Dill Oil Company, LLC v. Stephens, No. 11-6309 (10th Cir., Jan. 15, 2013)

CASE SNAPSHOT

The Court of Appeals for the Tenth Circuit, in a case of first impression before the court, joined the Fourth Circuit in holding that the absolute priority rule remains applicable in individual chapter 11 cases.

FACTUAL BACKGROUND

The individual debtors were the owners/operators of convenience stores and owed their supplier $1.8 million for gasoline purchases. The debtors executed mortgages on various real properties in favor of the supplier, which mortgages were subordinate to existing mortgages on the properties. The debtors subsequently filed a chapter 11 petition and later filed a proposed plan of reorganization. Under the plan, the gasoline supplier would be paid approximately $15,000 as a secured creditor, but its remaining claim would be considered unsecured. The debtors would retain possession and control of their property. The supplier filed an objection to the proposed plan, arguing that the plan violated the absolute priority rule. Additionally, the supplier voted to reject the plan, under which it would receive approximately 1 percent of their unsecured claim over five years. Because the supplier’s vote constituted 96 percent of one class of claims, the supplier’s rejection precluded approval of the plan. The bankruptcy court entered an order approving the plan under the cramdown provisions of section 1129(b). The supplier appealed to the Bankruptcy Appellate Panel, which certified the question for immediate appeal to the Court of Appeals.

COURT ANALYSIS

The question on appeal was "whether the 2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors from the absolute priority rule." That rule "bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full." The court began its analysis by focusing on the language of section 1129(b)(2)(B)(ii), which provides that the holder of any claim that is junior to the claim of any objecting class shall not receive or retain 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…." (Emphasis in opinion.) Section 1115, which was added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), states, "In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541…." (Emphasis in opinion.)

"Although a number of courts have held this language to be ambiguous, they have reached starkly different conclusions regarding the ‘plain’ meaning." The court cited a Florida case that held that the plain meaning is that section 1115 includes section 541 property; however, the Dill court also cited a Georgia case where the court held that nothing in section 1115’s language suggests that it subsumes section 541. The Dill court said, "The very existence of this dichotomy seems indicative of the text’s ambiguity." The court then noted that the Ninth Circuit B.A.P. and five bankruptcy courts (one of which was affirmed by a district court) adopted a "broad view" – that the BAPCPA amendments eliminated the absolute priority rule as applied to the individual’s entire estate. In contrast, the Fourth Circuit and numerous bankruptcy courts reached the opposite conclusion – the amendments only exempt from the absolute priority rule property acquired by the individual post-petition, what is known as the "narrow view."

The Dill court found that either interpretation of section 1115 was plausible, and thus the language was ambiguous. Because of the statutory ambiguity, the court next examined Congressional intent. "Nowhere in BAPCPA’s sparse legislative history is there an explanation of what changes result from section 1115." The court determined that both the text and Congressional intent were ambiguous, and so the court "heed[ed] the presumption against implied repeal" of established creditor protections. The court adopted the narrow view, reasoning that Congress certainly knew how to clearly express repeal, and if it had intended to limit application of the absolute priority rule to individual chapter 11 debtors, it could have expressed such intent in the legislative history and/or statutory language. Therefore, the court reversed the bankruptcy court’s order confirming the plan, and remanded for further proceedings.

PRACTICAL CONSIDERATIONS

This is the second Court of Appeals to adopt the so-called narrow view that the absolute priority rule continues to apply to individual chapter 11 debtors. (The Fourth Circuit first adopted the narrow view in In re Maharaj, also discussed in this newsletter.) Creditors are gaining some advantage on this question, thanks to these two Court of Appeals decisions.