Opinion ID: 3173092
Heading Depth: 3
Heading Rank: 4

Heading: Kan. 2007).

Text: Courts applying the narrow view instead hold “that the BAPCPA amendments merely have the effect of allowing individual Chapter 11 debtors to retain property and earnings ZACHARY V. CALIFORNIA BANK & TRUST 11 acquired after the commencement of the case that would otherwise be excluded under § 541(a)(6) & (7).” In re Maharaj, 681 F.3d at 563. Under this view, an individual debtor may not cram down a plan that would permit the debtor to retain prepetition property that is not excluded from the estate by § 541, but may cram down a plan that permits the debtor to retain only postpetition property. A split panel of the Ninth Circuit BAP accepted the broad view in In re Friedman, 466 B.R. at 484. But, all of our sister circuits that have considered the issue have adopted the narrow view, 2 as have a sizeable majority of the district, bankruptcy appellate, and bankruptcy courts. 3 We 2 See Ice House, 751 F.3d at 740 (“We therefore hold that the absolutepriority rule continues to apply to pre-petition property of individual debtors in Chapter 11 cases.”); In re Lively, 717 F.3d 406, 410 (5th Cir. 2013) (“The absolute priority rule, in particular, has been a cornerstone of equitable distribution for Chapter 11 creditors for over a century. We must presume Congress was well aware of that rule and, in the absence of a clearer directive, modified § 1129(b)(2)(B)(ii) in order to refine it, not reverse it, for individual debtors.”); In re Stephens, 704 F.3d 1279, 1287 (10th Cir. 2013) (“[W]e decline to find an implied repeal [of the absolute priority rule] here.”); In re Maharaj, 681 F.3d at 575 (“[W]e believe that Congress did not intend to abrogate the absolute priority rule for individual Chapter 11 debtors.”). 3 See, e.g., In re Woodward, 537 B.R. 894, 901 (B.A.P. 8th Cir. 2015); In re Brown, 505 B.R. 638, 648-49 (E.D. Pa. 2014); In re Tucker, 479 B.R. 873, 877-78 (Bankr. D. Or. 2012); In re Arnold, 471 B.R. 578, 613-14 (Bankr. C.D. Cal. 2012); In re Borton, No. 09-00196-TLM, 2011 WL 5439285, at  (Bankr. D. Idaho Nov. 9, 2011); In re Kamell, 451 B.R. 505, 512 (Bankr. C.D. Cal. 2011); In re Draiman, 450 B.R. 777, 821 (Bankr. N.D. Ill. 2011); In re Stephens, 445 B.R. 816, 820-21 (Bankr. S.D. Tex. 2011); In re Karlovich, 456 B.R. 677, 682 (Bankr. S.D. Cal. 2010); and In re Gbadebo, 431 B.R. 222, 230 (Bankr. N.D. Cal. 2010). But see, e.g., In re Friedman, 466 B.R. at 482; In re 12 ZACHARY V. CALIFORNIA BANK & TRUST today agree with our sister circuits and overrule In re Friedman. D. Interpretation of the BAPCPA amendments. BAPCPA added § 1115 as an entirely new provision of the Bankruptcy Code. That section “expands the definition of ‘property of the estate’ in Chapter 11 cases to include, for the first time, property obtained by the debtor ‘after the commencement of the case.’ And all of that property, absent some other amendment to the Code, would be subject to the absolute-priority rule.” Ice House, 751 F.3d at 738 (quoting 11 U.S.C. § 1115(a)(1), (2)). The new language in § 1129(b)(2)(B)(ii) added by BAPCPA obviously creates “an exception to the absolute-priority rule,” but less obvious is “the exception’s scope.” Id. The key to that question is determining what the word “included” means in the phrase of § 1129(b)(2)(B)(ii) stating that “the debtor may retain property included in the estate under section 1115.” The Friedman majority determined: “Included” is not a word of limitation. To limit the scope of estate property in §§ 1129 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). Anderson, 2012 WL 3133895, at  n.6; In re Shat, 424 B.R. at 868; and In re Roedemeier, 374 B.R. at 276. ZACHARY V. CALIFORNIA BANK & TRUST 13 466 B.R. at 482 (footnote omitted). In contrast, the Sixth Circuit’s opinion in Ice House held: The critical language in § 1129(b)(2)(B)(ii) is that “the debtor may retain property included in the estate under section 1115.” And the key word within that language is “included.” “Include” is a transitive verb, which means it “shows action, either upon someone or something.” Shertzer, Elements of Grammar 26 (1986). The action described by “include” is either “to take in as a part, an element, or a member” (first definition) or “to contain as a subsidiary or subordinate element” (second definition). The American Heritage Dictionary 913 (3d ed. 1992). The first definition (“to take in”) describes genuine action—grabbing something and making a part of a larger whole—whereas the second definition (“to contain”) lends itself, more dryly, to a description of things that are already there— “the duties of a fiduciary include. . . .” The first definition is plainly the better fit in § 1129(b)(2)(B)(ii): converted into the active voice, § 1129(b)(2)(B)(ii) refers to property that § 1115 includes in the estate, which naturally reads as “property that § 1115 takes into the estate,” rather than as “property that § 1115 contains in the estate.” Thus—employing this definition and converted into the active voice—§ 1129(b)(2)(B)(ii) provides that “the debtor may retain property that § 1115 takes into the estate.” 14 ZACHARY V. CALIFORNIA BANK & TRUST Ice House, 751 F.3d at 738–39 (alterations omitted). Under this reading, “what § 1115 takes into the estate is property ‘that the debtor acquires after the commencement of the case,’” and it is only “that property” that “‘the debtor may retain’ when his unsecured creditors are not fully paid.” Id. at 739 (quoting 11 U.S.C. §§ 1115(a), 1129(b)(2)(B)(ii)) (internal punctuation omitted). We agree with the Sixth Circuit. Section 1115 and the new clauses in § 1129(b)(2)(B)(ii) were both added by BAPCPA. Reading these two provisions as defining a new class of property that is exempt from the absolute priority rule nicely harmonizes the new provisions. 4 See In re Lively, 717 F.3d 406, 409 (5th Cir. 2013) (“[W]e are inclined to 4 Some courts and commentators have suggested that the cross-reference in the second new clause in § 1129(b)(2)(B)(ii) to § 1129(a)(14), a provision involving domestic support obligations, is a scrivener’s error and was meant to refer to § 1129(a)(15), which involves a new “best efforts” requirement added to chapter 11 by BAPCPA. See, e.g., In re Lucarelli, 517 B.R. 42, 47 n.2 (Bankr. D. Conn. 2014); In re Lively, 467 B.R. 884, 890 n.3 (Bankr. S.D. Tex. 2012); In re Shat, 424 B.R. at 860 n.21; Ralph Brubaker, The Absolute Priority Rule for Individual Chapter 11 Debtors: To Be or Not to Be?, 32 No. 10 Bankr. L. Letter, at 5 (Oct. 2012) (“[A]s all fully recognize, the cross-reference in the absolute priority rule amendment to § 1129(a)(14) (dealing with full payment of domestic support obligations) was obviously a drafting error.”). We need not decide that issue today. We note that although the reference to (a)(14) may have been a scrivener’s error, it is “not an entirely absurd mixup. . . . One could easily assume that Congress wished to protect domestic support creditors by not allowing a debtor to keep any postpetition earnings—a form of Section 1115 property—so long as any domestic support obligation was not current.” In re Shat, 424 B.R. at 860 n.21. ZACHARY V. CALIFORNIA BANK & TRUST 15 agree with the bankruptcy court in this case that the ‘narrow’ interpretation is unambiguous and correct.”). The history of the absolute priority rule also strongly supports the narrow view. Congress repealed the absolute priority rule in 1952, only to reinstate it in 1978, demonstrating that when it intends to abrogate the rule, it knows how to do so explicitly. Compare H.R. Rep. No. 822320 (1952), reprinted in 1952 U.S.C.C.A.N. 1960, 1981– 82, with Bankruptcy Code of 1978, Pub. L. No. 95-598, § 1129, 92 Stat. 2549, 2635–38 (codified in scattered sections of 11 and 28 U.S.C.). 5 More importantly, the 5 The legislative history of the BAPCPA also bolsters the view that Congress did not intend to repeal the absolute priority rule. The Judiciary Committee Report describes “various consumer protection reforms” in BAPCPA, such as penalizing “a creditor who unreasonably refuses to negotiate” and requiring certain credit solicitations to “include enhanced consumer disclosures.” H.R. Rep. No. 109-31(I), pt. 1, at 2 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 89. But this list of protections does not include any supposed repeal of the absolute priority rule. It seems unlikely that Congress would address a cornerstone rule of bankruptcy practice “in the most oblique way possible, and yet omit any mention of this remedy from the legislative history.” In re Maharaj, 681 F.3d at 575; see also Dewsnup v. Timm, 502 U.S. 410, 419 (1992) (“Furthermore, this Court has been reluctant to accept arguments that would interpret the [Bankruptcy] Code, however vague the particular language under consideration might be, to effect a major change in preCode practice that is not the subject of at least some discussion in the legislative history.”); In re Bonner Mall P’ship, 2 F.3d 899, 913 (9th Cir. 1993) (“Where the text of the Code does not unambiguously abrogate pre-Code practice, courts should presume that Congress intended it to continue unless the legislative history dictates a contrary result.”) (citing Dewsnup, 502 U.S. at 419). It also seems unlikely that Congress would facilitate cramdowns, typically objected to by creditors, in an act designed “to correct perceived abuses of the bankruptcy system.” Ransom v. FIA Card Servs., 562 U.S. 61, 64 (2011) (quoting Milavetz, 16 ZACHARY V. CALIFORNIA BANK & TRUST Supreme Court has expressly warned against finding implied repeal of provisions of the Bankruptcy Code. United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 380 (1988) (“Such a major change in the existing rules would not likely have been made without specific provision in the text of the statute; it is most improbable that it would have been made without even any mention in the legislative history.”) (citation omitted); see also In re Maharaj, 681 F.3d at 571 (“The canon against implied repeal is particularly strong in the field of bankruptcy law.”). Courts adopting the broad view have stressed that “Congress in adopting BAPCPA’s individual debtor chapter 11 provisions borrowed provisions from chapter 13,” which does not have an absolute priority rule. In re Friedman, 466 B.R. at 483 (comparing, inter alia, §§ 1123(a)(8) and 1322(a)(1), §§ 1141(d)(5)(A) and 1328(a), and §§ 1127(e) and 1329(a)); see also In re Shat, 424 B.R. at 868 (noting “the host of change[s] to chapter 11 with respect to individuals, all made with the goal of shaping an individual’s chapter 11 case to look like a chapter 13 case”); In re Roedemeier, 374 B.R. at 275 (“Many of the BAPCPA’s changes to Chapter 11 apply only to individual debtors and are clearly drawn from the Chapter 13 model.”). But if the BAPCPA amendments were intended to abrogate the absolute priority rule for chapter 11 individual debtors, Congress could have achieved that goal in a far more straightforward manner. Instead of adding language to § 1129(b)(2)(B)(ii), Congress simply could have made that provision inapplicable to individual chapter 11 Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 231-32 (2010)); see also In re Friedman, 466 B.R. at 490 (Jury, Bankr. J., dissenting) (“[T]he purpose behind BAPCPA was to have debtors pay more, not less.”). ZACHARY V. CALIFORNIA BANK & TRUST 17 reorganizations. See In re Lively, 717 F.3d at 410 (describing broad view as “a startling, and most indirect, way for Congress to have effected partial implicit repeal of the very provision that the section amended”). Or Congress could have raised the debt limits for chapter 13 cases, ushering more individuals into that regime. See In re Maharaj, 681 F.3d at 573 (“Congress could have effected the changes that Debtors argue it sought in a far less awkward and convoluted manner by simply raising the Chapter 13 debt limits and making additional individuals eligible to proceed under that chapter.”); see also Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494, 501 (1986) (“The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific. The Court has followed this rule with particular care in construing the scope of bankruptcy codifications.”) (citation omitted). We acknowledge that retaining the absolute priority rule in chapter 11 cases works a “double whammy” on a debtor because, under the BAPCPA amendments to § 1129(a)(15), he “must dedicate at least five years’ disposable income to the payment of unsecured creditors, and—unlike a debtor in Chapter 13—is also subject to the absolute-priority rule (and thus cannot retain any pre-petition property) if he does not pay those creditors in full.” Ice House, 751 F.3d at 740. But the broad view could exact a heavy penalty on a “crammed down” creditor, as this case illustrates. Our task is not to balance the equities, however, but to interpret the Bankruptcy Code. See Norwest, 485 U.S. at 209 (noting that relief from any unfairness in the statutory scheme “cannot come from a miscontruction of the applicable bankruptcy laws, but rather, only from action by Congress”). We 18 ZACHARY V. CALIFORNIA BANK & TRUST conclude today that the BAPCPA amendments do not impliedly repeal the long-standing absolute priority rule.