United States Bankruptcy Appellate Panel

For the Eighth Circuit

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No. 15-6001

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In re: Suzette Woodward

llllDebtor

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Heritage Bank

lllllllllllllllllllll Creditor - Appellant

v.

Suzette Woodward

llllllllllllllllllllDebtor - Appellee

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National Association of Consumer Bankruptcy Attorneys

 Amicus on Behalf of Appellee(s)

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Appeal from United States Bankruptcy Court 

for the District of Nebraska - Lincoln

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 Submitted: July 22, 2015

 Filed: August 13, 2015

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Before FEDERMAN, Chief Judge, SCHERMER, and SHODEEN, Bankruptcy

Judges. 

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SCHERMER, Bankruptcy Judge

Heritage Bank (Heritage) appeals from a Bankruptcy Court order confirming

Suzette Woodward's (Debtor) Fifth Amended Chapter 11 Plan. The confirmation

order is a final order of the Bankruptcy Court over which we have jurisdiction on

appeal. See 28 U.S.C. § 158(b). The Notice of Appeal and Statement of Election also

references an April 29, 2014 order denying the Debtor's Third Amended Plan. We

believe that the denial of confirmation of the Debtor's Third Amended Plan is not a

final order and cannot be the subject of this appeal. Bullard v. Blue Hills Bank, 135

S.Ct. 1686 (2015). Therefore, the sole basis of this appeal is the order confirming the

Debtor's Fifth Amended Chapter 11 Plan. For the following reasons, the confirmation

order is reversed and the case is remanded for a new confirmation hearing.

ISSUES

1.Whether an impaired class of claims has accepted the Debtor's Fifth Amended Plan. 

2.Whether 11 U.S.C. §§ 1129(b)(2)(B)(ii)'s absolute priority rule preventsindividual

debtors in Chapter 11 from retaining property acquired prior to the filing of the

bankruptcy petition when not all creditors' claims will be paid in full. 

3. Whether the value of the property to be distributed under the Fifth Amended Plan

is less than the Debtor’s disposable income.

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BACKGROUND

The Debtor is a practicing pathologist in Grand Island, Nebraska. She is a

member of Pathology Specialists, LLC. On April 4, 2011, the Debtor filed for relief

under Chapter 7 of the BankruptcyCode. Heritage holds an allowed, unsecured claim

in the amount of $270,566.00. 

On May 15, 2012, the Debtor acquired property at 2604 Arrowhead Road in

Grand Island, Nebraska as her principal residence from Leland and Marie Elliott

(Elliotts). As part of the purchase price, the Debtor signed a promissory note in favor

of the Elliotts in the amount of $169,900, and granted the Elliotts a security interest

in the property. The Elliotts perfected their lien in the Debtor’s property. In addition

to regular monthly payments, the terms of the note required the Debtor to make a

balloon payment on June 1, 2013. The Elliotts subsequently agreed to extend the date

on which the balloon payment was due by one year.

The case was converted to a proceeding under Chapter 11 on September 10,

2012. The Elliotts filed a proof of claim asserting secured status with respect to the

principal residence. Heritage objected to the Elliotts’ proof of claim, not because it

arose postpetition, but based on the timeliness of its filing. The Bankruptcy Court

overruled the objection and allowed the claimin the amount of $158,724.54. Heritage

did not appeal the order allowing the claim, but instead continued to object to the

Elliotts’ voting on the plan as an impaired class, on the ground that the claim was a

postpetition claim. At plan confirmation, the Bankruptcy Court essentially held that

the Elliotts had an allowed claim, that the plan altered the treatment of their claim,

and, thus, that the Elliotts were an impaired class entitled to the vote on the plan.

The BankruptcyCourt entered an order confirming the Debtor's Fifth Amended

Plan on December 23, 2014. The Elliotts, the sole members of their class, voted in

favor of the plan. No other impaired classes voted to accept the plan. On appeal,

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Heritage argues that the plan should not have been confirmed because: (1) an

impaired class did not accept it; (2) it violated the absolute priority rule; and (3) it

does not call for payment of all of the Debtor's disposable income.

STANDARD OF REVIEW

We review the bankruptcy court's findings of fact for clear error and its

conclusions of law de novo. In re Walker, 528 B.R. 418, 427 (B.A.P. 8th Cir. 2015)

(citing Heide v. Juve (In re Juve), 761 F.3d 847, 851 (8th Cir.2014)). Determining

whether the Elliotts may vote on the plan and whether the absolute priority rule

applies in individual Chapter 11 cases involve purely legal questions of statutory

interpretation. We exercise de novo review with respect to each issue. In re Johnson,

509 B.R. 213, 214-15 (B.A.P. 8th Cir. 2014) (citing Graven v. Fink (In re Graven),

936 F.2d 378, 384-85 (8th Cir.1991). We find it unnecessary to reach the third issue.

DISCUSSION

1. An Impaired Class of Claims has Accepted the Plan

Heritage asserts on appeal that since the Debtor’s obligation to the Elliotts

arose postpetition, the Elliotts were not “creditors,” as that term is defined in §

101(10), and so the Elliotts were not entitled to vote on the plan. Thus, Heritage

asserts, the Bankruptcy Court erred in treating them as a consenting class under §

1129(a)(10). We disagree and think that Heritage’s argument misses the mark under

the circumstances of this case. 

The issue is not whether the Elliotts were “creditors” under § 101(10), as

Heritage asserts, because the time to litigate the Elliotts’ creditorstatus has long since

passed. As a result, Heritage is now foreclosed from raising the argument on appeal.

Although it is true that Heritage objected to the Elliotts’ proof of claim, the objection

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was based on the timeliness of its filing. Heritage never objected to the claim’s

foundation in postpetition debt. Heritage did not appeal the BankruptcyCourt’s order

allowing the Elliotts’ claim, and review is now precluded by principles of res

judicata. Heritage may not raise the issue now. We hold that the Elliotts have an

allowed claim.

We do question, however, whether the Elliotts should have been holders of an

allowed claim because we are not convinced that the Bankruptcy Code allows for a

postpetition claim such as this. See, e.g., Bankr. Law Manual § 6:24 (5th ed.)

(although recognizing that the Code provides for specific, identified, exceptions to

the rule, stating that “[i]n general, only those claims that exist as of the date of the

filing of the bankruptcy petition, commonly referred to as prepetition claims, may be

allowed as claims against the estate.”). 

Nevertheless, because the Elliotts were the “holders of a[n] [allowed] claim,”

they were entitled to vote on the plan under the plain language of § 1126(a). That

section provides that “[t]he holder of a claim or interest allowed under section 502

of this title may accept or reject a plan” (emphasis added). Furthermore, § 

1129(a)(10) provides that, in order to confirm a plan, “[if] a class of claims is

impaired under the plan, at least one class of claims that is impaired under the plan

has accepted the plan, determined without including any acceptance of the plan by

any insider” (emphasis added). “[A] class of claims or interests is impaired under a

plan, unless,” as relevant here, the plan “leaves unaltered the legal, equitable, and

contractual rights to which such claim or interest entitles the holder of such claim or

interest.” 11 U.S.C. § 1124. We believe that the Elliotts’ claim is impaired. They

agreed to alter their rights under the note when they extended the date on which the

balloon payment was due. In so doing, the Elliotts also waived § 1123(b)(5)’s

prohibition against the modification of security interests in a debtor’s principal

residence. The antimodification provision can be waived by the creditor holding such

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a claim. See, e.g., In re Arns, 372 B.R. 876, 882-83 (Bankr. N.D. Ill. 2007) (holding 1

that a lender can waive the antimodification provision in § 1123 by agreeing to the

plan and not pursuing an objection to confirmation); In re Canovali, 2011 WL

307374 at 6 (Bankr. E.D. N.C. Jan. 27, 2011) (same); In re Mayberry, 487 B.R. 44,

46 (Bankr. D. Mass. 2013) (“Absent the creditor’s agreement the debtor cannot

obtain confirmation of a chapter 13 plan which proposes to modify a claim secured

by the debtor’s principal residence. If the creditor opts to agree to different

treatment, it is certainly free to do so.”) (quoting In re Wofford, 449 B.R. 362, 365

(Bankr. W.D. Wis. 2011) (emphasis added); In re Smith, 409 B.R. 1, 4 (Bankr. D.

N.H. 2009) (“[N]othing prevents a secured creditor from consenting to the

modification of its claim.”). 

Heritage cites In re Kliegl Bros. Universal Electric Stage Lighting Co., which

held that, since § 1126(a) provides that only the holder of a claim or interest allowed

under § 502 may accept or reject a plan, and since postpetition secured lenders are not

mentioned or implied in § 502, the class containing such a postpetition lender as its

sole member was not entitled to vote on the plan. 149 B.R. 306, 307 (Bankr. E.D.

N.Y. 1992) (citations omitted). However, in contrast to this case, Kliegl Bros. did not

say whether the lender there actually had an allowed claim, as the Elliotts do here. 

Again, maybe the Elliotts should not have had an allowed claim, but the fact is, they

do. To the extent Kliegl Bros. can be read to prohibit the Elliotts – as the holders of

an allowed claim impaired by the plan – from voting on the plan, we believe such a

reading is contrary to the language of the statutes discussed above. 

Consequently, we do not believe that the BankruptcyCourt erred in permitting

the Elliotts' ratifying vote to serve as the sole basis for the satisfaction of §

The modification of a residential mortgage such as this could, conceivably,

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raise good faith issues if the modification was done to create a favorable impaired

class, but good faith is not an issue raised in this appeal.

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1129(a)(10)'s requirement that an impaired class of claim holders vote in favor of the

plan. As the holders of an allowed claim and sole members of their impaired class,

the Elliotts’ ratifying vote satisfied § 1129(a)(10).

2. The Absolute Priority Rule Applies in Individual Chapter 11 Cases

“[T]he 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.” Norwest Bank Worthington v. Ahlers, 485 U.S.

197, 202 (1988) (quoting Ahlers v. Northwest Bank (In re Ahlers), 794 F.2d 388, 401

(8th Cir. 1986)); 11 U.S.C. § 1129(b)(2)(B)(ii). However, Congress amended the

bankruptcy code in 2005 to include a statutory exception permitting individual

Chapter 11 debtors to retain property included in the estate under section 1115..."

without first paying creditors (emphasis added). 11 U.S.C. § 1129(b)(2)(B)(ii).

Although most courts agree that § 1115 defines "property of the estate" as property

and income acquired after commencement of the case in addition to the prepetition

property specified in § 541, defining what "property [is] included in the estate under

section 1115" has divided courts. Whether prepetition property is "property included

in the estate under section 1115" will ultimately determine whether the absolute

priority rule has any continuing application in individual debtor Chapter 11 cases.

In order to determine whether clarity exists in the murky jurisprudence

surrounding the absolute priority rule, we think an overview of Congress’s thinking

with respect to individual Chapter 11 cases would be illuminating. Congress grafted

many aspects of Chapter 13 onto the individual Chapter 11 framework. For instance, 

§ 1123(b)(5) generally mimics § 1322(b)(2)’s treatment of claims secured only by the

Debtor’s principal residence. In addition, § 1129(a)(15) imports § 1325(a)(5)’s

concept of disposable income, and § 1141(d)(5) does the same with respect to §

1328(a)’s limitations on discharge. Finally, like § 1306, § 1115 brings into the estate

postpetition earnings and property. Other similarities exist.

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Although Congress was able to import many elements of Chapter 13 into the

individual Chapter 11 arena, it was not a perfect fit. In fact, in certain respects, it did

not fit at all. The absolute priority rule states, in full, that:

[T]he 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 [relating to payment of domestic support obligations].

§ 1129(b)(2)(B)(ii). We suggest that there is no “interest” holder in an individual

Chapter 11 case. The concept plainly applies to equity holders in the corporate or

partnership Chapter 11 context, for example, but we do not believe that there is an

individual Chapter 11 analogue. Ahlers simply assumed, without discussion, that the

Debtors were interest holders. Northwest Bank Worthington v. Ahlers, 485 U.S. at

966. But how can one hold an interest in oneself? We do not think this is possible. In

any event, one cannot avoid the fact that this is a Chapter 11 case. If Congress

intended for all Chapter 13 specific law to apply in individual Chapter 11 cases, it

could have afforded higher income debtors the ability to seek reorganization under

Chapter 13. It did not. 

We hold that the absolute priority rule still applies in individual Chapter 11

casesto prevent debtors fromretaining prepetition property. Our holding issupported

by: (1) the language and context of § 1129(b)(2)(B)(ii) and 1115; (2) the absence of

a clear indication by Congress of an intent to abrogate; and (3) the weight of existing

authority.

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A. The Relevant Statutory Language and Context Supports the Absolute

Priority Rule's Continuing Application

"In determining the meaning of a statutory provision, 'we look first to its

language, giving the words used their ordinary meaning." Lawson v. FMR LLC, 134

S. Ct. 1158, 1165 (2014) (quoting Moskal v. United States, 498 U.S. 103, 108

(1990)). "Whether a statutory term is unambiguous, however, does not turn solely on

dictionary definitions of its component words. Rather, '[t]he plainness or ambiguity

ofstatutory language is determined [not only] by reference to the language itself, [but

as well by] the specific context in which that language is used, and the broader

context of the statute as a whole." Yates v. United States, 135 S. Ct. 1074, 1081-82

(2015) (citing Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997)).

The language of §§ 1129 and 1115 favors the absolute priority rule's continuing

application. That postpetition property is the only "property included in the estate

under section 1115" follows from § 1129's use of the word "included." "The action

described by 'include' is either 'to take in as a part, an element, or a member

...[C]onverted into the active voice, § 1129(b)(2)(B)(ii) refersto property that § 1115

includes in the estate, which naturally reads as 'property that § 1115 takes into the

estate... ." Ice House America, LLC v. Cardin (In re Cardin), 751 F.3d 739 (6th Cir.

2014). Contextually, the only property that § 1115 can take into the estate is

postpetition property and income because prepetition property is already part of the

estate under § 541. "Section 1115 cannot take into the estate property that was already

there [prepetition property under § 541] ... what § 1115 takes into the estate-is

property 'that the debtor acquires after the commencement of the case." Id.

 

The text of § 1115(a) leads to the same conclusion. It states that "property of

the estate includes, in addition to the property specified in section 541– all property

of the kind specified in section 541 that the debtor acquires after the commencement

of the case... .” (emphasis added). The inclusion of "in addition to" as a modification

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of the "property specified in section 541" separates the "property specified in section

541" from all of the other property mentioned in § 1115, thereby channeling all of the

other property into "property included in the estate under section 1115" while

filtering from this definition "the property specified in section 541." In other words, 

[T]he phrase, 'the property specified in section 541' cannot be viewed in

isolation. The phrase is part of the prepositional phrase beginning with

'in addition to,' and is thus not the direct object of the transitive verb,

'includes,' so it does not relate to the subject of the sentence, 'property

of the estate... . 

In re Arnold, 471 B.R. 578, 602 (Bankr. C.D. Cal. 2012).

The broader statutory context provides further support. "Because § 541

independently includes all § 541 property in the estate, it would be a redundancy to

'reinclude' that property through the § 1115 language." In re Maharaj, 681 F.3d 569

(4th Cir. 2012). Consequently, we are left to conclude that the "property specified in

section 541" – that is, prepetition property – is not "property included in the estate

under section 1115" that is excluded from the absolute priority rule. Section 541

cannot operate as a "subset" of § 1115 as some "broad view" courts have suggested.

Id. at 569 (discussing Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (B.A.P.

9th Cir. 2012)). Therefore, the statutory language and context suggeststhat Congress

did not abrogate the absolute priority rule in individual Chapter 11 cases. 

B. Congress has not Evinced a Clear Indication of an Intent to Abrogate

the Absolute Priority Rule

The concept of the absolute priority rule was first articulated in 1913. N. Pac.

R. Co. V. Boyd, 228 U.S. 482, 508 (1913). We believe that Congress would have

employed clearer language to abrogate the absolute priority rule if it had so intended.

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It could have "expressly exempted individual debtors at the beginning of §

1129(b)(2)(B)(ii)." Dill Oil Company, LLC v. Stephens (In re Stephens), 704 F.3d

1286 (10th Cir. 2013). It could have omitted "in addition to the property specified in

section 541" from the introductory clause of § 1115(a), while including the words

"before and" directly preceding "after" in (a)(1) of the statute. The language of the

statute, then, would read, "property of the estate includes [comma and text omitted]

– all property of the kind specified in section 541 that the debtor acquires before and

after the commencement ofthe case." Congress did not make these changes, however,

and we see no reason to read them into §§ 1129 or 1115.

Furthermore, any mention of the absolute priority rule's abrogation is

conspicuously absent in The Bankruptcy Abuse and Prevention Act of 2005's

(BAPCPA) legislative history. PL 109-8, April 20, 2005, 119 Stat 23." BAPCPA's

legislative history lists several debtor protections but makes no mention of

eliminating the APR ... had Congress intended such a drastic change, itsurely would

have included the amendment in its list of debtor protections. Instead, the

amendments are best understood as preserving the status quo." Stephens, 704 F.3d at

1286 (citing H.R.REP. NO. 109-31, pt. 1, at 2, 17-18 and Maharaj, 681 F.3d at 572).

"[W]e will not read the Bankruptcy Code to erode past bankruptcy practice absent a

clear indication that Congress intended such a departure." In re Lively, 717 F.3d 406

(5th Cir. 2013) (quoting Hamilton v. Lanning, 560 U.S. 505, 517 (2010)).

C. The Overwhelming Weight of Authority has Upheld the Absolute

Priority Rule

Finally, the majority of courts to address the issue, including the Fourth, Fifth,

Sixth, and Tenth Circuits, follow the "narrow view." See Ice House, 751 F.3d at 734;

Lively, 717 F.3d at 406; Stephens, 704 F.3d at 1279; Maharaj, 681 F.3d at 558. They

have held, as we do today, that § 1115 merely augments existing estate property as

set out in § 541 by drawing in postpetition property and income. In fact, no circuit

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court has ruled otherwise. Therefore, we are comfortable in concluding that the

absolute priority rule still has application in individual Chapter 11 cases.

3. Determining whether the Debtor is Contributing Less than Her Disposable

Income to the Plan is Unnecessary

When the holder of an allowed unsecured claim objects to plan confirmation 

in a Chapter 11 case involving an individual debtor, § 1129(a)(15) requires that all

unsecured claims be paid in full or that the debtor pay all of her disposable income

into the plan for five years. “[D]isposable income” is defined in § 1325(b)(2) as

“current monthly income received by the Debtor ... less than amounts reasonably

necessary to be expended ... .” TheBankruptcyCourt determined the Debtor’s income

and the reasonableness of her expenses. 

Heritage, however, believesthat the Debtor’s income tax return should be used

to determine “current monthly income” rather than an average of her previous six

monthly “draws” from Pathology Specialists, LLC. Heritage also disputes the

reasonableness of the Debtor’s expenses. Because we have determined that the

absolute priority rule applies to individuals in Chapter 11, it is unnecessary to address

the Bankruptcy Court’s determination of the Debtor’s disposable income. The

Debtor’s “disposable income” as defined in § 1325(b)(2) is “property included in the

estate under section 1115" which the Debtor may retain. Heritage stated at oral

argument that it will only accept full payment on its claim. Therefore, any

determination of disposable income on appeal is unnecessary.

CONCLUSION

For the reasons stated above, we remand the case for a new confirmation

hearing.

 

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