Philip Lively

Case: 12-20277 Document: 00512255765 Page: 1 Date Filed: 05/29/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 29, 2013
No. 12-20277
Lyle W. Cayce
Clerk
In the Matter of: PHILIP REED LIVELY,
Debtor
------------------------------
PHILIP REED LIVELY,
Appellant
Appeal from the United States Bankruptcy Court
for the Southern District of Texas
Before JONES, DENNIS and HIGGINSON, Circuit Judges.
EDITH H. JONES, Circuit Judge:
The denial of confirmation of an individual Chapter 11 debtor’s
reorganization plan was certified for appeal from the bankruptcy court pursuant
to 28 U.S.C. § 158(d)(2)(A)(i) and (ii) to resolve a question of first impression in
this circuit: whether Chapter 11's absolute priority rule, 11 U.S.C.
§ 1129(b)(2)(B), as amended by the BAPCPA1, applies in such individual debtor
cases? In accord with two other circuits, we hold that it does. In re Stephens,
704 F.3d 1279 (10th Cir. 2013); In re Maharaj, 681 F.3d 558 (4th Cir. 2012). The
bankruptcy court’s order denying confirmation is affirmed.
1
Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, Pub. L. No. 109-8,
119 Stat. 23 (2005).
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No. 12-20277
Debtor Philip Lively’s Chapter 13 case was converted to Chapter 11 after
a creditor filed a claim that caused his scheduled debts to exceed the debt ceiling
for Chapter 13 cases. Proceeding in Chapter 11, Lively proposed a
reorganization plan that, inter alia, allowed him to retain all of his property,
including the net value of a mortgage and net lease income from nine railroad
tank cars, while paying unsecured creditors a small dividend that exceeded the
liquidation value of his assets. No competing plans were filed; no objections to
confirmation were filed by any creditor. Although the unsecured claims class
voted overwhelmingly in dollar amount to approve the plan, the majority of that
class voted by number of claims to reject it.
At the confirmation hearing, the court was thus required to determine
whether the absolute priority rule applies, preventing confirmation unless the
dissenting, impaired unsecured creditor class was “crammed down.” The court
was obliged independently to determine whether the reorganization plan
complies with applicable law. In re Williams, 850 F.2d 250, 253 (5th Cir. 1988).
The court held that the absolute priority rule applies, denied confirmation, and
certified the issue for immediate appeal, because the issue is arising with some
frequency in the Fifth Circuit and has been the subject of conflicting bankruptcy
court opinions. This court accepted the certification. We note that Lively alone
has filed a brief, as no parties in interest have come forward on this point. The
appeal is properly before this court.
DISCUSSION
We review de novo this issue of statutory interpretation. United States v.
Kay, 359 F.3d 738, 742 (5th Cir. 2004). The absolute priority rule provides that
a Chapter 11 reorganization plan is “fair and equitable” with respect to a
2
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No. 12-20277
dissenting class of unsecured claims, if
(i) the plan provides that each holder of a claim of such class receive
or retain on account of such claim property of a value, as of the
effective date of the plan, equal to the allowed amount of such claim;
or
(ii) the holder of any claim or interest that is junior to the claims of
such class will not receive or retain under the plan on account of
such junior claim or interest any property; except that in a case in
which the debtor is an individual, the debtor may retain property
included in the estate under section 1115, subject to the requirements
of subsection (a)(14) of this section.
11 U.S.C. § 1129(b)(2)(B)(emphasis added). Lively does not dispute that his plan
fails to comply with the absolute priority rule, because it allows him to retain the
above-listed valuable, non-exempt, pre-petition assets. Relying on a minority
string of bankruptcy court authorities,2 he asserts that the “exception” italicized
above, which was carved out of the absolute priority rule when the Bankruptcy
Code was amended in 2005, exempts him entirely from its operation. The
question he poses is: what does the provision mean when it allows an individual
debtor to retain property included in the debtor’s estate under § 1115. 11 U.S.C.
§ 1115(a), also added in 2005, states:
In a case in which the debtor is an individual, property of the estate
includes, in addition to the property specified in [11 U.S.C. §] 541—
(1) all property of the kind specified in section 541 that
the debtor acquires after the commencement of the
case . . . ; and
(2) earnings from services performed by the debtor after
the commencement of the case . . . .
2
See, e.g. Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. B.A.P. 2012).,
In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010); In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan.
2007).
3
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Section 541 is the comprehensive description of “property of the debtor’s estate”
at the commencement of a case in any chapter (7, 9, 11, 12, or 13) of the
Bankruptcy Code.
Most of the cases that have interpreted BAPCPA’s modification of the
absolute priority rule have found the amendatory language ambiguous and have
gone on to examine unenlightening legislative history and extrinsic interpretive
factors to arrive at either a “narrow” or “broad” interpretation. The “narrow”
interpretation holds that the absolute priority rule was amended so that
individual debtors could exclude from its reach only their post-petition earnings
and post-petition acquisitions of property, i.e., only property that was not already
included in the Chapter 11 estate by § 541.3 The “broad” interpretation holds
that the exception’s (§ 1129(b)(2)(B)(ii)) reference to property “included in” the
individual debtor’s estate “under” § 1115 subsumes or supersedes the § 541
definition completely, thus effecting abrogation of the absolute priority rule. See
n.2 supra.
To answer Lively’s question, we use standard tools of statutory
interpretation, which focus on the language of the statute taken in the context
of the Bankruptcy Code of which it is a part. RadLAX Gateway Hotel, LLC v.
Amalgamated Bank, 132 S. Ct. 2065, 2070-71 (2012). So doing, we are inclined
to agree with the bankruptcy court in this case that the “narrow” interpretation
is unambiguous and correct, and the exception to the absolute priority rule
plainly covers only the individual debtor’s post-petition earnings and
3
See, e.g., In re Maharaj, supra; In re Stephens, 445 B.R. 816 (Bankr. S.D. Tex. 2011);
In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010); In re Gbadebo, 431 B.R. 222 (Bankr. N.D.
Cal. 2010); In re Karlovich, 456 B.R. 677 (Bankr. S.D. Cal. 2010).
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post-petition acquired property. But even if the statutory language is
ambiguous, then the “narrow view” must prevail, because the opposite
interpretation leads to a repeal by implication of the absolute priority rule for
individual debtors. In re Maharaj, 681 F.3d at 571.
A plain reading of § 1129(b)(2)(B)(ii) in light of § 1115(a) is that both
provisions were adopted when BAPCPA was passed in order to coordinate
individual debtor reorganization cases to some extent with Chapter 13 cases,
whose debt limit may throw debtors like Lively into a Chapter 11 reorganization.
See 11 U.S.C. § 109(e). Had Chapter 11 remained unaltered, Lively could
reorganize in Chapter 11 under more favorable terms than those available to
chapter 13 debtors. Chapter 13 subjects a debtor’s post-petition “disposable
income,” including his salary and earnings, to creditor claims as a plan
confirmation requirement. Before the BAPCPA amendments, however, an
individual Chapter 11 debtor would only have to satisfy the absolute priority
rule with assets that were “property of the estate” at the date of filing for relief;
the individual debtor’s personal post-petition earnings were not subject to
liability to satisfy his creditors. In § 1115, Congress remedied this potential
inequity in Chapter 11 by adding to the § 541 definition the individual debtor’s
post-petition earnings and property acquisitions. Other effects of this
amendment were to bring such property interests within the protection of the
automatic stay, In re Maharaj, 681 F.3d at 570, which benefits the individual
debtor, while enabling court supervision of the debtor’s use of those interests.
See, e.g., 11 U.S.C. §§ 363(b), (c)(1).
When the debtor’s post-petition property and earnings were added to
Chapter 11, however, Congress also had to modify the absolute priority rule so
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that a debtor would not be saddled with committing all post-petition property to
satisfy creditors’ claims. See In re Kamell, 451 B.R. 505, 511 (Bankr. C.D. Cal.
2011) (“the property included in the estate under § 1115 includes all
post-petition earnings, not limited by deduction for monthly expenses [as in
Chapter 13] . . .[s]o, if the ‘absolute priority rule’ persisted after BAPCPA, it
would have prevented the debtor from keeping any of his post-petition earnings
as the price for cram down; thus enters the necessary amelioration in
§ 1129(b)(2)(B)(ii) . . . . But this is as far as one needs to go to make sense of the
new statutory scheme.”) This most natural reading of the amendments renders
no Code provision superfluous and reveals a reasonable purpose.
The case law finding ambiguity rests on the terms “included in” and
“under,” two words not normally the subject of such parsing. Reading the phrase
in § 1129(b)(2)(B)(ii) to evince ambiguity seems a grammatical stretch, because
§ 1115 expressly states that property is being “added” to that comprised by
§ 541; the section does not supersede § 541 property, any more than
“2”supersedes “3” when added to it. See also In re Seafort, 669 F.3d 662 (6th Cir.
2012) (interpreting similar provision, 11 U.S.C. § 1306(a)).4
But if ambiguity exists, the consequence of the “broad view” is that the
“except” clause abrogates the absolute priority rule for individual debtors. This
is a startling, and most indirect, way for Congress to have effected partial
4
One argument for ambiguity is that exempting only post-petition earnings and
property from the absolute priority rule would confer at best a trivial benefit on a Chapter 11
debtor. The bankruptcy court here thoroughly repudiated that argument with a simple
hypothetical showing that if an individual debtor either increased his earnings or reduced his
expenses post-confirmation, he would be better off even under a plan confirmed according to
11 U.S.C. § 1129(a)(15), which, if invoked, requires a commitment of the debtor’s “disposable
income” for five years.
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implicit repeal of the very provision that the section amended. As a matter of
standard statutory construction, this result is unacceptable. Repeals by
implication are disfavored and will not be presumed unless the legislature’s
intent is “clear and manifest.” Nat’l Ass’n of Home Builders v. Defenders of
Wildlife, 551 U.S. 644, 662, 127 S. Ct. 2518, 2532 (2007). The Court has also
explained that “we will not read the Bankruptcy Code to erode past bankruptcy
practice absent a clear indication that Congress intended such a departure.”
Hamilton v. Lanning, ___ U.S. ___, 130 S. Ct. 2464, 2473 (2010) (quotation
omitted). The absolute priority rule, in particular, has been a cornerstone of
equitable distribution for Chapter 11 creditors for over a century. We must
presume Congress was well aware of that rule and, in the absence of a clearer
directive, modified § 1129(b)(2)(B)(ii) in order to refine it, not reverse it, for
individual debtors.
For these reasons, the bankruptcy court’s judgment is AFFIRMED.
7