Court Opinion

ID: 2757134
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:34.124737+00
Date Added: 2024-06-11T09:16:19.890117
License: Public Domain

FILED
 1                         ORDERED PUBLISHED                 MAR 19 2012
                                                         SUSAN M SPRAUL, CLERK
 2                                                         U.S. BKCY. APP. PANEL
                                                           O F TH E N IN TH C IR C U IT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5
 6   In re:                        )      BAP Nos.     AZ-11-1105-JuKiCl
                                   )                   AZ-11-1149-JuKiCl
 7   GREGORY A. FRIEDMAN and       )                   (Consolidated)
     JUDITH MERCER-FRIEDMAN,       )
 8                                 )      Bk. No.     07-02135
                    Debtors.       )
 9   ______________________________)
                                   )
10   GREGORY A. FRIEDMAN; JUDITH   )
     MERCER-FRIEDMAN,              )
11                                 )
                    Appellants,    )
12   v.                            )      O P I N I O N
                                   )
13   P+P, LLC,                     )
                                   )
14                  Appellee.      )
     ______________________________)
15
                    Argued and Submitted on January 18, 2012
16                             at Phoenix, Arizona
17                           Filed - March 19, 2012
18            Appeal from the United States Bankruptcy Court
                        for the District of Arizona
19
         Honorable Philip H. Brandt, Bankruptcy Judge, Presiding
20    Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding*
                       ____________________________
21
     Appearances:     Scott D. Gibson, Esq., of Gibson, Nakamura &
22                    Green, PLLC, argued for appellants Gregory A.
                      Friedman and Judith Mercer-Friedman;
23                    Daniel Mark Press, Esq., argued for National
                      Association of Consumer Bankruptcy Attorneys, as
24                    amicus curiae, by special leave of the Panel,
                      supporting the appellants’ position.
25                           ____________________
26
          *
27          Judge Brandt issued the order denying confirmation of the
     plan, BAP No. 11-1105. Judge Marlar issued the order converting
28   the case to chapter 7, BAP No. 11-1149.
 1   Before:   JURY, KIRSCHER, and CLARKSON,** Bankruptcy Judges.
 2   CLARKSON, Bankruptcy Judge:
 3
 4        Chapter 11 debtors, Gregory Friedman (“Gregory”) and Judith
 5   Mercer-Friedman (“Judith”) (collectively, the “Friedmans” or
 6   “Debtors”), appeal the bankruptcy court’s orders denying
 7   confirmation of their second amended plan (BAP No. 11-1105) and
 8   converting their case to chapter 7 (BAP No. 11-1149).
 9        These consolidated appeals raise the issue whether the
10   absolute priority rule embodied in § 1129(b)(2)(B)(ii)1 applies
11   to individual chapter 11 debtors.     We granted leave to the
12   National Association of Consumer Bankruptcy Attorneys (“NACBA”)
13   to file an amicus brief in support of Debtors’ position that the
14   rule does not apply to them.   Both the Appellants and the NACBA
15   participated in the oral arguments before us.     No party has
16   participated as an appellee in this appeal.     For the reasons
17   stated, we hold that the absolute priority rule does not apply
18   in individual debtor chapter 11 cases and REVERSE the bankruptcy
19   court’s order denying confirmation of their second amended plan
20   (BAP No. 11-1105).   We also REVERSE the bankruptcy court’s order
21   converting the Debtors’ chapter 11 case to chapter 7 (BAP No.
22   11-1149).   We REMAND these matters to the bankruptcy court for
23
24        **
            Hon. Scott C. Clarkson, Bankruptcy Judge for the Central
     District of California, sitting by designation.
25
          1
26          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
27   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure and “Civil Rule” references are to the Federal Rules
28   of Civil Procedure.

                                     -2-
 1   further action consistent with this opinion.
 2                                 I.   FACTS2
 3        The Friedmans are technology entrepreneurs who founded and
 4   operated several internet-related businesses.     Several of those
 5   businesses suffered financial difficulties and had filed for
 6   protection under chapter 11 of the United States Bankruptcy
 7   Code.     Eventually, however, those businesses were unable to
 8   reorganize and their bankruptcy cases were dismissed, leaving
 9   the Friedmans with significant tax liabilities and unpaid
10   secured and unsecured business debts.
11        A.      The Prior Corporations’ Bankruptcy Events
12        The Friedmans founded Netbeam, Inc. (“Netbeam”), a company
13   that provided high speed wireless internet services to customers
14   in Summit County, Colorado.     On July 10, 2001, Netbeam filed a
15   voluntary petition for chapter 11 relief in the Colorado
16   bankruptcy court (Bankruptcy Case No. 01-19986).     Two days prior
17   to Netbeam’s filing, the Friedmans formed Peak Speed
18   Communications, Inc. (“Peak”).      Ten days after Netbeam’s filing,
19   the Friedmans, as officers of Peak, entered into an Operating
20   and Merger Agreement between Netbeam and Peak.     Although this
21
          2
            Debtors’ record on appeal is far from complete. In their
22
     brief, they cite to docket numbers of pleadings filed in the
23   bankruptcy court, but do not provide us with citations to any
     particular page number or lines in the pleadings in violation of
24   Rule 8010(a)(1)(D). As a result, we were left to search the
     pleadings cited for the relevant facts and procedural background
25   of this case. We take judicial notice of the relevant pleadings
26   which were docketed and imaged in Debtors’ underlying bankruptcy
     case as well as those filed in Debtors’ business bankruptcy
27   cases in the District of Colorado (Bankruptcy Nos. 01-19986 and
     04-19246). Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),
28   293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

                                        -3-
 1   agreement was not disclosed to the bankruptcy court, the
 2   Friedmans implemented its terms.      At some point, the undisclosed
 3   agreement surfaced and an examiner was appointed.
 4        Netbeam eventually confirmed a plan which effectively
 5   merged Netbeam and Peak.    In accordance with the confirmed plan,
 6   Peak, the successor, closed a loan from First United Bank (the
 7   “Bank”) in the approximate amount of $600,000.     P+P, LLC (“P+P”)
 8   pledged $200,000 to guarantee the loan.     The loan was secured by
 9   all of Peak’s assets and a second deed of trust on the
10   Friedman’s real property located in Breckenridge, Colorado (“the
11   Breckenridge Property”), which they used as a rental property
12   and a part-time residence.
13        During Netbeam’s bankruptcy, significant amounts of
14   employment taxes went unpaid.   Eventually, Netbeam ceased making
15   its quarterly payments to the U.S. Trustee and was unable to
16   make other payments required under the plan.     On August 22,
17   2006, the bankruptcy court dismissed Netbeam’s case.
18             A few years earlier, on May 3, 2004, Peak filed a
19   chapter 11 petition in the Colorado bankruptcy court (Bankruptcy
20   Case No. 04-19246).   During the course of Peak’s bankruptcy, P+P
21   purchased the Bank’s loan to Peak.     In the process, P+P stepped
22   into the Bank’s shoes with respect to the Bank’s security
23   interest in virtually all of Peak’s assets and the second deed
24   of trust on the Breckenridge Property.     P+P then acquired and
25   later sold Peak’s assets.
26        In 2007, P+P commenced an action in the Colorado state
27   court against the Friedmans, seeking a declaration that it had a
28   valid lien on the Breckenridge Property and the right to

                                     -4-
 1   foreclose.    The state court entered a default judgment in favor
 2   of P+P which began foreclosure proceedings on the Breckenridge
 3   Property.
 4        B.     The Friedmans’ Bankruptcy Events
 5        On October 27, 2007, the Friedmans filed their chapter 11
 6   petition in the Arizona bankruptcy court, thus staying the
 7   foreclosure.3   Their Schedule A valued the Breckenridge Property
 8   at $750,000 and Schedule D showed the property was
 9   overencumbered with three liens.      Washington Mutual Home Loans
10   (“Washington Mutual”) had a first lien in the amount of
11   $578,000.    P+P had a second lien in the amount of $556,000.
12   Finally, a painting company held a third lien in the amount of
13   $2,500.
14        Debtors’ Amended Schedule B showed personal property
15   consisting of household goods and vehicles.     It also showed that
16   Debtors (1) were the sole members in AZCI NET, LLC (“AZCI”), a
17   wireless internet service provider located in Arizona City,
18   Arizona; (2) owned 100% of the stock of Blue River Networks,
19   Inc. (“Blue River”), a technology and management consulting and
20   support company located in Arizona City, Arizona; (3) were
21   partners in a family trust named JGF Family LLP, the purposes of
22   which were resort rental management services and family trust;
23   and (4) held stock or had an interest in Peak, a wireless
24   broadband engineering company located in Breckenridge, Colorado.
25   Debtors assigned a zero value to their interests in all these
26
27
          3
            At the time of Debtors’ filing, their primary residence
28   was in Arizona.

                                     -5-
 1   entities.
 2        Schedule E showed priority unsecured debt consisting of
 3   substantial amounts owed to the Colorado Department of Revenue
 4   and the Internal Revenue Service for employment taxes by Netbeam
 5   or Peak, and for personal income taxes.      Schedule F showed debt
 6   owed on equipment leases and vehicles for Netbeam.      Those
 7   amounts, along with credit card and other miscellaneous
 8   unsecured debt, totaled $359,000.
 9        Finally, Debtors’ Amended Schedule I showed combined
10   average monthly income as $15,094.      Of that amount, $9,000 was
11   attributed to income from their businesses and $3,000 was
12   attributed to income from rentals on the Breckenridge Property.
13   Amended Schedule I also reflected that both debtors were
14   collecting social security income and Gregory was receiving a
15   pension from IBM of $594 a month.      Amended Schedule J showed
16   average monthly expenses of $13,698, which included $6,730.18
17   towards the debt on the Breckenridge Property.      Debtors’ monthly
18   net income was reflected at $1,395.84.
19        P+P immediately moved for relief from stay on the
20   Breckenridge Property.    Washington Mutual later filed a similar
21   motion.
22        C.     Debtors’ Initial Plan
23        Debtors’ initial plan provided for, among other things,
24   payments to satisfy their mortgage and other debt related to the
25   Breckenridge Property, with the exception of the claims of P+P.
26   Debtors stated their belief that they had paid P+P in full.4
27
          4
              Debtors were also seeking to set aside P+P’s default
28
                                                          (continued...)

                                      -6-
 1   Under the heading “Implemention of the Plan”, the plan provided:
 2        Upon confirmation, all of the assets of the Debtors’
          estate shall be vested in the Debtors and the Debtors
 3        shall continue to work in their consulting and
          business management company. Debtors shall pay all
 4        expenses of their personal life, including taxes and
          insurance costs, on a current basis. The Debtors’
 5        disposable income shall be deposited into the Plan
          Fund and distributed as provided herein.
 6
 7        D.     Debtors’ First Amended Plan
 8        After a status conference on this plan, Debtors filed a
 9   first amended plan which provided for P+P’s claim in the event
10   the state court default judgment against them was upheld.    The
11   plan also provided that to the extent P+P’s claim was unsecured,
12   its claim would be paid pro rata with the other general
13   unsecured claims.    Debtors proposed to pay $634 per month to
14   unsecured creditors.5
15        Before any hearing took place on Debtors’ first amended
16   plan, the bankruptcy court granted P+P’s motion for relief from
17   stay on the Breckenridge Property by order entered on September
18   12, 2008.    The bankruptcy court later granted Washington
19   Mutual’s relief from stay motion on the Breckenridge Property by
20   order entered on April 9, 2009.    Eventually, Washington Mutual
21   foreclosed on the Breckenridge Property.    Due to the collapse of
22   the real estate market, P+P’s secured claim against the
23   Breckenridge property became entirely unsecured.
24
25        4
           (...continued)
26   judgment against them in the state court.
          5
27          From our review of the docket, it does not appear that a
     hearing on this plan ever took place. Presumably, this plan was
28   withdrawn when Debtors filed their second amended plan.

                                     -7-
 1        E.      Debtors’ Second Amended Plan
 2        In early February 2010, Debtors filed their second amended
 3   plan.     For confirmation purposes, this plan only needed to
 4   address the priority and secured claims of the taxing
 5   authorities and Debtors’ general unsecured claims, including the
 6   claims of P+P.6    Debtors’ proposed statement of implementation
 7   of the plan remained the same; i.e., upon confirmation, their
 8   assets, including their equity interests in their businesses,
 9   would revest in Debtors and they would continue to work and
10   contribute all their disposable income to the plan.     The
11   proposed payment of $634 a month to unsecured creditors was not
12   altered.
13        According to Debtors’ second amended disclosure statement,
14   their combined monthly income went from $15,094 to $6,297.      The
15   $6,297 figure consisted of $2,000 income from Debtors’
16   businesses with the remaining amounts attributed to Gregory’s
17   IBM pension and Debtors’ combined social security income.
18        P+P, Debtors’ largest unsecured creditor, voted against the
19   second amended plan and filed an objection7 on the grounds that
20   it (1) violated the absolute priority rule because Debtors’ plan
21   left their ownership interests in “valuable” property untouched
22
23
          6
            Debtors’ second amended plan separately classified
24   Washington Mutual’s secured claim against the Breckenridge
     Property in Class 3 and provided for P+P’s secured claim against
25   the Breckenridge Property in Class 5. Most likely, Washington
26   Mutual foreclosed on the property after Debtors had filed this
     latest version of their plan.
27
          7
            The Internal Revenue Service and the U.S. Trustee also
28   objected to the second amended plan on various grounds.

                                      -8-
 1   while paying unsecured creditors only $634 a month; (2) violated
 2   the best interests of creditors’ test under § 1129(a)(7) because
 3   Debtors had not properly disclosed the value of their business
 4   interests in AZCI and Blue River; and (3) was filed in bad
 5   faith. In connection with its objection, P+P offered the opinion
 6   of an expert that ACZI had a value of $605,000 to $662,500 as of
 7   the date of the petition.8
 8        F.   The Debtor’s Modification to their Second Amended Plan
 9        On June 3, 2010, Debtors filed a modification to their
10   second amended plan.   The modification increased the payments to
11   unsecured creditors on a monthly basis following the effective
12   date, based on anticipated growth in Debtors’ business ventures.
13        The bankruptcy court conducted a hearing on Debtors’ second
14   amended plan and only addressed the applicability of the
15   absolute priority rule found in § 1129(b)(2)(B)(ii).   The
16
17        8
            P+P’s objection also implicated § 1129(a)(15) because it
     complained that Debtors’ expenses were unreasonable. Section
18   1129(a)(15) states:
19
          In a case in which the debtor is an individual and in
20        which the holder of an allowed unsecured claim objects
          to the confirmation of the plan--
21
          (A) the value, as of the effective date of the plan,
22
          of the property to be distributed under the plan on
23        account of such claim is not less than the amount of
          such claim; or
24
          (B) the value of the property to be distributed under
25        the plan is not less than the projected disposable
26        income of the debtor (as defined in § 1325(b)(2)) to
          be received during the 5-year period beginning on the
27        date that the first payment is due under the plan, or
          during the period for which the plan provides
28        payments, whichever is longer.

                                    -9-
 1   bankruptcy court, recognizing the split of authority throughout
 2   the nation, concluded that the absolute priority rule applied to
 3   individual chapter 11 plans.    On February 17, 2011, the
 4   bankruptcy court entered the order denying confirmation of
 5   Debtors’ second amended plan.    In the order, Debtors were
 6   instructed to filed a third amended plan and disclosure
 7   statement by March 1, 2011.
 8        Debtors did not further amend their plan.    Instead, they
 9   filed an appeal of the order denying confirmation of their
10   second amended plan.   On March 7, 2011, the bankruptcy court
11   conducted a show cause hearing as to why Debtors’ case should
12   not be dismissed or converted.    The court issued a Memorandum
13   Decision and converted the case to chapter 7, finding that
14   (1) Debtors failed to comply with an order of the court,
15   (2) there was an absence of a reasonable likelihood of
16   rehabilitation, and (3) Debtors failed to file a disclosure
17   statement, or file or confirm a plan within the time fixed by
18   order of the court, § 1112(b)(4)(J).    The bankruptcy court
19   entered the order converting Debtors’ case on March 11, 2011.9
20        Debtors moved for a stay pending appeal.    On March 29,
21   2011, the bankruptcy court granted the motion in a Memorandum
22   Decision, staying the proceedings pending the adjudication of
23   this appeal.   The bankruptcy court again recognized the split of
24
          9
            When the bankruptcy court converted Debtors’ case, the
25   order denying confirmation of their second amended plan became a
26   final order. See Giesbrecht v. Fitzgerald (In re Giesbrecht),
     429 B.R. 682, 687 (9th Cir. BAP 2010); see also Rosson v.
27   Fitzgerald (In re Rosson), 545 F.3d 764, 770 (9th Cir. 2008)
     (order converting case from chapter 13 to chapter 7 is a final
28   order).

                                      -10-
 1   authority on the issue of whether the absolute priority rule
 2   applied to individual chapter 11 debtors and, therefore, found
 3   Debtors had a chance of success on appeal.      In addition, the
 4   bankruptcy court found that Debtors would suffer irreparable
 5   injury if no stay was granted because their businesses could be
 6   sold in chapter 7, leaving them without the ability to earn a
 7   living.   The bankruptcy court also found that the harm to the
 8   IRS and P+P was merely delay.      Finally, the bankruptcy court
 9   stated that as a policy question, the public interest would be
10   advanced by obtaining a ruling from this Panel on the
11   applicability of the absolute priority rule in an individual
12   chapter 11 case.   The bankruptcy court entered the order staying
13   the conversion of Debtors’ case on March 29, 2011.      Despite the
14   stay, Debtors received their chapter 7 discharge on September
15   22, 2011.10
16                            II.   JURISDICTION
17        The bankruptcy court had jurisdiction over this proceeding
18   under 28 U.S.C. §§ 1334 and 157(b)(2)(L).      We have jurisdiction
19   under 28 U.S.C. § 158.
20                               III.    ISSUE
21        Does the absolute priority rule in § 1129(b)(2)(B)(ii)
22
23
          10
24          The order simply stated: “IT IS ORDERED GRANTING the
     Appellants’ Motion for Stay Pending Appeal, IT IS FURTHER
25   ORDERED STAYING the Chapter 7 Conversion Order of this Court
26   Dated February 17 and March 10, 2011.” It is possible that the
     court and the parties contemplated that the chapter 7 would
27   proceed with respect to Debtors and their discharge, but that
     the liquidation of their estate was stayed until this appeal
28   concludes.

                                     -11-
 1   apply to chapter 11 debtors who are individuals?11
 2                          IV.   STANDARD OF REVIEW
 3        This appeal raises a statutory interpretation question
 4   which we review de novo.     AMB Prop., L.P. v. Official Creditors
 5   (In re AB Liquidating Corp.), 416 F.3d 961, 963 (9th Cir. 2005).
 6   A de novo review allows us to examine the interpretation and
 7   application of the relevant statutes independent of the
 8   bankruptcy court’s determination.
 9                                V.   DISCUSSION
10        A.     The Absolute Priority Rule
11        The absolute priority rule, and issues within its realm,
12   are significant mainstay topics for most bankruptcy
13   practitioners and jurists of the last quarter of the 20th and
14   early 21st centuries.    Once only held closely in the hearts and
15   minds of commercial and business reorganization counsel, since
16   the passage of the 2005 BAPCPA12 the absolute priority rule, as
17
          11
            We do not reach Debtors’ second issue of whether they
18
     could avoid a strict application of the absolute priority rule
19   by contributing “new value” into a plan of reorganization in the
     form of exempt assets for two reasons. First, the bankruptcy
20   court did not make any findings on this issue. Second, it is
     not readily apparent from the record whether Debtors had exempt
21   assets which were not encumbered by the IRS’s liens. Thus,
22   Debtors appear to be seeking an advisory opinion on this issue.
     However, we lack jurisdiction to render advisory opinions. See
23   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.
24   177, 195-96 (9th Cir. BAP 2003) (noting that when bankruptcy
     court did not make the requisite factual findings that debtor
25   had satisfied the new value corollary, it was unnecessary to
26   decide if debtor, who was individual, could invoke the exception
     in chapter 11 case).
27
          12
               The Bankruptcy Abuse Prevention and Consumer Protection
28                                                        (continued...)

                                        -12-
 1   amended, has now crossed over to the general consumer bankruptcy
 2   practice world.13
 3        The absolute priority rule initially was a judicially
 4   created concept, arising from a series of early
 5   twentieth-century railroad cases including N. Pac. Ry. Co. v.
 6   Boyd, 228 U.S. 482, 508 (1913).   The U.S. Supreme Court adopted
 7   the absolute priority rule to prevent deals between senior
 8   creditors and equity holders that would impose unfair terms on
 9   unsecured creditors.
10        An interesting feature of the absolute priority rule, even
11   before enactment of the BAPCPA amendment to
12   § 1129(b)(2)(B)(ii)14, is that the rule has never been absolute.
13   For instance, the U.S. Supreme Court in Kansas City Terminal Ry.
14   Co. v. Cent. Union Trust Co., 271 U.S. 445, 455 (1926), albeit
15   in dicta, recognized that a new, substantial, and necessary
16   contribution could allow an old equity holder to retain an
17   interest in the reorganized debtor.   This contribution was
18
19
          12
           (...continued)
20   Act of 2005, Public Law 109-8, 119 Stat. 23.
21        13
            There is no doubt that the absolute priority rule was a
22   necessary feature to be considered in individual debtors’
     chapter 11 plans of reorganization prior to the enactment of
23   BAPCPA. However, Congress has not significantly increased the
     outer limits of eligibility for chapter 13 debtors and a
24   combination of the present day national economic climate, the
     amendment to § 1129(b)(2)(B)(ii) and the addition of the new
25   § 1115 has presented consumer bankruptcy lawyers with growth
26   opportunities in the individual debtor chapter 11 practice.
          14
27          The absolute priority rule was codified at
     § 1129(b)(2)(B)(ii) with the enactment of the Bankruptcy Code in
28   1978.

                                   -13-
 1   commonly called the “new value corollary.”   Later, in Case v.
 2   Los Angeles Lumber Products Co., 308 U.S. 106 (1939), the U.S.
 3   Supreme Court considered an offer by shareholders to continue
 4   their participation in the company’s business after confirmation
 5   of the plan of reorganization, which finally confirmed and
 6   clarified the new value corollary.15
 7        The absolute priority rule (as it pertained to unsecured
 8   creditors) was eventually codified in 1978, within
 9   § 1129(b)(2)(B)(ii).   Interestingly, and despite years of case
10   law by that time, no reference was made to “absolute priority”
11   or “new value” in that codification.   The words “absolute
12   priority” or “new value” do not appear anywhere in § 1129.
13        Other nuances with respect to the absolute priority rule
14   developed following its codification, with courts finding other
15   “exceptions” besides the new value corollary that do not appear
16   in the text of the statute.   For instance, in 2001, the 9th
17   Circuit Court of Appeals in Security Farms v. Gen. Teamsters,
18   Warehousemen and Helpers Union, Local 890 (In re Gen. Teamsters,
19   Warehousemen & Helpers Union, Local 890), 265 F.3d 869, 874 (9th
20   Cir. 2001), found that the absolute priority rule did not apply
21   to organizations where their members did not hold “equity
22   interests” in the entity (even though the term “equity interest”
23   does not appear in § 1129(b)(2)(B)(ii)).
24
25        15
            The U.S. Supreme Court stated that the shareholders had
26   to do more than just continue to participate in the debtor’s
     business to retain their equity. Instead, they must contribute
27   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
28   value corollary was indeed crystallized.

                                    -14-
 1        In that case, the Ninth Circuit, relying on the Seventh
 2   Circuit’s case of In re Wabash Valley Power Ass’n, 72 F.3d 1305,
 3   1315 (7th Cir. 1995), agreed that the term “interest” in
 4   § 1129(b)(2)(B)(ii) meant equity interest in a for-profit
 5   corporation.   These cases undertook a historical review of the
 6   absolute priority rule, delving into the fact that the “absolute
 7   priority rule” had (at least) one specific mission - to
 8   undermine corporate shareholders’ advantages over unsecured
 9   creditors.
10        Prior to the enactment of BAPCPA, an individual debtor’s
11   plan needed to meet the requirements of the absolute priority
12   rule.16   “Interest” as it appears in § 1129(b)(2)(B)(ii) has
13   various meanings, and the individual debtor’s ownership rights
14   in estate property, as that property is defined from time to
15   time by the Bankruptcy Code and judicial interpretations, are
16   perfectly harmonized within the absolute priority rule, both
17   prior to and after BAPCPA’s enactment.
18        Two points are to be drawn here.    First, courts have always
19   reviewed § 1129(b)(2)(B)(ii) through the lens of common sense
20   and have approached legislative interpretation in a way to
21   facilitate the goals of the statute.    Second, simply because
22   words may have alternative meanings, ambiguities do not
23   necessarily arise.   The words, all of them, should be read in
24   context with the sentence, the paragraph, and the entire text of
25   the statute (in this case, the Bankruptcy Code).    As in the case
26
          16
27          Courts almost universally found that individuals could
     reorganize and that the absolute priority rule applied to their
28   plan prior to the enactment of BAPCPA.

                                    -15-
 1   of “interest” in § 1129(b)(2)(B)(ii), words have various
 2   meanings depending on their underlying required usages, but no
 3   real reasonable ambiguity is created simply because of those
 4   various usages.
 5        B.     The Methodology of Statutory Interpretation
 6        How do we endeavor to understand the parts of
 7   §§ 1129(b)(2)(B)(ii) and 1115 as they relate to the
 8   applicability of the absolute priority rule to individual
 9   chapter 11 debtor plans?    We are first guided by primary
10   principles.
11        “The interpretation of the Bankruptcy Code first begins
12   with the language itself.     See In re Griffith, 206 F.3d 1389,
13   1393 (11th Cir. 2000); United States v. Ron Pair Enters., 489
14   U.S. 235, 241 (1989).     If the language is plain and unambiguous,
15   then the Court must enforce the Bankruptcy Code according to its
16   terms.    Id.”   In re Gosman, 282 B.R. 45, 48 (Bankr. S.D. Fla.
17   2002).
18        The U.S. Supreme Court in Lamie v. U.S. Trustee, addressed
19   this point directly:
20             The starting point in discerning congressional intent
          is the existing statutory text, see Hughes Aircraft Co. v.
21        Jacobson, 525 U.S. 432, 438 (1999), and not the predecessor
          statutes. It is well established that “when the statute’s
22        language is plain, the sole function of the courts--at
          least where the disposition required by the text is not
23        absurd--is to enforce it according to its terms.” Hartford
          Underwriters Ins. Co. v. Union Planters Bank, N.A., 530
24        U.S. 1, 6 (2000) (internal quotation marks omitted)
          (quoting United States v. Ron Pair Enterprises, Inc., 489
25        U.S. 235, 241 (1989), in turn quoting Caminetti v. United
          States, 242 U.S. 470, 485 (1917)).
26
27   Lamie, 540 U.S. 526, 534 (2004).
28        In interpreting the Bankruptcy Code, the U.S. Supreme Court

                                      -16-
 1   has held “as long as the statutory scheme is coherent and
 2   consistent, there generally is no need for a court to inquire
 3   beyond the plain language of the statute.”     BFP v. Resolution
 4   Trust Corp., 511 U.S. 531, 566 (1994).
 5        Thus, we look to the statutory language at issue.
 6        C.   The Plain Meaning of the Absolute Priority Provisions
 7        The requirements for confirmation of a plan of
 8   reorganization are generally set out in § 1129, which provides
 9   two separate and distinct paths for successful confirmation.
10   The first path is mapped out in the sixteen paragraphs of
11   § 1129(a).   If a plan proponent can demonstrate to the
12   satisfaction of the court that each and every requirement
13   contained in paragraphs (1) through (16) of § 1129(a) has been
14   met, a plan can be confirmed.     Of particular note is the
15   requirement of obtaining the consent of each class of creditor
16   as required by paragraph (8) of § 1129(a).
17        A second path to confirmation is established pursuant to
18   § 1129(b), where absent consent of each class of creditor (as
19   required by § 1129(a)(8)), a plan may still be confirmed by the
20   bankruptcy court if (1) the fifteen remaining paragraphs of
21   § 1129(a) are met, and (2) the plan is, among other things,
22   “fair and equitable.”   This nonconsensual method of confirmation
23   is referred to as “cramdown.”17    The burden of demonstrating that
24   the plan is “fair and equitable” in order to obtain confirmation
25   falls on the plan proponent.
26
          17
27           See Kenneth N. Klee, All You Ever Wanted to Know About
     Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J. 133
28   (1979).

                                     -17-
 1        The Bankruptcy Code provides guidance as to whether a plan
 2   is “fair and equitable” as to unsecured creditors.   Section
 3   1129(b)(2)(B)(ii), known as the “absolute priority rule”,
 4   provides that a plan is “fair and equitable” if:
 5        (B) With respect to a class of unsecured claims—
          . . .
 6        (ii) the holder of any claim or interest that is
          junior to the claims of such class will not receive or
 7        retain under the plan on account of such junior claim
          or interest any property, except that in a case in
 8        which the debtor is an individual, the debtor may
          retain property included in the estate under section
 9        1115, subject to the requirements of subsection
          (a)(14) of this section.
10
11   11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added).18
12        Simply put, a plan not paying an unsecured creditor in full
13   is nevertheless “fair and equitable” (and can be crammed down
14   over the unsecured creditor’s objections), so long as an
15   individual debtor does not retain property except property
16   included in the bankruptcy estate under § 1115.
17        Therefore, one must now consider the companion section to
18   § 1129(b)(2)(B)(ii), § 1115, to determine what property was
19   included in the bankruptcy estate when the debtor is an
20   individual.
21        We believe that § 111519 plainly identifies an individual
22
          18
23          The BAPCPA amendments of 2005 added the emphasized
     portion of § 1129(b)(2)(B)(ii), appearing above.
24
          19
               Section 1115 reads as follows:
25
26        Section 1115. Property of the estate
          (a) In a case in which the debtor is an individual,
27        property of the estate includes, in addition to the
          property specified in section 541–
28                                                     (continued...)

                                      -18-
 1   chapter 11 debtor’s estate as
 2        (1)   Property specified in § 541 (i.e., “property of the
 3              estate includes, in addition to the property specified
 4              in section 541”) (emphasis added);
 5        (2)   All property of the kind specified in § 541 that the
 6              (individual) debtor acquires after the commencement
 7              (but before the closure, dismissal or conversion) of
 8              the case; and
 9        (3)   earnings from services performed by the debtor after
10              the commencement of the case but before the case is
11              closed, dismissed, or converted to a case under
12              chapter 7, 12, or 13, whichever occurs first.
13        Application of “plain-meaning analysis” has been set out in
14   the recent 9th Circuit BAP decision Barnes v. Belice (In re
15   Belice), 461 B.R. 564 (9th Cir. BAP 2011).   In that opinion, the
16   BAP was critical of the bankruptcy court’s application of the
17   plain-meaning analysis.
18
19        19
          (...continued)
20            (1) all property of the kind specified in section
         541 that the debtor acquires after the commencement of
21       the case but before the case is closed, dismissed, or
         converted to a case under chapter 7, 12, or 13,
22
         whichever occurs first; and
23            (2) earnings from services performed by the
         debtor after the commencement of the case but before
24       the case is closed, dismissed, or converted to a case
         under chapter 7, 12, or 13, whichever occurs first.
25
26       (b) Except as provided in section 1104 or a confirmed
         plan or order confirming a plan, the debtor shall
27       remain in possession of all property of the estate.

28       11 U.S.C. § 1115.

                                     -19-
 1         Without considering the relationship of the phrase in
           question to the contextual statutory scheme or the logical
 2         impact of their broad interpretation on that scheme, they
           improperly emphasize one meaning of the words to the
 3         exclusion of all other considerations. See Corley v.
           United States, 129 S. Ct. 1558, 1567 n.5 (2009).
 4
 5   Belice at 577.
 6         With this guidance in mind, we consider here, and later in
 7   our opinion, our plain-meaning interpretation of the language
 8   contained in §1129(b)(2)(B)(ii) and § 1115 within the contextual
 9   statutory scheme and logic of plan confirmation requirements of
10   Chapter 11.
11         First, we observe that there are no conflicting provisions
12   within Chapter 11 relative to our view that the absolute
13   priority rule does not apply in individual chapter 11 cases.    We
14   find no anomalies, inconsistencies or conflicts created by this
15   interpretation.   More importantly, we find significant
16   contextual concordance with the other requirements for plan
17   confirmation, including those previously described, including
18   but not limited to (1) the new requirement for dedication of all
19   of debtor’s disposable income for five years, (2) the straight-
20   forward best interest of creditors test, and (3) the delay of
21   issuance of discharge until the plan has been fully consummated.
22   Including the § 541 property within the universe of property
23   contained in § 1115, as we believe a plain-meaning
24   interpretation requires, does no violence to the logical impact
25   of the reorganization process or scheme established in chapter
26   11.   Indeed, especially combined with the new additional
27   requirement of five years of debtor’s disposable income, it is
28   illogical to thereafter remove the debtor’s means of production

                                    -20-
 1   of debtor’s disposable income by maintaining the absolute
 2   priority rule in an individual’s case.
 3        The dissent argues that the rule of statutory construction
 4   guides that, where possible, one must avoid rendering any parts
 5   superfluous.    (Citing TRW Inc. v. Andrews, 534 U.S. 19, 31
 6   (2001)).    The dissent further argues that “the broad
 7   construction the Panel advocates causes parts of the Code to
 8   become superfluous.    For example, § 103(a) makes § 541, which
 9   states that an estate is created upon the filing of a petition,
10   applicable in chapter 11 cases.    Section 103(a) was not amended
11   by BAPCPA.    But the broad view makes § 103(a) inapplicable in
12   individual chapter 11’s.”    However, the argument proves too much
13   and is incongruent with the reality of the Bankruptcy Code.
14   Section 1115 mirrors § 1306 which was part of the 1978 Code
15   concurrent with enactment of § 103(a).    Nobody, ever, has argued
16   that § 1306 made § 103(a) surplusage, and there is no reason for
17   this Panel to do so with respect to § 1115.    To do otherwise
18   would create an indefensible discontinuity between § 1115 and
19   § 1306.
20        Section 1115’s identification of estate property consists
21   of the property contained in § 541 and the two post-petition
22   acquired assets - newly acquired property and income.    The so-
23   called disputes over what “included” means in
24   § 1129(b)(2)(B)(ii) and “in addition to” in § 1115 arise from
25   misinterpretation of the words.    “Included” is not a word of
26   limitation.20   To limit the scope of estate property in §§ 1129
27
          20
               See Bankruptcy Code § 102(3) and especially see Am.
28
                                                          (continued...)

                                     -21-
 1   and 1115 would require the statute to read “included, except for
 2   the property set out in Section 541” (in the case of
 3   § 1129(b)(2)(B)(ii)), and “in addition to, but not inclusive of
 4   the property described in Section 541” (in the case of § 1115).
 5        A plain reading of §§ 1129(b)(2)(B)(ii) and 1115 together
 6   mandates that the absolute priority rule is not applicable in
 7   individual chapter 11 debtor cases.   Accord SPCP Group, LLC v.
 8   Biggins, ___ B.R. ___, 2011 WL 4389841, at *3-5 (M.D. Fla. Sept.
 9   21, 2011) (declined to follow In re Gelin, 437 B.R. 435 (Bankr.
10   M.D. Fla. 2010), which followed the narrow view based on an
11   ambiguity analysis); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb.
12   2007) (following a plain meaning analysis); In re Shat, 424 B.R.
13   854 (Bankr. D. Nev. 2010) (following the broad view based upon
14   an ambiguity analysis).
15
          D.   Analysis of Legislative History, Congressional Intent,
16             or other Speculations
17        Much time has been spent by jurists and scholars on the
18   legislative history, congressional intent, and other
19   speculations surrounding the applicability of the absolute
20   priority rule in individual debtor chapter 11 cases.   We have
21   reviewed a myriad of lower court decisions and articles replete
22   with seemingly endless analyses of possible congressional
23   intentions and various outcomes depending on the “narrow” or
24
25        20
           (...continued)
26   Surety Co. v. Marotta, 287 U.S. 513, 517 (1933) in which the
     U.S. Supreme Court presents in that bankruptcy setting a
27   definitive explanation for the use and meaning of the word
     “include.” See also Kenneth N. Klee, Bankruptcy and the Supreme
28   Court, at 22 and n.70, 35-36,(Lexis/Nexis 2008).

                                   -22-
 1   “broad” view adopted by the author.
 2        While certainly not exhaustive in scope, these decisions
 3   and articles have undertaken a titanic effort to frame their
 4   outcomes on what may be a very weak universe of original
 5   resources.   However the Bankruptcy Code, as the main resource,
 6   does provide significant assistance.   For instance, Congress in
 7   adopting BAPCPA’s individual debtor chapter 11 provisions
 8   borrowed provisions from chapter 13.   Section 1123(a)(8) was
 9   added to the Bankruptcy Code, providing that, to be confirmable,
10   an individual debtor’s plan must provide for the payment to
11   creditors of all or such portion of earnings from personal
12   services or other future income of the debtor – resembling
13   § 1322(a)(1).   Section 1129(a)(15) was added, giving dissenting
14   unsecured creditors who are not being fully paid under the plan
15   absolute veto power over the plan unless the debtor contributes
16   an amount equal to all of his projected disposable income over
17   the longer of five years or the plan payment period - resembling
18   § 1325(b).   Section 1141(d)(5)(A) was added, delaying the
19   discharge until completion of all plan payments - resembling
20   § 1328(a).   Section 1141(d)(5)(B) was added, permitting a
21   discharge for cause before all payments are completed -
22   resembling the hardship discharge of § 1328(b).    And, Section
23   1127(e) was added, permitting modification of a plan even after
24   substantial consummation - resembling § 1329(a).
25        Finally, a plain reading of §§ 1129 and 1115 demonstrates
26   that, just as in chapter 13, to confirm a plan does not require
27   the application of an absolute priority rule.   As in Chapter 13,
28   the disposable income requirement insures that the individual

                                    -23-
 1   debtor is required to dedicate all of his or her disposable
 2   income over a designated time period (three or five years in
 3   Chapter 13, at least five years in chapter 11) to plan payments
 4   directed to unsecured creditors.
 5        When decisions have gone further than exercising a plain
 6   reading of the statute, they have entered into speculative
 7   analyses that are fatally flawed.
 8        As an example, the bankruptcy court in In re Gbadebo, in
 9   determining that the absolute priority rule continued to exist
10   in individual debtor chapter 11 cases, found a so-called
11   “anomaly” that made “no sense.”    The bankruptcy court said:
12             Finally, if §§ 1129(b)(2)(B)(ii) and 1115 are
          read to eliminate the “absolute priority” rule for
13        individual chapter 11 debtors, the Court is faced with
          a procedural anomaly. If the plan proposes to pay
14        them anything, the debtor is required to send them a
          ballot. Yet, their vote can be ignored. This makes
15        no sense. The Court reads §§ 1129(b)(2)(B)(ii) and
          1115 to eliminate the “absolute priority” rule only as
16        to an individual chapter 11 debtor’s post-petition
          property. It bases this conclusion on both the
17        language of the statute, both in isolation and viewed
          in the context of the Bankruptcy Code as a whole. It
18        finds this reading most consistent with the intent of
          Congress as expressed in the legislative history.
19
20   In re Gbadebo, 431 B.R. 222, 230 (Bankr. N.D. Cal. 2010).
21        The above passage challenges the abrogation of the absolute
22   priority rule in individual cases (with respect to pre-BAPCPA
23   § 541 estate property) based on an apparent procedural anomaly
24   that the debtor must solicit votes but can ignore them.    No
25   anomaly exists; those votes are not ignored.    The analysis is
26   incomplete.   If the class votes yes, § 1129(a)(8) is satisfied.
27   If the class votes no, its vote is not ignored.    If the plan
28   provides distributions of property equal to the allowed amount

                                    -24-
 1   of the unsecured claim, both §§ 1129(a)(15)(A) and
 2   1129(b)(2)(B)(i) are met, and the court may confirm the plan if
 3   it is fair and equitable under § 1129(b)(1).   If the plan
 4   provides for less than satisfaction in full on a present value
 5   basis and the impaired class votes no, then it may be confirmed
 6   as long as § 1129(a)(15)(B) and (b)(1) are satisfied.    In
 7   essence, Congress affirmatively amended the law so that
 8   § 1129(a)(15)(B) would trump § 1129(b)(2)(B)(ii) in individual
 9   debtor cases.   Thus, § 1129(b)(2)(B)(ii)’s proscription on the
10   retention of ownership interests by an individual debtor is not
11   an aspect of the absolute priority rule in individual debtor
12   chapter 11 cases.   In this instance, recourse to legislative
13   history and spirited analytics is unnecessary in light of the
14   plain meaning of this particular statute.
15        The Dissent disagrees with the Panel’s point, stating that
16   for one reason or another, creditors may vote against a plan
17   without filing an objection.   However, clearly, the drafters of
18   § 1129(a)(15) tried to create symmetry between chapters 11 and
19   13 for individual debtors.   Of course in chapter 13, unsecured
20   creditors do not get to vote on the plan.   They can only object
21   to confirmation under § 1325(b)(1).   The BAPCPA amendment to
22   § 1129(a)(15) mirrors this treatment in chapter 11 where
23   creditors holding claims in impaired classes have the right to
24   vote on the plan as well as to object to confirmation.    The
25   drafter’s failure to anticipate this nuance does not provide a
26   reason to destroy the symmetry between chapters 11 and 13.      The
27   possibility that all unsecured creditors voting against the plan
28   would simultaneously fail to object to confirmation is a

                                    -25-
 1   theoretical figment squarely opposed to reality.   We will not
 2   interpret a statute to destroy a sensible interpretation based
 3   on such a conjecture.
 4                           VI.   CONCLUSION
 5        We hold that the absolute priority rule does not apply in
 6   individual debtor chapter 11 cases for the reasons stated above.
 7   Therefore, we REVERSE the orders denying confirmation of
 8   Debtors’ second amended plan and converting their case to
 9   chapter 7, and REMAND the matter to the bankruptcy court for
10   further action consistent with this opinion.
11
12   JURY, Bankruptcy Judge, dissenting:
13        Addressing an issue that has confronted and confounded
14   innumerable bankruptcy courts around the country and resulted in
15   a significant number of published opinions from those courts
16   which split demonstratively in their results, the Panel rules
17   that the words of the post-BAPCPA statutes about the absolute
18   priority rule in individual chapter 11’s are “plain” and subject
19   to only one simple reading.   The Panel premises this simplistic
20   outcome on its conviction that Congress intended to align
21   individual chapter 11’s almost entirely with chapter 13’s
22   because of some alterations in the Bankruptcy Code by BAPCPA
23   which made the two previously divergent proceedings more
24   similar.
25        I disagree — not only with the holding, but also with the
26   underlying assumptions which drive the decision.   The majority’s
27   analysis would have us conclude that the definition of property
28   of the estate found in § 541 and made applicable to all chapters

                                    -26-
 1   by § 103(a) has no meaning in individual chapter 11’s.    They
 2   would further have us conclude that one of the significant
 3   differences between chapter 11’s and 13’s — that classes of
 4   creditors are entitled to vote for or against confirmation in
 5   chapter 11’s whereas no class vote exists in chapter 13’s — has
 6   little or no importance in an individual chapter 11.    Finally,
 7   their narrow reading of the meaning of the terms “included” and
 8   “in addition to” by focusing solely on §§ 1129(b)(2)(B)(ii) and
 9   1115 causes them to overlook one of the key tenets of statutory
10   construction:    that we are to read the statute as a cohesive
11   whole, giving all sections their due place and not creating an
12   island of words that floats independently of the integrated
13   continent.
14        Taken in this context the meaning of the words is not
15   plain.    There can be more than one cogent interpretation of
16   their meaning and intent and I believe they do not write the
17   absolute priority rule out of individual chapter 11’s.
18        In addition to my disagreement with the statutory
19   construction elements of the majority decision, I believe my
20   colleagues have lost sight of two important policies — one of
21   which has been an underpinning of chapter 11 determinations
22   since the enactment of the Code in 1978 and the other of which
23   was the primary purpose of the BAPCPA amendments in 2005.     The
24   long standing purpose behind chapter 11, as stated by the
25   Supreme Court, is to strike a balance between a debtor’s
26   interest in reorganizing and restructuring its debts and the
27   creditors’ interest in maximizing the value of the bankruptcy
28   estate.    See Toibb v. Radloff, 501 U.S. 157, 163 (1991).   The

                                     -27-
 1   majority’s approach loses sight of this balance, allowing the
 2   reorganized individual debtor to retain all his or her assets
 3   while disenfranchising the vote of unsecured creditors who seek
 4   more value.
 5        More recently, the policy behind the enactment of BAPCPA
 6   was to enhance the return to creditors.      As observed by many
 7   courts, “BAPCPA has been read to tighten, not loosen, the
 8   ability of debtors to avoid paying what can reasonably be paid
 9   on account of debt.”    In re Kamell, 451 B.R. 505, 508 (Bankr.
10   C.D. Cal. 2011) (citing In re Gbadebo, 431 B.R. at 229);        In re
11   Lindsey, 453 B.R. 886, 904 (Bankr. E.D. Tenn. 2011) (observing
12   that the primary purpose of BAPCPA is “‘to improve bankruptcy
13   law and practice by restoring personal responsibility and
14   integrity in the bankruptcy system and ensure that the system is
15   fair for both debtors and creditors.’”).
16        The Panel’s ruling eviscerates these recognized motives
17   behind the original Code and its revisions when applied in the
18   individual chapter 11 proceeding.      Based on both of these
19   considerations, I respectfully dissent.
20                                    I.
21        Section 1129 sets forth the requirements for the
22   confirmation of a chapter 11 plan.      The focus of this case is on
23   § 1129(b)(2)(B)(ii) which contains the “fair and equitable”
24   requirement.    That section, which is referred to generally as
25   the “absolute priority rule,” was amended in 2005 with the
26   enactment of BAPCPA, and provides that a plan is fair and
27   equitable if:
28        (B) With respect to a class of unsecured claims —

                                     -28-
 1        (ii) the holder of any claim or interest that is
          junior to the claims of such class will not receive or
 2        retain under the plan on account of such junior claim
          or interest any property, except that in a case in
 3        which the debtor is an individual, the debtor may
          retain property included in the estate under section
 4        1115 . . . . (Emphasis added).
 5   It is the statute’s use of the word “included” and its cross
 6   reference to § 1115 which has caused interpretive problems.
 7   Namely, what property is “included” in the estate by § 1115 that
 8   an individual chapter 11 debtor may retain?   Section 1115(a)
 9   provides the following definition of property of the estate for
10   individual chapter 11 debtors:
11        In a case in which the debtor is an individual,
          property of the estate includes, in addition to the
12        property specified in section 541--
13        (1) all property of the kind specified in section 541
          that the debtor acquires after the commencement of the
14        case but before the case is closed, dismissed, or
          converted to a case under chapter 7, 12, or 13,
15        whichever occurs first; and
16        (2) earnings from services performed by the debtor
          after the commencement of the case but before the case
17        is closed, dismissed, or converted to a case under
          chapter 7, 12, or 13, whichever occurs first.
18        (Emphasis added).
19   Here, the key phrase for interpretation is contained in the
20   preamble of the statute: “property of the estate includes, in
21   addition to the property specified in section 541.”
22                                     A.
23        Before proceeding with the application of any interpretive
24   rule, a brief review of the current state of the bankruptcy
25   court caselaw in the Ninth Circuit is warranted.   Two basic
26   interpretations of §§ 1129(b)(2)(B)(ii) and 1115 have emerged.
27        Under what is called the broad view, the bankruptcy court
28   in In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010) construed the

                                      -29-
 1   phrase “in addition to the property specified in section 541”
 2   contained in § 1115 to mean that “[s]ection 1115 absorbs and
 3   then supersedes [s]ection 541 for individual chapter 11 cases.”
 4   Id. 865.      In turn, the court reasoned that if
 5   § 1129(b)(2)(B)(ii) excepts from the operation of the absolute
 6   priority rule that property “included” in § 1115, then the
 7   “exception extends to all property of the estate.”      Id.21    Thus,
 8   in essence, In re Shat holds that the absolute priority rule
 9   does not apply in individual chapter 11 cases.      Id. at 867.    In
10   reaching its decision, the Shat court relied upon the numerous
11   revisions in BAPCPA which make individual chapter 11’s more like
12   chapter 1322 and also the few cases which had addressed the
13   issue.      Id. at 865-66.   Nonetheless, the court acknowledged that
14   its broad reading of § 1115 was “not without problems.”         Id. at
15   867.
16          Other bankruptcy courts, in equally well-reasoned
17   decisions, have narrowly interpreted § 1115 to supplement § 541
18
            21
19          Under this reading, when § 1129(b)(2)(B)(ii) says “the
     debtor may retain property included in the estate under section
20   1115” it means “the debtor may retain all property of the
     estate.” Why did it not just say that?
21
            22
            These changes, also relied upon by the majority,
22
     included: (1) redefining property under § 1115 along the lines
23   of property of the estate under § 1306; (2) changing the
     mandatory contents of a plan pursuant to § 1123(a)(8) to
24   resemble § 1322(a)(1); (3) adding the disposable income test of
     § 1325(b) to § 1129(a)(15); (4) delaying the discharge until
25   completion of all plan payments as in § 1328(a); (5) permitting
26   discharge for cause before all payments are completed pursuant
     to § 1141(d)(5), similar to the hardship discharge of § 1328(b);
27   and (6) the addition of § 1127(e) to permit the modification of
     a plan even after substantial consummation for purposes similar
28   to § 1329(a). In re Shat, 424 B.R. at 862.

                                        -30-
 1   by adding only the debtor’s postpetition earnings and other
 2   property acquired after the commencement of the case.     See In re
 3   Tucker, 2011 WL 5926757 (Bankr. D. Or. 2011); In re Borton, 2011
 4   WL 5439285 (Bankr. D. Idaho 2011);      In re Kamell, 451 B.R. 505;
 5   In re Karlovich, 456 B.R. 677 (Bankr. S.D. Cal. 2010); In re
 6   Gbadebo, 431 B.R. 222.   Under the narrow view, the absolute
 7   priority rule still applies to individual chapter 11 debtors
 8   with respect to their prepetition property, but postpetition
 9   property is not subject to its strictures.     Notably, the Panel
10   mentions only one of these well-reasoned decisions.
11        Not surprisingly, Debtors and NACBA advocate adoption of
12   the broad view and echo an analysis similar to that in In re
13   Shat.   My colleagues accepted those arguments, but I am not
14   persuaded.   Instead, I think numerous statutory interpretive
15   tools favor the narrow construction camp.     Even if in the end of
16   my endeavor no clear answer emerges after application of these
17   tools, then I ask a further question not addressed by the Panel:
18   What purpose consistent with generally recognized policies would
19   a broad reading of the relevant statutes serve?     Nowhere does
20   the Panel address the answer to that question.
21                                     B.
22        I start my analysis with a review of the basic statutory
23   rules by which I am bound.   If the statutory language is clear,
24   I must apply it by its terms unless to do so would lead to
25   absurd results.   United States v. Ron Pair Enters., Inc.,
26   489 U.S. 235, 241–42 (1989).   I do not recite this tenet of
27   statutory interpretation idly.    Examining the language of a
28   statute in the context in which it is used is always the

                                      -31-
 1   starting point.
 2        In addition, I am instructed to construe a statute, if
 3   possible, so that “no clause, sentence or word” is rendered
 4   “superfluous, void, or insignificant.”   TRW Inc. v. Andrews,
 5   534 U.S. 19, 31 (2001); see also, Conn. Nat’l Bank v. Germain,
 6   503 U.S. 249, 253 (1992) (“[C]ourts should disfavor
 7   interpretations of statutes that render language superfluous.”).
 8   Another basic tenet of statutory construction is that courts
 9   should interpret a law to avoid absurd or bizarre results.
10   Demarest v. Manspeaker, 498 U.S. 184, 191 (1991) (applying
11   statute’s terms where the result was not “so bizarre that
12   Congress could not have intended it”); Griffin v. Oceanic
13   Contractors, Inc., 458 U.S. 564, 575 (1982) (“It is true that
14   interpretations of a statute which would produce absurd results
15   are to be avoided if alternative interpretations consistent with
16   the legislative purpose are available.”). Finally, I engage in
17   statutory interpretation by taking a holistic approach that
18   strives to implement the policies behind the enactment of BAPCPA
19   and harmonize the provisions of the Code.   See Drummond v.
20   Wiegand (In re Wiegand), 386 B.R. 238, 241 (9th Cir. BAP 2008).
21   Of course, underlying all these interpretive tools is the tenet
22   that “aids to interpretation can be used only to resolve
23   ambiguity and never to create it.”    2A Norman J. Singer and J.D.
24   Shambie Singer, Statutes and Statutory Construction § 46:4 (7th
25   ed. 2007).   Keeping this in mind, I now apply the rules.
26                                   C.
27        There is no serious debate about whether
28   § 1129(b)(2)(B)(ii) allows an individual chapter 11 debtor to

                                    -32-
 1   retain some property without running afoul of the absolute
 2   priority rule.    The definition of that property is “included” in
 3   § 1115.   The Panel contends that the word “included” is not a
 4   word of limitation under the Code and that, to treat it as such,
 5   the statute would read a different way than drafted; i.e.,
 6   “included, except for property set out in Section 541.”    I
 7   cannot adopt this strained reading of the word “included.”
 8        The Panel loses sight that words have different meanings in
 9   different contexts.    It is a well-established canon of statutory
10   construction that when the word “includes” or “including” is
11   followed by a list of examples, those examples are considered
12   illustrative rather than exhaustive.    See Vermejo Park Corp. v.
13   Kaiser Coal Corp. (In re Kaiser Steel Corp.), 998 F.2d 783, 788
14   (10th Cir. 1993) (holding that the word “including” after “party
15   in interest” in § 1109(b) indicates that the list of examples is
16   not exhaustive of possible parties in interest); In re Adams,
17   275 B.R. 274, 281 (N.D. Ill. 2002) (stating that § 503(b) is a
18   nonexclusive list of six categories of administrative claims).
19   Thus, the “not a term of limitation” context.    Here, however,
20   the statutory use of the word “included” is not used as the
21   preface for representative or illustrative examples.    Rather,
22   the property “included” in the estate requires further inquiry
23   by its cross reference to § 1115 (not § 541).    As a result, I
24   believe the word “included” in § 1129(b)(2)(B)(ii) means that
25   property “added to” the estate under § 1115.
26        My conclusion is consistent with my view of what § 1115
27   accomplishes.    The introductory phrase of § 1115 states that
28   “property of the estate includes, in addition to the property

                                     -33-
 1   specified in § 541 . . . .”    My interpretation of the word
 2   “includes” here is derived from the fact that property of the
 3   estate is already defined in § 541.      Section 1115(a) brings into
 4   the estate a debtor’s postpetition property expressly excluded
 5   by § 541.    See § 541(a)(6) (carving out post-petition earnings
 6   from services performed by an individual debtor after the
 7   commencement of the case) and § 541(a)(7) (making property of
 8   the estate any interest in property that the estate (not the
 9   debtor) acquires after the case).       Therefore, Congress intended
10   to add, or “include,” the postpetition property to the
11   individual chapter 11 debtor’s estate in § 1115, in order to
12   expand the estate.
13        This reading is compatible with the phrase “in addition to
14   the property specified in section 541,” which is not ambiguous.
15   The ordinary meaning of “in addition to” is “a part added” or
16   “besides”.   Merriam-Webster’s Dictionary, http://merriam-
17   webster.com; see also Oxford English Dictionary,
18   http://oxforddictionaries.com (“the action or process of adding
19   something to something else”).    Accordingly, for these reasons,
20   I believe that §§ 1129(b)(2)(B)(ii) and 1115 are most naturally
21   understood to add to the property already defined in § 541 the
22   property which the debtor acquires postpetition.      See In re
23   Kamell, 451 B.R. at 512 (“[T]he careful reference in
24   § 1129(b)(2)(B)(ii) to only § 1115 and not to § 541 preserves
25   the distinction between existing assets and those acquired
26   post-petition because of the way § 1115 is worded (which clearly
27   makes post-petition earnings and acquisitions an addition to
28   § 541 property).”).

                                      -34-
 1        In statutory construction endeavors, I am also guided by
 2   the rule that, where possible, I must avoid rendering any parts
 3   superfluous.   TRW Inc. v. Andrews, 534 U.S. at 31.     The broad
 4   construction the Panel advocates causes parts of the Code to
 5   become superfluous.    For example, § 103(a) makes § 541, which
 6   states that an estate is created upon the filing of a petition,
 7   applicable in chapter 11 cases.    Section 103(a) was not amended
 8   by BAPCPA.   But the broad view makes § 103(a) inapplicable in
 9   individual chapter 11’s.    See In re Stephens, 445 B.R. 816,
10   820–21 (Bankr. S.D. Tex. 2011); In re Gelin, 437 B.R. 435, 442
11   (Bankr. M.D. Fla. 2010) (stating that since neither § 103(a) nor
12   § 541 was amended by BAPCPA, “there is no reason for § 1115 to
13   ‘absorb’ and ‘supersede’ § 541 to define property of the estate
14   for individual chapter 11 cases.”).
15        In short, by interpreting § 1115 to add only postpetition
16   property to the individual chapter 11 debtor’s estate, I avoid a
17   construction which creates superfluous language and preserve the
18   distinctions between prepetition property which becomes property
19   of the estate under § 541 and postpetition property which
20   becomes property of the estate under § 1115.    These
21   distinctions, which are mainstays of bankruptcy law, make it
22   unlikely that Congress meant for § 1115 to “absorb” and
23   “supersede” § 541.    See In re Borton, 2011 WL 5439285, at *4
24   (finding that § 1115 “supplements § 541, but it does not
25   supplant or subsume § 541”).23
26
27        23
            This interpretation of § 1115 is consistent with one
     circuit court’s view of what the companion chapter 13 provision,
28
                                                       (continued...)

                                      -35-
 1        There are other textual difficulties with the broad view.
 2   For example, an adoption of the broad view likely eliminates
 3   § 1129(b)(2)(B)(i),24 if not renders it an absurdity.
 4        The ‘broad view’ necessarily eliminates subsection
          (B)(i) as well, even though none of its language was
 5        amended in BAPCPA, because otherwise the statute would
          express a nonsensical and harsh alternative in (B)(i)
 6        to a much more lenient if not entirely inapplicable
          subsection (B)(ii) which, in the ‘broad view,’ allows
 7        the individual debtor to keep all of his pre-petition
          property and all post-petition property not already
 8        dealt with at § 1129(a)(15). This is another reason
          the court doubts the ‘broad view,’ because it makes
 9        subsections (B)(i) and (B)(ii), expressed as
          alternatives, into an absurdity. Since the BAPCPA
10        language referencing individuals is only included in
          alternative (B)(ii), (B)(i) remains there as a nullity
11        respecting individuals in the ‘broad view.’
12   In re Kamell, 451 B.R. at 508 n.3.
13        In their result-driven approach, my colleagues do not
14   address any of these problems.
15                                     D.
16        I also disagree with the Panel’s statement that “Congress
17   affirmatively amended the law so that § 1129(a)(15)(B)25 would
18
          23
19         (...continued)
     § 1306, means to a chapter 13 estate. In In re Seafort,
20   ___F.3d.___, 2012 WL 469723,*4 (6th Cir. 2012), the court found
     that “section 1306(a) expressly incorporates section 541. Read
21
     together, § 541 fixes property of the estate as of the date of
22   filing, while § 1306 adds to the ‘property of the estate’
     property interests which arise post-petition.” (Emphasis added).
23
          24
            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
25   such claim property of a value, as of the effective date of the
26   plan, equal to the allowed amount of such claim[.]”
          25
27             Section 1129(a)(15)(B) provides:

28                                                      (continued...)

                                      -36-
 1   trump § 1129(b)(2)(B)(ii) in individual debtor cases.”     Notably,
 2   the Panel reached this conclusion without explaining how.       The
 3   Panel overlooks that § 1129(a)(15) is only triggered when the
 4   holder of an allowed unsecured claim objects to confirmation of
 5   the plan.   An objection is clearly different than a vote under
 6   the Code.   For this reason, I part company with the Panel’s
 7   critique of the “so-called” procedural anomaly created by the
 8   broad view as stated in In re Gbadebo, 431 B.R. at 230 (stating
 9   that “[i]f the plan proposes to pay [a creditor] anything, the
10   debtor is required to send them a ballot.     Yet, [under the broad
11   view], their vote can be ignored.     This makes no sense.”).   It
12   is quite possible that for one reason or another creditors may
13   vote against a plan without filing an objection.     In that event,
14   the way I read the Code, § 1129(a)(15) would not come into play.
15        Moreover, under the narrow reading that I propose, an
16   individual chapter 11 debtor would still retain property during
17   the first five years of his or her plan.     One recent decision
18   contained the following illustration:
19        • A married couple files a joint Chapter 11 petition.
20        • At confirmation the debtors are making two separate
21
          25
          (...continued)
22
         In a case in which the debtor is an individual and in
23       which the holder of an allowed unsecured claim objects
         to the confirmation of the plan —
24       . . .
         (B) the value of the property to be distributed under
25       the plan is not less than the projected disposable
26       income of the debtor (as defined in section
         1325(b)(2)) to be received during the 5-year period
27       beginning on the date that the first payment is due
         under the plan, or during the period for which the
28       plan provides payments, whichever is longer.

                                    -37-
 1        $700 monthly car payments to secured creditors.   The
          plan is confirmed with the two car payments.
 2
          • One year into the plan, the debtors trade these cars
 3        for less expensive cars requiring payments of only
          $400 per month each.
 4
               BAPCPA’s § 1129(b)(2)(B)(ii)’s exception allows
 5        the debtors to retain the savings on the cars. Under
          § 1325(b)(2) as incorporated by § 1129(a)(15), the
 6        $1,400.00 in car payments would have served to reduce
          the debtors’ projected disposable income.
 7        Nevertheless, the trade-in of the cars would allow the
          debtors’ actual disposable income to be supplemented
 8        by a $600.00 per month saving without any
          corresponding increase in projected disposable
 9        income—which is determined as of the petition date.
          Over the remaining four years of the plan, the total
10        amount retained by the debtors would be $28,800. (The
          total savings per month is $600 ($300 for both cars).
11        There are 48 months left in the first five years of
          the plan. Forty-eight times $600 equals $28,800.).
12
               The debtors’ actual income might increase during
13        the plan as well—perhaps if one of the debtors
          received a raise or decided to work fifty hours per
14        week instead of forty. Because debtors’ projected
          disposable income, and monthly payments to secured
15        creditors, were calculated based on circumstances at
          the beginning of the plan, the resulting difference is
16        an amount the debtors may retain because of the
          exclusion contained in § 1129(b)(2)(B)(ii).
17
18   In re Lively, 2011 WL 6936363, at *4-5 (Bankr. S.D. Tex. 2011).
19   The Lively court recognized that a creditor could attempt to
20   modify the plan under § 1127(e), but noted that a court would
21   not necessarily approve the modification for two reasons.
22   “Regarding the trade-in, a modification would have the perverse
23   result of punishing debtors for economizing.   As to the example
24   of a debtor deciding to work more hours, a debtor might return
25   to the regular normal number of hours if the only result of the
26   greater effort is an increased payout to creditors.”   Id. at
27   n.10.
28        For these reasons, Congress could not have intended

                                   -38-
 1   § 1129(a)(15) to replace the absolute priority rule with respect
 2   to an individual chapter 11 debtor’s prepetition property.
 3                                   II.
 4        I also believe that the Panel has relied exclusively on
 5   what it perceives to be the literal meaning of the statutes
 6   while ignoring their purpose.   I am not convinced that BAPCPA’s
 7   amendments, which make some aspects of individual chapter 11
 8   cases similar to chapter 13, translate into an abrogation of the
 9   absolute priority rule with respect to individual chapter 11
10   debtors.   In the larger picture, this approach is demonstrably
11   at odds with the policies behind the enactment of BAPCPA.     As
12   previously mentioned, the purpose behind BAPCPA was to have
13   debtors pay more, not less.   In re Kamell, 451 B.R. at 508
14   (citing In re Gbadebo, 431 B.R. at 229); In re Lindsey, 453 B.R.
15   at 905.    Furthermore, the broad view taken by the Panel destroys
16   the careful balance between an individual chapter 11 debtor’s
17   interest in reorganizing and restructuring his or her debts and
18   the creditors’ interest in maximizing the value of the
19   bankruptcy estate.   Radloff, 501 U.S. at 163.   Individual
20   chapter 11 debtors are not simply chapter 13 debtors with larger
21   debts.    Rather, chapter 11 debtors, individuals or not, stay in
22   possession of their property and enjoy all the rights and powers
23   of a trustee.   They are authorized to operate their business and
24   can choose to extend their plan beyond five years.    In exchange,
25   the chapter 11 process does not leave unsecured creditors by the
26   wayside by affording individual chapter 11 debtors the luxury to
27   retain all pre and postpetition property at their expense.
28        The Panel begins its discussion by offering the history of

                                     -39-
 1   the absolute priority rule which it traces back to 1913.      Courts
 2   and bankruptcy practitioners alike appreciate this history and
 3   the evolution of the rule with its judicially created
 4   exceptions.    I am also cognizant that the rule was traditionally
 5   applied to equity interests and that the rule’s mission was to
 6   undermine corporate shareholders’ advantages over unsecured
 7   creditors.    However, an equity interest is nothing more than an
 8   ownership interest and individuals who own businesses, like the
 9   Friedmans in this case, file chapter 11 when they are over the
10   debt limit for chapter 13.   Individuals who own a business have
11   the same opportunities as corporate shareholders to take
12   advantage of unsecured creditors.      Thus, I discern no good
13   reason to depart from the absolute priority rule’s traditional
14   application.   Finally, I am convinced that because the absolute
15   priority rule has been embedded in bankruptcy jurisprudence and
16   codified for many years, we should proceed cautiously when asked
17   to recognize an exception from the rule that Congress has not
18   clearly expressed.
19        Given the history of the absolute priority rule and its
20   evolution, I ask what conceivable reason could Congress have had
21   for silently writing into § 1129(b)(2)(B)(ii) an abrogation of
22   the absolute priority rule for individual chapter 11 debtors?
23   The Panel answers this question by simply referring to
24   amendments in BAPCPA which make individual chapter 11 cases
25   similar to chapter 13.   This, I submit, is not enough.
26   “Statutory interpretation is not a game of blind man’s bluff.
27   Judges are free to consider statutory language in light of a
28   statute’s basic purposes.”   Dole Food Co. v. Patrickson, 538

                                     -40-
 1   U.S. 468, 484 (2003).   It is the Panel’s failure to consider the
 2   purpose behind BAPCPA and chapter 11 in general that has led it
 3   to construe the relevant statutes in a way that runs contrary to
 4   what Congress would have hoped for and expected by the
 5   amendments in BAPCPA.
 6                                  III.
 7        I finish by addressing the NACBA’s argument that retention
 8   of the absolute priority rule makes it virtually impossible for
 9   sole proprietors, who are individual chapter 11 debtors, to
10   confirm a plan of reorganization.     I am not convinced that
11   application of the rule makes it “impossible” for sole
12   proprietors to confirm their plans.     Plan acceptance may occur
13   through a variety of tools used by chapter 11 debtors prior to
14   the enactment of BAPCPA:   they may negotiate a consensual plan,26
15   pay higher dividends, pay dissenting classes in full, or comply
16   with the absolute priority rule by contributing prepetition
17   property.   In re Kamell, 451 B.R. at 512; In re Gbadebo, 431
18   B.R. at 229-30.   Even so, I am not at liberty to read words into
19   a statute simply because I perceive the existing words to lead
20   to a harsh result.
21                                  IV.
22        Other than the arguments regarding the absolute priority
23   rule, Debtors have not pointed out any additional errors
24   relating to the conversion of their case.     Thus, those arguments
25
          26
26          NACBA ignores the very practical consideration that if
     plan failure results in conversion to chapter 7, the classes of
27   unsecured and junior secured creditors often receive very
     little. These classes have traditionally been highly motivated
28   to negotiate.

                                    -41-
 1   are waived for purposes of this appeal.   Smith v. Marsh, 194
 2   F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal, arguments not
 3   raised by a party in its opening brief are deemed waived.”).
 4                                  V.
 5        In sum, for all these reasons, I respectfully dissent.     I
 6   would hold that the absolute priority rule applies to an
 7   individual chapter 11 debtor’s prepetition property, but that
 8   the rule has been abrogated with respect to postpetition
 9   property under the plain terms of §§ 1129(b)(2)(B)(ii) and 1115.
10   Therefore, I would AFFIRM the order denying confirmation of
11   Debtors’ second amended plan and the order converting their case
12   to chapter 7.
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                   -42-