Dill Oil Company, LLC v. Stephens

FILED
United States Court of Appeals
Tenth Circuit
January 15, 2013
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
ARVIN E. STEPHENS; KAREN J.
STEPHENS, f/d/b/a Ninnekah Quick
Mart,
Debtors,
-------------------------
DILL OIL COMPANY, LLC; DANNY
DILL; NANCY DILL,
Appellants,
v. No. 11-6309
ARVIN E. STEPHENS; KAREN J.
STEPHENS, f/d/b/a Ninnekah Quick
Mart,
Appellees,
NATIONAL ASSOCIATION OF
CONSUMER BANKRUPTCY
ATTORNEYS,
Amicus Curiae.
APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(No. 10-14028-WV)
James Bellingham of Bellingham & Loyd, P.C., Oklahoma City, Oklahoma, for
Appellants.
James Brunson of AG-LAW, PC, Oklahoma City, Oklahoma, for Appellees.
Tara Twomey of National Consumer Bankruptcy Rights Center, San Jose,
California, for Amicus Curiae.
Before KELLY and HOLMES, Circuit Judges, and MARTINEZ*, District
Judge.
KELLY, Circuit Judge.
This appeal presents an issue of first impression for our circuit: whether the
2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors
from the absolute priority rule. The bankruptcy court answered this question in
the affirmative. It therefore confirmed the Debtors’ proposed plan of
reorganization over certain creditors’ objections that the plan violated the
absolute priority rule. On appeal, the bankruptcy appellate panel certified the
case for direct appeal. Exercising our jurisdiction under 28 U.S.C.
§§ 158(d)(2)(A) & 158(a)(1), we now reverse the bankruptcy court’s order
confirming the plan and remand for further proceedings.
Background
On June 30, 2010, Arvin E. Stephens and Karen J. Stephens, f/d/b/a/
*
The Honorable William J. Martinez, United States District Judge, District
of Colorado, sitting by designation.
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Ninnekah Quick Mart, LLC (collectively, “Debtors”) filed for relief under
Chapter 11 of the Bankruptcy Code. Aplt. App. 28. Dill Oil Company, LLC and
Danny and Nancy Dill (collectively, “the Dills”) objected to confirmation on the
ground that the proposed plan violated the absolute priority rule (“APR”), 1 which
bars junior claimants, including debtors, from retaining any interest in property
when a dissenting class of senior creditors has not been paid in full. Id. at 28, 30;
see Search Mkt. Direct, Inc. v. Jubber (In re Paige), 685 F.3d 1160, 1183 (10th
Cir. 2012) (discussing APR).
Debtors owned a chain of convenience stores for which the Dills were the
primary supplier of gasoline and gas station products. Aplt. App. 28. Due to the
rising price of gas and a diminishing customer base, Debtors’ stores began
operating at a loss. Id. at 120. Eventually, Debtors became liable to the Dills for
approximately $1.8 million. Id. at 28. In December 2008, Debtors executed
1
The APR originated in the late 1800s as a judicial invention that was
primarily employed in the context of railroad reorganizations. See Jonathan C.
Lipson, The Expressive Function of Directors’ Duties to Creditors, 12 Stan. J.L.
Bus. & Fin. 224, 250–52 (2007); see also N. Pac. Ry. Co. v. Boyd, 228 U.S. 482,
504–08 (1913). The Bankruptcy Act of 1898 codified the common law APR by
requiring that a reorganization plan be “fair and equitable.” In 1952, Congress
revoked the “fair and equitable” requirement. H.R. Rep. 82-2320, at 1981–82
(1952), reprinted in 1952 U.S.C.C.A.N. 1960, 1982; see also Pub. L. No. 456, 66
Stat. 420, 433 (1952). However, in 1978, Congress adopted the Bankruptcy Code,
which again codified the APR as applied to all reorganizations under Chapter 11
(including individual debtors). See Norwest Bank Worthington v. Ahlers, 485
U.S. 197, 202 (1988). Accordingly, “no Chapter 11 reorganization plan [could]
be confirmed over the creditors’ legitimate objections . . . if it fail[ed] to comply
with the [APR].” Id. This rule remained undisputed until BAPCPA’s 2005
enactment.
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mortgages in favor of the Dills on various tracts of real estate, including a house
and farmlands. Id. at 28, 120. The Dills’ mortgages, however, were subordinate
to existing mortgages on the properties. Id. at 28.
On December 30, 2010, Debtors filed a proposed plan of reorganization.
Id. at 17. Pursuant to the plan, the Dills would be paid approximately $15,000 as
a secured creditor, but their remaining claim would be considered unsecured. Id.
at 28. Under the plan, Debtors would retain possession and control of their
property; the Dills would receive a monthly payment for five years, totaling about
1% of their unsecured claim. Id. at 29, 76.
The Dills subsequently filed an objection to Debtors’ proposed plan. Id. at
29, 97, 198. Because their vote constituted approximately 96% of Class 8’s
claims, the Dills’ rejection precluded approval of the plan under § 1129(a). Id. at
102, 132.
On May 20, 2011, the bankruptcy court entered an order confirming the
plan under § 1129(b)’s “cram down” mechanism. Id. at 17, 29. The Dills argued
that the plan was unconfirmable because it violated the APR. Id. at 29. The
bankruptcy court rejected this contention, holding instead that the plain language
of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”)
abrogated the APR as to individual Chapter 11 debtors. Id. at 21–22.
The Dills timely filed a notice of appeal on June 1, 2011, seeking reversal
of the confirmation order. Id. at 25, 32. The Dills proceeded to the bankruptcy
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appellate panel (“BAP”), which sua sponte issued a certification of final order for
direct appeal to this court based on its determination that the case presents a
question of public importance for which there is no controlling law. Id. at 25.
We granted permission to appeal. Id. at 15.
Discussion
A. Should this Appeal Be Dismissed Under the Doctrine of Equitable
Mootness?
Debtors urge us to dismiss this appeal under the doctrine of equitable
mootness, which “allows a court to decline to hear a bankruptcy appeal, even
when relief could be granted, if implementing the relief would be inequitable.” In
re C.W. Mining Co., 641 F.3d 1235, 1239–40 (10th Cir. 2011). Equitable
mootness is a discretionary, prudential doctrine. See id. at 1240. We have held
that a court should apply the doctrine when reaching the merits would be unfair or
impractical, taking into consideration the following questions:
(1) Has the appellant sought and/or obtained a stay pending appeal?
(2) Has the appealed plan been substantially consummated? (3) Will
the rights of innocent third parties be adversely affected by reversal
of the confirmed plan? (4) Will the public-policy need for reliance
on the confirmed bankruptcy plan—and the need for creditors
generally to be able to rely on bankruptcy court decisions—be
undermined by reversal of the plan? (5) If appellant’s challenge
were upheld, what would be the likely impact upon a successful
reorganization of the debtor? And (6) based upon a quick look at the
merits of appellant’s challenge to the plan, is [the argument] legally
meritorious or equitably compelling?
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In re Paige, 584 F.3d 1327, 1339 (10th Cir. 2009). The party seeking to prevent
the court from reaching the merits bears the burden of proving these factors weigh
in favor of dismissal. See id. at 1339–40.
The Dills did not seek a stay pending their appeal, but this factor alone
does not preclude the court from granting relief. See id. at 1339 (citing In re Inv.
Co. of the Sw., Inc., 341 B.R. 298, 308 (B.A.P. 10th Cir. 2006)). And although
the plan has, according to Debtors, been substantially consummated, this does not
act as a “blanket discharge of [the] judicial duty to examine carefully each request
for relief.” In re AOV Indus., Inc., 792 F.2d 1140, 1148 (D.C. Cir. 1986); see
also In re Paige, 584 F.3d at 1342 (explaining that substantial consummation is
“not dispositive”).
Instead, “[t]he effects that reversal will have on non-party creditors is
probably the foremost concern in our analysis.” In re Paige, 584 F.3d at 1343(emphasis added); see also In re SI Restructuring, Inc., 542 F.3d 131, 135–36 (5th
Cir. 2008). “The other factors are often given much less weight and, in some
cases, completely ignored.” In re Paige, 584 F.3d at 1339. Here, reversal will
likely compel conversion to a Chapter 7 proceeding. See 11 U.S.C. § 1112;
Aplee. Br. 27–28. According to Debtors, the Dills will receive little or nothing
under Chapter 7 due to superior liens on non-exempt assets. See Aplee. Br. 28.
But the Dills’ argument—which Debtors have not disputed— is that under
Chapter 7 either: 1) the secured creditors will receive their property; or 2)
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Debtors will reaffirm the creditors’ secured debts and retain the property. See
Aplt. R. Br. 14. In either scenario, we find it unlikely that non-party creditors
will be adversely affected in any significant way, and Debtors have failed to
convince us otherwise. See In re Paige, 584 F.3d at 1343–44.
Although we recognize that Debtors have devoted substantial time and
resources toward the plan’s implementation, and we appreciate that reversing the
confirmation order will likely preclude a successful reorganization, we also note
that the Dills have approximately $1.8 million at stake. Moreover, this case
involves a “matter of public importance” for which “there is no controlling
decision” in this circuit, Aplt. App. 25, and we believe the Dills’ argument is
legally meritorious. As the BAP emphasized in its certification order, “[u]ntil the
meaning of the BAPCPA amendments to Chapter 11 is clarified, debtors and
creditors in every individual Chapter 11 case must anticipate the possibility of the
expense and delay associated with litigation over this issue.” Id. at 34. Because
of the private and public interest in resolving this legal issue, we decline to apply
the doctrine of equitable mootness. See In re Paige, 584 F.3d at 1348.
B. Does BAPCPA Repeal the Absolute Priority Rule with Respect to
Individual Chapter 11 Debtors?
This appeal presents a question of statutory interpretation. Accordingly, we
review the bankruptcy court’s determination de novo. In re Kirkland, 572 F.3d
838, 840 (10th Cir. 2009). “[T]he starting point is always the language of the
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statute itself. If the language is clear and unambiguous, the plain meaning of the
statute controls.” United States v. Quarrell, 310 F.3d 664, 669 (10th Cir. 2002)
(citation omitted). If, on the other hand, the text is ambiguous—i.e., “capable of
being understood by reasonably well-informed persons in two or more different
senses”—we must inquire further to discern Congress’s intent. See id. (quotation
omitted).
1. Is the statutory language clear and unambiguous?
We begin our analysis by focusing exclusively on the language of the
Bankruptcy Code. See Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 723
(2011). Section 1129 of the Code sets out the general requirements for
confirmation of a reorganization plan. Section 1129(a) allows for confirmation
where each class of creditors consents. Alternatively, § 1129(b) provides a
“cram-down” mechanism, whereby a plan may be confirmed without the consent
of each class if, among other things, the plan is “fair and equitable.” Section
1129 outlines the “fair and equitable” criteria, which include the absolute priority
rule. Specifically, § 1129(b)(2)(B)(ii), as amended by BAPCPA, provides that:
the holder of any claim or interest that is junior to the claims of such
class will not receive or retain under the plan on account of such
junior claim or interest any property, except that in a case in which
the debtor is an individual, the debtor may retain property included
in the estate under section 1115, subject to the requirements of
subsection (a)(14) of this section.
(emphasis added).
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Section 1115, which BAPCPA added, in turn states:
(a) In a case in which the debtor is an individual, property of the estate
includes, in addition to the property specified in section 541 2—
(1) all property of the kind specified in section 541 that the debtor
acquires after the commencement of the case but before the
case is closed, dismissed, or controverted to a case under
chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the
commencement of the case but before the case is closed,
dismissed, or controverted to a case under chapter 7, 12, or 13,
whichever occurs first.
(b) Except as provided in section 1104 or a confirmed plan or order
confirming a plan, the debtor shall remain in possession of all
property of the estate.
(emphasis added).
Although a number of courts have held this language to be unambiguous,
they have reached starkly different conclusions regarding the “plain” meaning.
Compare SPCP Grp., LLC v. Biggins, 465 B.R. 316, 322 (M.D. Fla. 2011) (“The
plain reading of this statute” is that § 1115 “includes . . . property specified in
section 541.”), with In re Steedley, No. 09-50654, 2010 WL 3528599, at *2
(Bankr. S.D. Ga. Aug. 27, 2010) (“Nothing in the plain language of § 1115
suggests that it subsumes § 541.”). The very existence of this dichotomy seems
indicative of the text’s ambiguity. Indeed, several courts have recognized that §§
1115 and 1129(b)(2)(B)(ii) are susceptible to two different yet plausible
2
Section 541 defines property of the estate to include “all legal or
equitable interests of the debtor in property as of the commencement of the case.”
11 U.S.C. § 541. Section 103, in turn, provides that § 541 applies in Chapter 11
cases, including those which involve individual debtors. See 11 U.S.C. § 103(a).
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interpretations. See, e.g., In re Maharaj, 681 F.3d 558, 569 (4th Cir. 2012); In re
Lindsey, 453 B.R. 886, 903 (Bankr. E.D. Tenn. 2011).
To date, the Bankruptcy Appellate Panel for the Ninth Circuit and five
bankruptcy courts (one of which was affirmed by a district court) have adopted a
“broad view,” holding that the BAPCPA amendments eliminate the APR as
applied to an individual’s entire estate. 3 In contrast, the Fourth Circuit and
seventeen bankruptcy courts have reached the opposite conclusion, holding that
the BAPCPA amendments only exempt from the APR that property which § 1115
adds to an individual estate —not the pre-petition property already defined by §
541. 4
3
In re Friedman, 466 B.R. 471 (B.A.P. 9th Cir. 2012); SPCP Grp., LLC v.
Biggins, 465 B.R. 316 (M.D. Fla. 2011) (affirming unpublished decision of
bankruptcy court); In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010); In re Johnson,
402 B.R. 851 (Bankr. N.D. Ind. 2009); In re Roedemeier, 374 B.R. 264 (Bankr. D.
Kan. 2007); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007).
4
In re Maharaj, 681 F.3d 558 (4th Cir. 2012) (affirming the bankruptcy
court’s decision in 449 B.R. 484 (Bankr. E.D. Va. 2011)); In re Lee Min Ho
Chen, No. 11-08170, 2012 WL 5463256 (Bankr. D. P.R. Nov. 9, 2012); In re
Tucker, 479 B.R. 873 (Bankr. D. Or. 2012); In re Arnold, 471 B.R. 578 (Bankr.
C.D. Cal. 2012); In re Lively, 467 B.R. 884 (Bankr. S.D. Tex. 2012); In re
Borton, No. 09-00196-TLM, 2011 WL 5439285 (Bankr. D. Idaho Nov. 9, 2011);
In re Lindsey, 453 B.R. 886 (Bankr. E.D. Tenn. 2011); In re Kamell, 451 B.R.
505 (Bankr. C.D. Cal. 2011); In re Draiman, 450 B.R. 777 (Bankr. N.D. Ill.
2011); In re Walsh, 447 B.R. 45 (Bankr. D. Mass. 2011); In re Stephens, 445 B.R.
816 (Bankr. S.D. Tex. 2011); In re Karlovich, 456 B.R. 677 (Bankr. S.D. Cal.
2010); In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010); In re Steedley, No. 09-
50654, 2010 WL 3528599 (Bankr. S.D. Ga. Aug. 27, 2010); In re Mullins, 435
B.R. 352 (Bankr. W.D. Va. 2010); In re Gbadebo, 431 B.R. 222 (Bankr. N.D. Cal.
2010); see also In re Friedman, 466 B.R. at 476 (discussing the bankruptcy
court’s determination—in an unpublished February 17, 2011 order—that the APR
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According to the broad view, § 1115 incorporates and supercedes § 541.
Under § 1115, an individual’s estate includes post-petition property and earnings
in addition to the pre-petition property established by § 541. In re Tegeder, 369
B.R. 477, 480 (Bankr. D. Neb. 2007); see also In re Shat, 424 B.R. 854, 863
(Bankr. D. Nev. 2010) (“Initially, Section 1115 creates a baseline estate of all the
property covered by Section 541. It then adds to that [post-petition property].”).
When § 1129(b)(2)(B)(ii) references the property “included by” § 1115, it
“refer[s] to all property Section 1115 itself references.” In re Shat, 424 B.R. at
863. Section 1115 thus absorbs § 541 for individual Chapter 11 cases. Id. at 865.
Therefore, the APR no longer applies to any property of an individual debtor’s
estate.
In contrast, the narrow view holds that § 1115 merely adds to—but does not
replace—§ 541’s definition of estate property for individual debtors. See, e.g., In
re Draiman, 450 B.R. 777, 821 (Bankr. N.D. Ill. 2011). Section 1115 “includes”
in the estate only that property which was not already included by § 541. See In
re Gbadebo, 431 B.R. 222, 229 (Bankr. N.D. Cal. 2010). In other words, § 1115
includes only post-petition property and earnings. In re Draiman, 450 B.R. at
821. In support of the narrow view, several courts have pointed to § 1115’s
grammatical structure. See, e.g., In re Arnold, 471 B.R. 578, 602 (Bankr. C.D.
Cal. 2012) (explaining that because the phrase, “in addition to the property
applies to individual Chapter 11 debtors).
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specified in section 541” is “not the direct object of the transitive verb,
‘includes,’” the phrase therefore “is not an answer to the question what is
included as ‘property of the estate’ under § 1115”). Accordingly, only post-
petition property added by § 1115 is exempt from the APR; the APR continues to
apply to § 541’s pre-petition property.
After examining the divergent interpretations of the statutory language, we
agree with the Fourth Circuit that “either construction is plausible.” In re
Maharaj, 681 F.3d at 569. In light of this linguistic ambiguity, we endeavor to
ascertain Congress’s intent. See United States v. Hohri, 482 U.S. 64, 69–71
(1987).
2. Is there a clear Congressional intent to repeal the absolute priority
rule as applied to individual Chapter 11 debtors?
Nowhere in BAPCPA’s sparse legislative history is there an explanation of
what changes result from § 1115. See In re Lindsey, 453 B.R. at 903; Bruce A.
Markell, The Sub Rosa Subchapter: Individual Debtors in Chapter 11 After
BAPCPA, 2007 U. Ill. L. Rev. 67, 90. Consequently, courts have reached
opposite conclusions regarding the legislative objective. Compare In re Shat, 424
B.R. at 862–65, with In re Gbadebo, 431 B.R. at 229–30. In deciphering
Congress’s intent, we recognize BAPCPA’s aim of curbing the abusive practices
of unscrupulous debtors, see H.R. Rep. No. 109-31, pt. 1, at 3–5 (2005), reprinted
in 2005 U.S.C.C.A.N. 88, 90–92, but we remain mindful that “a central purpose
of the Code” is to provide the honest but unfortunate debtor with a “fresh start,”
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Grogan v. Garner, 498 U.S. 279, 286–87 (1991) (quotations and citation omitted).
This inherent tension makes it difficult to identify a singular objective behind
§ 1115.
Advocates of the broad view emphasize that the BAPCPA amendments
evince an intent to model Chapter 11 on Chapter 13, which has no absolute
priority rule. See In re Friedman, 466 B.R. at 483; In re Shat, 424 B.R. at 868.
In support, they cite a number of provisions that are essentially copied from
Chapter 13. See, e.g., In re Roedemeier, 374 B.R. 264, 275–76 (Bankr. D. Kan.
2007). Further, proponents of the broad view emphasize that abolishing the APR
with respect to individual debtors does not leave unsecured creditors without any
power or protection. Instead, unsecured creditors can rely on the safeguards of
§ 1129(a)(15)’s disposable income test, see In re Shat, 424 B.R. at 863–64, and
§ 1129(a)(7)’s “best interests” test, see Amicus Br. of Nat’l Ass’n of Consumer
Bankr. Attorneys at 6.
In contrast, those ascribing to the narrow view argue that, “[e]ach one of
these new provisions,” even where modeled on Chapter 13, “appears designed to
impose greater burdens on individual chapter 11 debtor’s rights so as to ensure a
greater payout to creditors.” In re Gbadebo, 431 B.R. at 229 (emphasis added);
see also H.R. Rep. No. 109-31, pt. 1, at 2–5, 80–81. Narrow view proponents
urge that if Congress intended to abolish the APR with respect to individual
debtors, “it would have done so in a far less convoluted way.” In re Maharaj, 681
F.3d at 565–66. For instance, Congress could have raised Chapter 13’s debt
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ceiling or expressly exempted individual debtors at the beginning of
§ 1129(b)(2)(B)(ii). See In re Karlovich, 456 B.R. 677, 682 (Bankr. S.D. Cal.
2010). Moreover, BAPCPA’s legislative history lists several debtor protections
but makes no mention of eliminating the APR. See H.R. Rep. No. 109-31, pt. 1,
at 2, 17–18. Advocates for the narrow view argue that, had Congress intended
such a drastic change, it surely would have included the amendment in its list of
debtor protections. See In re Maharaj, 681 F.3d at 572. Instead, the amendments
are best understood as preserving the status quo. See, e.g., id. at 569–70 (noting
that the exemption of post-petition property and earnings ensures that the APR
operates as it did prior to BAPCPA’s passage).
Because both the statutory language and Congress’s intent are ambiguous,
we heed the presumption against implied repeal. “[R]epeals by implication are
not favored and will not be presumed unless the intention of the legislature to
repeal is clear and manifest.” Nat’l Ass’n of Home Builders v. Defenders of
Wildlife, 551 U.S. 644, 662 (2007) (quotations omitted). Where a party contends
“that legislative action changed settled law,” that party “has the burden of
showing that the legislature intended such a change.” Green v. Bock Laundry
Mach. Co., 490 U.S. 504, 521 (1989). These interpretive principles are
particularly critical in bankruptcy cases, where parties rely on settled rules in
conducting and structuring business. Thus, “[p]re-BAPCPA bankruptcy practice
is telling because we will not read the Bankruptcy Code to erode past bankruptcy
practice absent a clear indication that Congress intended such a departure.”
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Hamilton v. Lanning, 130 S. Ct. 2464, 2473 (2010) (quotation omitted). Here, the
statutory language and legislative history lack any clear indication that Congress
intended to erode a pillar of creditor bankruptcy protection. See Hui v.
Castaneda, 130 S. Ct. 1845, 1853 (2010); Dewsnup v. Timm, 502 U.S. 410,
419–20 (1992). Especially in light of the fact that Congress has expressly
repealed the APR in the past, see H.R. Rep. 82-2320, at 1981–82, we decline to
find an implied repeal here.
We therefore REVERSE the bankruptcy court’s order confirming the plan
and REMAND for further proceedings.
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