether

§ 1129(b)(2)(B)(ii) allows an individual chapter 11 debtor to
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retain some property without running afoul of the absolute

priority rule. The definition of that property is “included” in

§ 1115. The Panel contends that the word “included” is not a

word of limitation under the Code and that, to treat it as such,

the statute would read a different way than drafted; i.e.,

“included, except for property set out in Section 541.” I

cannot adopt this strained reading of the word “included.”

The Panel loses sight that words have different meanings in

different contexts. It is a well-established canon of statutory

construction that when the word “includes” or “including” is

followed by a list of examples, those examples are considered

illustrative rather than exhaustive. See Vermejo Park Corp. v.

Kaiser Coal Corp. (In re Kaiser Steel Corp.), 998 F.2d 783, 788

(10th Cir. 1993) (holding that the word “including” after “party

in interest” in § 1109(b) indicates that the list of examples is

not exhaustive of possible parties in interest); In re Adams,

275 B.R. 274, 281 (N.D. Ill. 2002) (stating that § 503(b) is a

nonexclusive list of six categories of administrative claims). 

Thus, the “not a term of limitation” context. Here, however,

the statutory use of the word “included” is not used as the

preface for representative or illustrative examples. Rather,

the property “included” in the estate requires further inquiry

by its cross reference to § 1115 (not § 541). As a result, I

believe the word “included” in § 1129(b)(2)(B)(ii) means that

property “added to” the estate under § 1115.

My conclusion is consistent with my view of what § 1115

accomplishes. The introductory phrase of § 1115 states that

“property of the estate includes, in addition to the property
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specified in § 541 . . . .” My interpretation of the word

“includes” here is derived from the fact that property of the

estate is already defined in § 541. Section 1115(a) brings into

the estate a debtor’s postpetition property expressly excluded

by § 541. See § 541(a)(6) (carving out post-petition earnings

from services performed by an individual debtor after the

commencement of the case) and § 541(a)(7) (making property of

the estate any interest in property that the estate (not the

debtor) acquires after the case). Therefore, Congress intended

to add, or “include,” the postpetition property to the

individual chapter 11 debtor’s estate in § 1115, in order to

expand the estate.

This reading is compatible with the phrase “in addition to

the property specified in section 541,” which is not ambiguous. 

The ordinary meaning of “in addition to” is “a part added” or

“besides”. Merriam-Webster’s Dictionary, http://merriamwebster.com; see also Oxford English Dictionary,

http://oxforddictionaries.com (“the action or process of adding

something to something else”). Accordingly, for these reasons,

I believe that §§ 1129(b)(2)(B)(ii) and 1115 are most naturally

understood to add to the property already defined in § 541 the

property which the debtor acquires postpetition. See In re

Kamell, 451 B.R. at 512 (“[T]he careful reference in

§ 1129(b)(2)(B)(ii) to only § 1115 and not to § 541 preserves

the distinction between existing assets and those acquired

post-petition because of the way § 1115 is worded (which clearly

makes post-petition earnings and acquisitions an addition to

§ 541 property).”).
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 This interpretation of § 1115 is consistent with one 23

circuit court’s view of what the companion chapter 13 provision,

(continued...)

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In statutory construction endeavors, I am also guided by

the rule that, where possible, I must avoid rendering any parts

superfluous. TRW Inc. v. Andrews, 534 U.S. at 31. The broad

construction the Panel advocates causes parts of the Code to

become superfluous. For example, § 103(a) makes § 541, which

states that an estate is created upon the filing of a petition,

applicable in chapter 11 cases. Section 103(a) was not amended

by BAPCPA. But the broad view makes § 103(a) inapplicable in

individual chapter 11’s. See In re Stephens, 445 B.R. 816,

820–21 (Bankr. S.D. Tex. 2011); In re Gelin, 437 B.R. 435, 442

(Bankr. M.D. Fla. 2010) (stating that since neither § 103(a) nor

§ 541 was amended by BAPCPA, “there is no reason for § 1115 to

‘absorb’ and ‘supersede’ § 541 to define property of the estate

for individual chapter 11 cases.”).

In short, by interpreting § 1115 to add only postpetition

property to the individual chapter 11 debtor’s estate, I avoid a

construction which creates superfluous language and preserve the

distinctions between prepetition property which becomes property

of the estate under § 541 and postpetition property which

becomes property of the estate under § 1115. These

distinctions, which are mainstays of bankruptcy law, make it

unlikely that Congress meant for § 1115 to “absorb” and

“supersede” § 541. See In re Borton, 2011 WL 5439285, at *4

(finding that § 1115 “supplements § 541, but it does not

supplant or subsume § 541”).23
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(...continued) 23

§ 1306, means to a chapter 13 estate. In In re Seafort,

___F.3d.___, 2012 WL 469723,*4 (6th Cir. 2012), the court found

that “section 1306(a) expressly incorporates section 541. Read

together, § 541 fixes property of the estate as of the date of

filing, while § 1306 adds to the ‘property of the estate’

property interests which arise post-petition.” (Emphasis added).

 This section provides in relevant part that “with respect 24

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[.]”

 Section 1129(a)(15)(B) provides: 25

(continued...)

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There are other textual difficulties with the broad view. 

For example, an adoption of the broad view likely eliminates

§ 1129(b)(2)(B)(i), if not renders it an absurdity. 24

The ‘broad view’ necessarily eliminates subsection

(B)(i) as well, even though none of its language was

amended in BAPCPA, because otherwise the statute would

express a nonsensical and harsh alternative in (B)(i)

to a much more lenient if not entirely inapplicable

subsection (B)(ii) which, in the ‘broad view,’ allows

the individual debtor to keep all of his pre-petition

property and all post-petition property not already

dealt with at § 1129(a)(15). This is another reason

the court doubts the ‘broad view,’ because it makes

subsections (B)(i) and (B)(ii), expressed as

alternatives, into an absurdity. Since the BAPCPA

language referencing individuals is only included in

alternative (B)(ii), (B)(i) remains there as a nullity

respecting individuals in the ‘broad view.’

In re Kamell, 451 B.R. at 508 n.3.

In their result-driven approach, my colleagues do not

address any of these problems.

D.

I also disagree with the Panel’s statement that “Congress

affirmatively amended the law so that § 1129(a)(15)(B) would 25
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(...continued) 25

In a case in which the debtor is an individual and in

which the holder of an allowed unsecured claim objects

to the confirmation of the plan —

. . . 

(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(b)(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.

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trump § 1129(b)(2)(B)(ii) in individual debtor cases.” Notably,

the Panel reached this conclusion without explaining how. The

Panel overlooks that § 1129(a)(15) is only triggered when the

holder of an allowed unsecured claim objects to confirmation of

the plan. An objection is clearly different than a vote under

the Code. For this reason, I part company with the Panel’s

critique of the “so-called” procedural anomaly created by the

broad view as stated in In re Gbadebo, 431 B.R. at 230 (stating

that “[i]f the plan proposes to pay [a creditor] anything, the

debtor is required to send them a ballot. Yet, [under the broad

view], their vote can be ignored. This makes no sense.”). It

is quite possible that for one reason or another creditors may

vote against a plan without filing an objection. In that event,

the way I read the Code, § 1129(a)(15) would not come into play.

Moreover, under the narrow reading that I propose, an

individual chapter 11 debtor would still retain property during

the first five years of his or her plan. One recent decision

contained the following illustration:

• A married couple files a joint Chapter 11 petition.

• At confirmation the debtors are making two separate
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$700 monthly car payments to secured creditors. The

plan is confirmed with the two car payments.

• One year into the plan, the debtors trade these cars

for less expensive cars requiring payments of only

$400 per month each.

BAPCPA’s § 1129(b)(2)(B)(ii)’s exception allows

the debtors to retain the savings on the cars. Under

§ 1325(b)(2) as incorporated by § 1129(a)(15), the

$1,400.00 in car payments would have served to reduce

the debtors’ projected disposable income. 

Nevertheless, the trade-in of the cars would allow the

debtors’ actual disposable income to be supplemented

by a $600.00 per month saving without any

corresponding increase in projected disposable

income—which is determined as of the petition date.

Over the remaining four years of the plan, the total

amount retained by the debtors would be $28,800. (The

total savings per month is $600 ($300 for both cars).

There are 48 months left in the first five years of

the plan. Forty-eight times $600 equals $28,800.).

The debtors’ actual income might increase during

the plan as well—perhaps if one of the debtors

received a raise or decided to work fifty hours per

week instead of forty. Because debtors’ projected

disposable income, and monthly payments to secured

creditors, were calculated based on circumstances at

the beginning of the plan, the resulting difference is

an amount the debtors may retain because of the

exclusion contained in § 1129(b)(2)(B)(ii).

In re Lively, 2011 WL 6936363, at *4-5 (Bankr. S.D. Tex. 2011). 

The Lively court recognized that a creditor could attempt to

modify the plan under § 1127(e), but noted that a court would

not necessarily approve the modification for two reasons. 

“Regarding the trade-in, a modification would have the perverse

result of punishing debtors for economizing. As to the example

of a debtor deciding to work more hours, a debtor might return

to the regular normal number of hours if the only result of the

greater effort is an increased payout to creditors.” Id. at

n.10.

For these reasons, Congress could not have intended
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§ 1129(a)(15) to replace the absolute priority rule with respect

to an individual chapter 11 debtor’s prepetition property.

II.

I also believe that the Panel has relied exclusively on

what it perceives to be the literal meaning of the statutes

while ignoring their purpose. I am not convinced that BAPCPA’s

amendments, which make some aspects of individual chapter 11

cases similar to chapter 13, translate into an abrogation of the

absolute priority rule with respect to individual chapter 11

debtors. In the larger picture, this approach is demonstrably

at odds with the policies behind the enactment of BAPCPA. As

previously mentioned, the purpose behind BAPCPA was to have

debtors pay more, not less. In re Kamell, 451 B.R. at 508

(citing In re Gbadebo, 431 B.R. at 229); In re Lindsey, 453 B.R.

at 905. Furthermore, the broad view taken by the Panel destroys

the careful balance between an individual chapter 11 debtor’s

interest in reorganizing and restructuring his or her debts and

the creditors’ interest in maximizing the value of the

bankruptcy estate. Radloff, 501 U.S. at 163. Individual

chapter 11 debtors are not simply chapter 13 debtors with larger

debts. Rather, chapter 11 debtors, individuals or not, stay in

possession of their property and enjoy all the rights and powers

of a trustee. They are authorized to operate their business and

can choose to extend their plan beyond five years. In exchange,

the chapter 11 process does not leave unsecured creditors by the

wayside by affording individual chapter 11 debtors the luxury to

retain all pre and postpetition property at their expense.

The Panel begins its discussion by offering the history of
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the absolute priority rule which it traces back to 1913. Courts

and bankruptcy practitioners alike appreciate this history and

the evolution of the rule with its judicially created

exceptions. I am also cognizant that the rule was traditionally

applied to equity interests and that the rule’s mission was to

undermine corporate shareholders’ advantages over unsecured

creditors. However, an equity interest is nothing more than an

ownership interest and individuals who own businesses, like the

Friedmans in this case, file chapter 11 when they are over the

debt limit for chapter 13. Individuals who own a business have

the same opportunities as corporate shareholders to take

advantage of unsecured creditors. Thus, I discern no good

reason to depart from the absolute priority rule’s traditional

application. Finally, I am convinced that because the absolute

priority rule has been embedded in bankruptcy jurisprudence and

codified for many years, we should proceed cautiously when asked

to recognize an exception from the rule that Congress has not

clearly expressed.

Given the history of the absolute priority rule and its

evolution, I ask what conceivable reason could Congress have had

for silently writing into § 1129(b)(2)(B)(ii) an abrogation of

the absolute priority rule for individual chapter 11 debtors? 

The Panel answers this question by simply referring to

amendments in BAPCPA which make individual chapter 11 cases

similar to chapter 13. This, I submit, is not enough. 

“Statutory interpretation is not a game of blind man’s bluff. 

Judges are free to consider statutory language in light of a

statute’s basic purposes.” Dole Food Co. v. Patrickson, 538
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 NACBA ignores the very practical consideration that if 26

plan failure results in conversion to chapter 7, the classes of

unsecured and junior secured creditors often receive very

little. These classes have traditionally been highly motivated

to negotiate.

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U.S. 468, 484 (2003). It is the Panel’s failure to consider the

purpose behind BAPCPA and chapter 11 in general that has led it

to construe the relevant statutes in a way that runs contrary to

what Congress would have hoped for and expected by the

amendments in BAPCPA.

III.

I finish by addressing the NACBA’s argument that retention

of the absolute priority rule makes it virtually impossible for

sole proprietors, who are individual chapter 11 debtors, to

confirm a plan of reorganization. I am not convinced that

application of the rule makes it “impossible” for sole

proprietors to confirm their plans. Plan acceptance may occur

through a variety of tools used by chapter 11 debtors prior to

the enactment of BAPCPA: they may negotiate a consensual plan,26

pay higher dividends, pay dissenting classes in full, or comply

with the absolute priority rule by contributing prepetition

property. In re Kamell, 451 B.R. at 512; In re Gbadebo, 431

B.R. at 229-30. Even so, I am not at liberty to read words into

a statute simply because I perceive the existing words to lead

to a harsh result.

IV.

Other than the arguments regarding the absolute priority

rule, Debtors have not pointed out any additional errors

relating to the conversion of their case. Thus, those arguments
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are waived for purposes of this appeal. Smith v. Marsh, 194

F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal, arguments not

raised by a party in its opening brief are deemed waived.”).

V.

In sum, for all these reasons, I respectfully dissent. I

would hold that the absolute priority rule applies to an

individual chapter 11 debtor’s prepetition property, but that

the rule has been abrogated with respect to postpetition

property under the plain terms of §§ 1129(b)(2)(B)(ii) and 1115. 

Therefore, I would AFFIRM the order denying confirmation of

Debtors’ second amended plan and the order converting their case

to chapter 7.