No IN THE. IN RE MARTIN MANVILLE Debtor. MARTIN MANVILLE, Petitioner, JONATHAN AZOFF, Respondent

Transcription

1 No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2010 IN RE MARTIN MANVILLE Debtor MARTIN MANVILLE, Petitioner, v. JONATHAN AZOFF, Respondent On Writ of Certiorari To the United States Court of Appeals For the Thirteenth Circuit BRIEF FOR RESPONDENT Team R 24 Counsel for the Respondent

2 QUESTIONS PRESENTED I. WHETHER THE ABSOLUTE PRIORITY RULE APPLIES IN AN INDIVIDUAL S CHAPTER 11 CASE TO PREVENT CONFIRMATION OF A PLAN OF REORGANIZATION OVER THE OBJECTION OF A DISSENTING CLASS OF IMPAIRED UNSECURED CREDITORS WHERE THE INDIVIDUAL IS RETAINING PRE-PETITION PROPERTY WITHOUT PAYING THE UNSECURED CLAIMS IN FULL. II. WHETHER A CHAPTER 11 PLAN CAN BE CONFIRMED OVER THE OBJECTION OF A SECURED CREDITOR WHERE THE PLAN PROVIDES FOR THE SALE OF THE SECURED CREDITOR S COLLATERAL BUT DENIES THE SECURED CREDITOR THE RIGHT TO CREDIT BID ITS CLAIM IN THE SALE. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... iv OPINIONS BELOW... ix STATEMENT OF JURISDICTION... ix STATUTORY PROVISIONS... ix STATEMENT OF FACTS...1 SUMMARY OF ARGUMENT...4 ARGUMENT...5 I. THE ABSOLUTE PRIORITY RULE MUST APPLY TO INDIVIDUAL CHAPTER 11 REORGANIZATIONS OR CONGRESS INTENT, THE STATUTORY SCHEME, AND THE BALANCE OF POWER IN BAPCPA WOULD BE THWARTED...5 A. Congress intended the absolute priority rule to apply to individual chapter 11 because it is coherent and consistent with BAPCPA s statutory scheme BAPCPA s Statutory Scheme in Individual Chapter 11 Reorganizations BAPCPA s Statutory Scheme Applies the Absolute Priority Rule to all Chapter 11 Cases... 7 II. B. A broad interpretation of section 1115 to include all property of the estate consisting of sections 541 and 1115 would be incoherent and inconsistent with Congress intent...9 C. If Congress wanted to eliminate the absolute priority rule it would have done so expressly or explained its reasoning in the legislative history as it had previously done...11 D. Eliminating the absolute priority rule from individual chapter 11 cases would upset the balance of power between debtor and creditor...13 THE CORRECT INTERPRETATION OF 1129 IS THAT WHENEVER A SECURED CREDITOR S COLLATERAL IS BEING CRAMMED DOWN AND SOLD PURSUANT TO A PLAN FREE OF EXISTING LIENS, THE LENDER HAS THE RIGHT TO CREDIT BID, WHICH IS CONSISTENT WITH LEGISLATIVE INTENT AND PUBLIC POLICY...17 A. Section 1129(b)(2)(A) Has Two Reasonable Interpretations, Therefore the Court Applies the Principles of Statutory Interpretation to Find Which of the Two Interpretations is the More Plausible...21 ii

4 1. The Interpretation that 1129(b)(2)(B)(ii) is the Exclusive Remedy for a Plan Sale of a Secured Creditor s Collateral Free of Existing Liens is Supported Under the Cannons of Statutory Construction By reading 1129(b)(2)(A) in the Context of Related Statues, the Intent of Congress is Clear that Credit Bidding is a Right Secured Creditors Have to Protect Their Collateral Legislative History Including Comments of Code Drafters Clarify Congressional Intent, that Credit Bidding Remain a Safeguard When the Value of a Secured Creditor s Collateral is Crammed Down for a Plan Sale Free of Liens...26 B. Credit Bidding Can Only Maximize The Value of the Estate, When a Debtor Proposes to Sell a Secured Creditor s Crammed Down Collateral, the Plan Should Never Be Approved if It Doesn t Allow the Secured Creditor to Credit Bid...28 C. If the Court Decides that 1129(b)(2)(A)(iii) is an Appropriate Remedy When a Secured Creditor s Collateral is Crammed Down Pursuant to a Plan Sale Free of existing liens, an Indubitable Equivalent of the Creditor s Bargained for Bundle of Rights Must Include the Ability to Credit Bid...31 CONCLUSION...35 CERTIFICATE OF COMPLIANCE...35 CERTIFICATE OF SERVICE...35 APPENDIX A... i APPENDIX B... ii APPENDIX C... vi APPENDIX D...x APPENDIX E... xi APPENDIX F... xii iii

5 TABLE OF AUTHORITIES CASES Page(s) Beiger v. IRS, 496 U.S. 53 (1990) Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939)...11 Corley v. U.S., 129 U.S (2009)...22 D. Ginsberg & Sons v. Popkin, 285 U.S. 204 (1932)...22 Greenblatt v. Steinberg, 339 B.R. 458 (N.D.Ill.2006)...18 Hibbs v. Winn, 542 U.S. 88, 124 S.Ct. 2276, 159 L.Ed.2d In re 183 Lorraine St. Assocs., 198 B.R. 16 (E.D.N.Y. 1996)...25 In re Aloha Airlines, No , 2009 WL (Bankr.D.Hawaii May 14, 2009)...18 In re Antaeus Technical Servs., Inc., 345 B.R. 556 (Bankr.W.D.Va.2005)...18 In re Briggs Transp. Co, 780 F.2d 1339 (8th Cir. 1985)...32 In re California Hancock, Inc., 88 B.R. 226 (9th Cir. BAP 1988)...20, 25 In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010)...7 In re H&M Parmely Farms v. Farmers Home Admin., 127 B.R. 644 (D. S.D. 1990)...20 In re JLJ, Inc., 988 F.2d (11th Cir. 1993)...5 In re Johnson, 402 B.R. 851 (Bankr. N.D. Ind. 2009)...9 iv

6 In re Karlovich, 2010 Bankr. LEXIS 4014 (Bankr. N.D. 2010)...7, 8 In re Kent Terminal, 166 B.R. 555 (Bankr. S.D.N.Y. 1994)...19, 20 In re Krohn, 886 F.2d 123 (6th Cir. Ohio 1989)...13 In re M & L Bus. Mach. Co., Inc., 84 F.3d 1330 (10th Cir. 1996)...17 In re Midway Investments, Ltd., 187 B.R. 382 (Bankr. S.D. Fla. 1995)...20 In re Monarch Beach Venture, Ltd., 166 B.R. 428 (C.D. Cal. 1993)...20 In re Murel Holding Corp., 75 F.2d 941 (2d Cir. 1935)...31, 32 In re Pacific Lumber Co., 584 F.3d 229 (5 th Cir. 2009)...19, 20, 30 In re Philadelphia Newspaper, 599 F.3d 298 (3d Cir. 2009)... passim In re Realty Invs., Ltd., 72 B.R. 143 (Bankr. C.D. Cal. 1987)...25 In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan. 2007)...9 In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010)...9, 11 In re Southerton Corp., 46 B.R. 391 (M.D. Pa. 1982)...33 In re SubMicron Systems Corp., 432 F.3d 448 (3d Cir. 2006)...17, 24 In re SunCruz Casinos, LLC, 298 B.R. 833 (Bankr. S.D. Fla. 2003)...20, 25 In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007)...9 v

7 In re Theroux, 169 B.R. 498 (Bankr.D.R.I.1994)...18 In re Townley, 256 B.R. 697 (Bankr. D.N.J. 2000)...32 Kelly v. Robinson, 479 U.S. 36 (1986)...24 Krohn v. Frommann, 153 B.R. 113 (Bankr. E.D.N.Y. 1993)...13 Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935)...33 Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913)...11 Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003)...24 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)...28 SEC v. American Trailer Rentals Co., 379 U.S. 594 (1965)...11 SEC v. United States Realty & Improvement Co., 310 U.S. 434 (1940)...12 State v. Ogden, 118 N.M. 234, 880 P.2d 845 (1994)...20 Torib v. Radloff, 501 U.S. 157 (1991)...28 United & Commercial Workers Union, Local 211 v. Family Snacks, Inc. (In re Family Snacks, Inc.), 257 B.R. 884 (B.A.P. 8 th Cir. 2001)...29 United Savings Ass'n of Tex. v. Timbers of Inwood Forest Assocs. (In re Timbers of Inwood Forest Assocs.), 793 F.2d 1380 (5th Cir. 1981)...33 United States v. Ron-Pair Enterprises, Inc., 489 U.S. 235 (1989)...5 vi

8 Williams v. Tower Loan of Miss., Inc. (In re Williams), 168 F.3d 845 (5 th Cir. 1999)...19 Wright v. Union Central Life Ins. Co., 311 U.S. 273 (1940)...32 STATUTES 11 U.S.C. 103(a) (2006)... 6, 7 11 U.S.C. 541(a) (2006) U.S.C (2006) U.S.C. 1123(a)(8) U.S.C. 1129(a)(7)(A)(ii) (2006) U.S.C. 1129(b)(1) U.S.C. 1129(b)(2)(B)(ii) (2006)...7, 8 11 U.S.C 1111(b)(1)(A) U.S.C. 1111(b)(2) U.S.C. 1129(b)(2)(A) (2006)... passim 11 U.S.C. 1129(b)(2)(A)(i) U.S.C. 1129(b)(2)(A)(ii)... passim 11 U.S.C. 1129(b)(2)(A)(iii)...19, 31 Bankruptcy Act, Pub. L. No. 696, 52 Stat. 883 (1938)...11 U.C.C (b)(35) (2006)...32 OTHER AUTHORITIES 3 Collier Bankruptcy Manual [1][a](3d ed. rev. 2009) Cong. Rec. 32,407 (1978) Cong. Rec. 34, nd Cong., 2d Sess. 35 (1952) th Cong. 2d Sess. 1129(b)(2) (1978)...12 vii

9 Am. Bankr. L.J. 133, 134 (1979)...23 Bruce H. White & William L. Medford, A Secured Creditor s Rights to Intellectual Property Licensed by a Debtor in Bankruptcy,...33 Collier on Bankruptcy, App. Pt. 4(f)(i)(2)...26 Collier on Bankruptcy, App. Pt. 4(f)(iii)...26 Eric W. Anderson The Philadelphia Story: Third Circuit Denies Lenders Credit-Bid Rights by Eric W. Anderson...33 Fifth Amendment...32 H.R (1978)...21 H.R. Rep. No. 2320, 82nd reprinted in 1978 U.S.C.C.A.N Ralph Brubaker, Individual Chapter 11 Debtors, BAPCPA, and the Absolute Priority Rule, 30 No. 4 Bankruptcy Law Letter 1, 2 (2010)...14, 15 Vincent S. Buccola, Credit Bidding and the Design of Bankruptcy Auctions, 18 Geo. Mason L. Rev. 99, 120 (2010)...29 William P. Weintraub, Third Circuit Bids Credit Bidding Adieu, 19 J. Bankr. L. & Prac. 3 Art. 4, 9 (2010)...29 viii

10 OPINIONS BELOW By order and decision, the United States Bankruptcy Court for the District of Moot granted an order confirming the reorganization plan of John Manville over the objection of John Azoff, a creditor. (R. 7). The United States District Court for the District of Moot affirmed without opinion. (R. 7). On October 10, 2010, the United States Court of Appeals for the Thirteenth Circuit reversed the decision of the District Court and remanded the matter for further proceedings consistent with its opinion. (R. 16). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS INVOLVED The relevant statutory provisions involved in this case are: 11 U.S.C. 103; 11 U.S.C. 363; 11 U.S.C. 541; 11 U.S.C. 1111; 11 U.S.C. 1115; 11 U.S.C. 1129, which are reproduced in Appendices A through F. ix

11 STATEMENT OF FACTS Martin Manville opened Manville Johns, a portable toilet business more than 30 years ago, in New York City. (R. 3). Business was good, and by 2005 Mansfield Johns had become the largest portable toilet provider in the greater New York area. (R. 3). Manville Johns had the coveted portable toilet supplier contract for all of the major outdoor concert and festivals, he also was the largest supplier to New York area construction sites. (R. 3). Because business was booming, Manville decided it was a good time to purchase an empty warehouse to house his thriving business. (R. 3). Jonathan Azoff agreed to loan Manville, his then brother-in-law $10 million to finance both the acquisition and renovation of the warehouse. (R. 3). The loan was secured by a properly recorded first mortgage on the warehouse, and was to be repaid in one balloon payment of principal on the loans 10 th anniversary, with interest being paid monthly in the interim. (R. 3). Manville renovated the first floor specifically with special sewer hookups. (R. 3). The upper two stories were available to rent out to other businesses. (R. 3). Manville was up to date with his interest payments to Azoff, until the economy took a downturn. (R. 4) He then stopped making the monthly interest payments, blaming both the New York construction slow down, and many outdoor concerts and festivals being cancelled. (R. 4). Manville s business continually declined until 2009, when slowly the economy began to improve, allowing Manville to keep his business afloat. (R. 4). During this time Azoff became increasingly frustrated with Manville for missing so many monthly payments. (R. 4) Also, Azoff no longer felt obligated to treat Manville like family, since Manville and Azoff s sister were now divorced. (R. 4). Azoff declared a default on the mortgage 1

12 loan and began foreclosure proceedings against the warehouse. In response Manville filed a chapter 11 bankruptcy petition to stay the foreclosure. (R. 4). The parties could not agree to lease terms in negotiations, so Manville proposed a plan of reorganization that provided for the sale of the warehouse free and clear of Azoff s lien for $6 million to a local real estate investor, Baum. (R. 4). Baum was not an insider, but made it clear that he would not buy the property without the lease agreement with Manville. (R. 4). The deal entailed leasing Manville the bottom floor of the warehouse for 10-years. (R. 4). Additionally the plan contemplated that Manville would continue operating Manville Johns, and that all of Manville s business and personal assets would vest in Manville free and clear of claims upon confirmation of the plan. (R. 4-5). The plan separately classified Azoff s claim into secured and unsecured portions. (R. 5) Although the total amount of his claim was close to $11 million, due to accrual of unpaid interest, the plan provided that only $6 million would be a secured claim. (R. 5). This would be paid to Azoff with the proceeds of the warehouse sale. (R. 5). The remaining $5 million of Azoff s claim was to be placed in one of the classes of unsecured claims. (R. 5). The plan provided that the unsecured claims would be funded by future operations of the business. Azoff voted both of his claims against the plan, which caused the secured class (of which he was the sole member) and one of the unsecured classes to reject the plan. (R. 5). Manville sought to cram down the plan on the two Azoff-controlled rejecting classes. (R. 5). At the confirmation hearing the bankruptcy judge found that all the section 1129(a) requirements were satisfied except the 1129(a)(8) requirement that each impaired class accept the plan. (R. 5). 2

13 Respecting the unsecured claim, the court also found that Azoff s unsecured claims in the class were not being paid in full and that Manville was retaining property under the plan. (R. 6). Ordinarily this would violate the absolute priority rule and would prevent cram down on the class, however the Court read the BAPCPA amendment to 1129(b)(2)(B)(ii) to abrogate the absolute priority rule in individual chapter 11 cases and replace it with the disposable income requirement imposed by 1129(a)(15). (R. 6-7). Respecting the secured claim, Azoff did not contest the valuation evidence that put a current value on the warehouse at $6 million, instead he asserted that the plan violated his rights under 1129(b)(2)(A)(ii) as a secured creditor to bid in his debt and obtain the building so that he, rather than Baum could capture future appreciation when the market began to recover. (R. 6). The bankruptcy court rejected this argument saying that credit bidding is only one of three alternative ways that a plan could satisfy the fair and equitable standard for a cram down on a secured class. (R. 6). The court found that the current value of Azoff s collateral provided him with the indubitable equivalent of his claim and could be crammed down pursuant to 1129 (b)(2)(a)(iii). (R. 6). The Bankruptcy Court entered an order confirming the plan and Azoff timely appealed. The District Court affirmed the Bankruptcy Court s ruling. The Thirteenth Circuit reversed the the lower courts holding and remanded the case to be re-evaluated in light of their holding that Manville s plan cannot be confirmed over the objection of Azoff because the plan allows Manville to retain pre-petition property without paying unsecured claims in full. (R. 8). The Thirteenth Circuit also held that Manville s proposed plan could not be confirmed over the objection of a secured class of creditors, without permitting Azoff the right to credit bid. (R. 8-9). 3

14 SUMMARY OF ARGUMENTS For over a century the absolute priority rule has been a cornerstone of individual chapter 11 reorganizations. It has helped maintain the balance of power in chapter 11 cases between debtor and creditor, therefore, promoting fairer negotiations. If Congress had intended to eliminate it from BAPCPA it would have done so expressly as it had previously done. Because Congress did not intend to eliminate the absolute priority rule from BAPCPA a broad interpretation of section 1115 to make the property of the estate include all pre-petition and postpetition property inconsistent with the statutory scheme. A narrow interpretation of 1115 to exclude only post-petition property from the absolute priority rule is coherent and consistent with BAPCPA s purpose to make chapter 11 debtors who can pay a portion of their debts do so. The absolute priority rule is applicable to individual chapter 11 cases and will prevent confirmation of a plan of reorganization where an adversely impacted unsecured creditor objects. Therefore, Mr. Manville s plan of reorganization cannot be confirmed because he intends to keep prepetition property in violation of the absolute priority rule over Mr. Azoff s objection. The Thirteenth Circuit correctly reversed the lower courts holding, by ruling that the a plan of reorganization that proposes to sell a secured creditor s collateral free of existing liens cannot be crammed down, over its objections without providing the secured creditors the right to credit bid. That credit bidding is a right granted by 1129(b)(2)(A) is supported by the cannons of statutory construction, Bankruptcy Code provisions read in conjunction, and legislative history. Public policy goals of maximizing the return to the bankruptcy estate, not rewarding bad debtor behavior and lowering transactional costs are all benefits of allowing secured creditors to credit bid. In the alternative, an indubitable equivalent of a secured lender s collateral must encompass his pre-bankruptcy bargained for bundle of rights which includes credit bidding. Accordingly this Court should affirm the Thirteenth Circuit s decision. 4

15 ARGUMENT Standard of Review: This Court engages in de novo review of the Thirteenth Circuit s holding that the absolute priority rule, as a matter of law, continues to apply to chapter 11 individual cases. In re JLJ, Inc., 988 F.2d, 1116 (11th Cir. 1993). I. The absolute priority rule must apply to individual chapter 11 reorganizations or Congress intent, the statutory scheme, and the balance of power in BAPCPA would be thwarted. The absolute priority rule continues to be a fundamental principle in individual chapter 11 reorganizations under the Bankruptcy Abuse Prevention and Consumer Protection Act ( BAPCPA ). The amendments to the Bankruptcy Code (the Code ) do not expressly eliminate the absolute priority rule from individual chapter 11 cases. The amended Code s provisions, statutory intent, and bankruptcy s policies could not be achieved if the absolute priority rule had been eliminated. The absolute priority rule acts as one of the fundamental checks on a debtor s power. Its elimination would create unequal bargaining power between debtors and creditors and thwart Congress intent to prevent abuse of bankruptcy law. Therefore, the absolute priority rule continues to be a cornerstone of individual chapter 11 cases. Because the absolute priority rule continues to apply to individual chapter 11 cases a dissenting class of impaired unsecured creditors can prevent confirmation of a plan of reorganization. A. Congress intended the absolute priority rule to apply to individual chapter 11 because it is coherent and consistent with BAPCPA s statutory scheme. Any court s first step in analyzing a statute is to review the statutory scheme and determine if there is a clear unambiguous answer to the question presented. [A]s long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute. United States v. Ron-Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). If the statutory language is plain, and the framework is coherent and consistent 5

16 the sole function of the courts is to enforce it according to its terms. Id. The Code may not be the clearest or most concisely written statute in existence, but its statutory scheme is coherent and consistent. The Code was amended to strengthen a statutory scheme that increased the probability of debtors paying back even a portion of their debts. H. Rpt , pt. 1, at 2 (2005). Put simply, BAPCPA was enacted to benefit creditors and increase their chance of repayment. Any code provision that contributes to or supports this end is coherent and consistent with the statutory scheme. The absolute priority rule allows unsecured creditors an opportunity to increase their probability of repayment. Therefore, the absolute priority rule is coherent and consistent with the intended statutory scheme. Because this statutory scheme is coherent and consistent courts should enforce its provisions as written. 1. BAPCPA s Statutory Scheme in Individual Chapter 11 Reorganizations Section 103 of BAPCPA makes all code provisions contained in chapters 1, 3, and 5 applicable to any chapter 11 case. 11 U.S.C. 103(a) (2006). Chapter 5 s section 541 defines the debtor s legal and equitable interests that create the debtor s estate. Section 541 outlines property of the estate as a debtor s legal or equitable interests in property and gives as examples, interests of the debtor or the debtor s spouse in community property, and property that would have belonged to the debtor because of a gift, agreement, or as a beneficiary within 180 days after the filing date. 11 U.S.C. 541(a) (2006). Section 1115, a BAPCPA amendment to the Code, states that an individual chapter 11 debtor s property of the estate includes, in addition to the property specified in section 541 all property of the kind specified in section 541 that the debtor acquires after the commencement of the case. 11 U.S.C (2006). Section 1129(b)(2)(B)(ii) states an individual in a chapter 11 reorganization may retain property 6

17 included in the estate under section U.S.C. 1129(b)(2)(B)(ii) (2006). Even though the language of the amended provisions could be interpreted so that a debtor could retain property included from the estate by both sections 541 and 1115 that interpretation would be inconsistent with the statutory scheme Congress created. Prior to BAPCPA section 103(a) clearly indicated that property of the estate described in section 541 applied to an individual chapter 11 case. 11 U.S.C.S. 103(a) (2006). BAPCPA did not change section 103 or section 541. It would be strange to interpret section 1115 property of the estate to include all of the property of the estate, absorbing the estate created by section 541 and then adding post-petition property and earnings to it as petitioner argues. This interpretation of section 1115 would make redundant and negate the language of section 103. In re Gelin, 437 B.R. 435, 442 (Bankr. M.D. Fla. 2010). It is more likely that section 1115 only added to, or was meant to include the post-petition property in the case of an individual chapter 11 debtor. Id. So for an individual chapter 11 debtor property of the estate includes all non-exempt property which would be property of the estate for any chapter 11 debtor plus,, property acquired postpetition. In re Karlovich, 2010 Bankr. LEXIS 4014 *1, *6 (Bankr. N.D. 2010). Therefore, Section 1129(b)(2)(B)(ii) does not abrogate the absolute priority rule, but instead limits the rule s applicability to the property the debtor acquires after the commencement of the case that is added to the estate by section Id. at *9. This interpretation preserves the statutory scheme and makes relevant section 103 s language that chapters 1, 3, and 5 apply to all chapter 11 cases. 2. BAPCPA s Statutory Scheme Applies the Absolute Priority Rule to all Chapter 11 Cases The new provision in section 1129(b)(2)(B)(ii) makes the absolute priority rule apply equally to both individual and non-individual chapter 11 debtors. The absolute priority rule s application with respect to individuals is exactly the same as it was pre-bapcpa. In re 7

18 Karlovich, 2010 Bankr. LEXIS 4014 at *9. Before BAPCPA property of the estate did not included post-petition property or earnings for individuals. Id. Property and earnings acquired by the individual after filing for bankruptcy was not included in the estate and could be kept by the individual without violating the absolute priority rule. Id. Section 1115 now includes property and earnings acquired post-petition in the estate subjecting it to the absolute priority rule and making it impossible for the debtor to have a reorganization plan approved over a creditors objection while keeping their property acquired post-petition without 1) obtaining the acceptance of the impaired unsecured class, 2) paying all claims in full, or 3) violating the absolute priority rule and risking a denial of discharge. Id. at *10. To solve this dilemma and continue the operation of the absolute priority rule as it had been prior to BAPCPA s enactment, Congress changed section 1129(b)(2)(B)(ii). The change states that a debtor may retain property included in the estate under section U.S.C.S. 1129(b)(2)(B)(ii). By enacting section 1115 Congress included in the debtors estate post-petition property and earnings making it impossible to approve a debtors plan if a class of creditors objects. Through the changes to section 1129(b)(2)(B)(ii) Congress excluded the post-petition property from the estate. The changes essentially cancelled each other out. The absolute priority rule functions as it did prior to BAPCPA with respect to individual debtors in a chapter 11. In re Karlovich, 2010 Bankr. LEXIS 4014 at *10. Under BAPCPA the statutory scheme is coherent and consistent. It changed 1129(b)(2)(B)(ii) and added 1115 so that both individual and non-individual debtors would be treated equally. Its added provisions function jointly and do not make other sections irrelevant or unnecessary. All provisions function together creating a coherent and consistent statutory scheme 8

19 as long as the absolute priority rule remains applicable to chapter 11 cases. Because it is coherent and consistent it should be enforced as written. B. A broad interpretation of section 1115 to include all property of the estate consisting of sections 541 and 1115 would be incoherent and inconsistent with Congress intent. While it is not likely what Congress intended, it is possible to interpret section 1115 broadly to find that property of the estate includes all of the property specified in section 541 and adds to it property and earnings acquired post-petition. 1 In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010). When courts have ruled that the absolute priority rule no longer applies they first determine the language to be ambiguous. Next, they examine other changes to chapter 11 and notice that the changes make chapter 11 Code provisions more similar to chapter 13 Code provisions than they were prior to BAPCPA. Finally, the courts assume that because the chapter 13 Code provisions do not have an absolute priority rule that the chapter 11 Code provisions must have abandoned the absolute priority rule too. Unfortunately, these courts cannot find any statutory provision expressly eliminating the absolute priority rule. At best they attempt to use inferences from the similarities in the amendments to chapter 11 to the chapter 13 provisions to eliminate the absolute priority rule. In re Shat, Judge Markell noted that interpreting the BAPCPA amendments broadly essentially reads the absolute priority rule out of individual chapter 11 cases, but does so in a convoluted manner arguably indicative that Congress did not fully appreciate the effect of the language it chose. 424 B.R. at 867. Assuming the changes to chapter 11 make it more like chapter 13 than it used to be does not mean that the new chapter 11 Code provisions are equivalent to chapter 13 Code provisions. 1 Most of the courts that have ruled the absolute priority rule no longer applies to individual chapter 11 cases have reached their conclusion by interpreting section 1115 to exempt all property of the estate therefore abrogating the absolute priority rule. See In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007); In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan. 2007); In re Johnson, 402 B.R. 851 (Bankr. N.D. Ind. 2009) (concluding that the absolute priority rule no longer applies to an individual s chapter 11 claim because the entire estate is exempt abrogating the absolute priority rule). 9

20 It is possible that the two chapters can be more similar than they previously were and still operate differently. Especially when the goal of BAPCPA is to make debtors who can pay towards their debts do so. For example, because the two chapters are more similar after BAPCPA does not mean that the absolute priority rule is no longer applicable in individual chapter 11 cases. Trying to force chapters 11 and 13 to operate identically because they are more similar after BAPCPA than they were prior to BAPCPA is flawed logic. It would be like trying to force two people who happen to wear the same shirt to act the same. Just because they are more similar wearing the same shirt than they would be not wearing the same shirt will not make them act identically. While it is true that the new amendments to chapter 11 include a disposable income test that references the disposable income test in section 1325(b)(2) the additional amendments make a chapter 11 bankruptcy more difficult for the debtor. See 11 U.S.C. 1123(a)(8) (requiring an individual debtor to contribute post-petition income to the reorganization plan). The amendments might lead one to believe that chapter 11 was intended to operate more like chapter 13. However, when the overarching statutory scheme of BAPCPA is considered it is clear that the amendments to chapter 11 were not intended to make chapter 11 and 13 operate identically, but to make a chapter 11 bankruptcy more difficult for the debtor. In re Gbadebo, Judge Tchaikovsky stated, [N]o one who reads BAPCPA as a whole can reasonably conclude that it was designed to enhance the individual debtor s fresh start. 431 B.R. 222, 229 (Bankr. N.D. Cal 2010). In re Gbadebo also notes that each of the new provisions of BAPCPA appears designed to impose greater burdens on individual chapter 11 debtor s rights so as to ensure a greater payout to creditors. Id. The legislative history available indicates Congress intent to make bankruptcy 10

21 more difficult for debtors stating that the purpose of BAPCPA was to force debtors who can pay back at least a portion of their debts to do so. H. Rpt , pt. 1, at 2 (2005). C. If Congress wanted to eliminate the absolute priority rule it would have done so expressly or explained its reasoning in the legislative history as it had previously done. It is highly unlikely that Congress intended to eliminate the absolute priority rule without expressly doing so. The absolute priority rule has been a cornerstone of chapter 11 reorganizations since its inception by the Supreme Court in See Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). Judge Markell, one of the justices ruling that BAPCPA eliminated the absolute priority rule recognized that before 2005, the authorities were pretty much in agreement that the absolute priority rule applied to individuals in chapter 11. That meant that an individual debtor could not retain any property if his or her creditors were not paid in full. In re Shat, 424 B.R. at 862. Because the absolute priority rule has been such a bedrock in chapter 11 reorganizations a brief analysis of its inclusion and exclusion through Congressional action will demonstrate how Congress would exclude the absolute priority rule from chapter 11 cases if it intended to. The common law absolute priority rule can be found in individual reorganization procedures as early as the Bankruptcy Act of See Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939). The rule moved from common law to statutory law when it was included in the original Bankruptcy Act as the fair and equitable test. Bankruptcy Act, Pub. L. No. 696, 52 Stat. 883 (1938). The original Bankruptcy Act had an express provision requiring all chapter 11 reorganizations to be fair and equitable. Id. at 221. To be fair and equitable unsecured creditors are entitled to priority over stockholders to the full extent of their debts and that any scaling down of the claims of creditors without some fair compensating advantage to them which is prior to the rights of stockholders is admissible. See SEC v. American Trailer 11

22 Rentals Co., 379 U.S. 594, 610 (1965). This rule was applied to all chapter 11 cases, even those involving individual debtors. See, e.g., SEC v. United States Realty & Improvement Co., 310 U.S. 434, 452 (1940). In the 1940s and early 1950s, the Supreme Court found that the absolute priority rule was frustrating the purposes of chapter 11 reorganizations. See, e.g., Id. at 453. Because the purposes of chapter 11 reorganization were being frustrated Congress amended the Bankruptcy Act in 1952 by eliminating the fair and equitable test from the Act and expressly adding a provision stating that the rule no longer applied. Pub. Law 456, 82nd Cong., 2d Sess. 35 (1952). In addition to the provision stating that the absolute priority rule no longer applied the legislative history also explained the reasoning behind the elimination of the rule. H.R. Rep. No. 2320, 82nd Cong., 2d Sess. 21, reprinted in 1952 U.S. Code Cong. & Admin. News (June 26, 1952). The history stated that the absolute priority rule could not realistically be applied because requiring the debtor to pay all of the creditor s claims prior to reorganization was unrealistic. Id. The statute made it clear that the absolute priority rule no longer applied to chapter 11 cases and the legislative history explained Congress reasoning for the exclusion. Id. The Bankruptcy Act was amended again in The 1978 version re-established the absolute priority rule by amending its provisions to expressly state reorganizations had to pass the fair and equitable test and defining in the provisions what fair and equitable meant in 1129(b)(2). Pub. Law , 95th Cong. 2d Sess. 1129(b)(2) (1978). Congress knew it had previously changed the Bankruptcy Code, exempting individuals from the absolute priority rule, and decided to expressly reinstate the rule by amending its provisions to include the fair and equitable test and defining what it meant. Id. Today, this fair and equitable test is the absolute priority rule. Again Congress made its intentions clear by adding the fair and equitable test to the 12

23 amended Bankruptcy Code. In addition to adding the test Congress defined what would satisfy the test making its intentions to reinstate the absolute priority rule clear. The Bankruptcy Code s history emphasizes that Congress knows about the absolute priority rule and doesn t change it unless it intends to. See, e.g., In re Bonner Mall Partnership, 2 F.3d 899, 912 (9th Cir. Idaho 1993) ( Once it has been shown that Congress was aware of a pre- Code practice, the remaining inquiry under Dewsnup and Davenport is whether it has made clear its intent to change that practice. ). When Congress decided to eliminate the long standing rule it did so expressly. In addition to the express revocation of the rule it also provided a detailed history explaining its decision to exempt chapter 11 individuals from the rule. When Congress reinstated the rule, it again did so expressly. To emphasize its point it also defined the rule in the statute. If past performance provides any predictive value, then Congress would not eliminate the absolute priority rule without doing so expressly as it previously had done. If Congress intended to eliminate the absolute priority rule and did not do so expressly it would have at least provided some type of legislative history indicating its intention to do so. Because the absolute priority rule was not expressly eliminated and BAPCPA s legislative history does not demonstrate Congress intent to eliminate the rule it is highly unlikely that it eliminated the absolute priority rule from individual chapter 11 cases. Under BAPCPA the absolute priority rule remains a cornerstone of chapter 11 reorganizations. D. Eliminating the absolute priority rule from individual chapter 11 cases would upset the balance of power between debtor and creditor. The goals of bankruptcy are to provide an honest debtor with a fresh start and to provide for an equitable distribution to creditors. In re Krohn, 886 F.2d 123, (6th Cir. Ohio 1989). In any bankruptcy case, discharge is a privilege, not a right. Krohn v. Frommann, 153 B.R. 113, 116 (Bankr. E.D.N.Y. 1993). In order to accomplish the goals of bankruptcy, preserve 13

24 the privilege of discharge, and promote fairness in chapter 11 cases Congress created checks and balances on power in chapter 11. If the balance of power were upset the goals of a fresh start and an equal distribution to creditors could not be accomplished. The absolute priority rule is an unsecured creditor s only check on a chapter 11 debtor s cram down power. If the absolute priority rule was eliminated individual debtors would hold a superior bargaining position in a chapter 11 case and thwart the goals of bankruptcy. Chapter 11 does not mandate any particular method of distribution to creditors. It contemplates that the parties themselves will ordinarily negotiate and agree, by class vote, on appropriate [c]hapter 11 distributions. Ralph Brubaker, Individual Chapter 11 Debtors, BAPCPA, and the Absolute Priority Rule, 30 No. 4 Bankruptcy Law Letter 1, 2 (2010). When the parties are unable to reach an agreement, the debtor can propose a plan to be voted on by the creditors. The creditors have the option to accept the plan by voting for it or reject the plan by voting against it. But if the plan can be approved without the creditors voting for its approval why would they vote? Not only does eliminating the absolute priority rule unbalance the power between debtors and creditors it also makes voting a pointless statutory provision. If a plan is rejected by one class of creditors it can still be approved if the plan meets all of the requirements except for unanimous approval, does not discriminate unfairly, and is fair and equitable to each class of creditors that doesn t accept the plan. 11 U.S.C. 1129(b)(1). This provision allows a debtor s plan to be approved in spite of dissenting creditors. This is known as a cram down. The absolute priority rule is the creditors check on the debtor s ability to cram down a plan. The cram down rules and the absolute priority rule set the parameters for, and the balance of power in, the parties negotiations by giving a dissenting class certain baseline protections against what they regard as inadequate [c]hapter 11 distributions. Ralph Brubaker, 14

25 Individual Chapter 11 Debtors, BAPCPA, and the Absolute Priority Rule, 30 No. 4 Bankruptcy Law Letter at 2. The power chapter 11 gives to debtors and creditors requires them to negotiate in good faith. A debtor will not attempt to approve a plan, intending to retain pre-petition property, if it does not provide a reasonable distribution to its creditors because its creditors will use the absolute priority rule to prevent the plan from being approved. Eliminating the absolute priority would also negatively impact negotiations by eliminating a debtor s incentive to propose a more valuable plan of distribution than an immediate liquidation and distribution of the estate. Conversely, a debtor s ability to cram down a plan on a creditor, as long as they do not keep any pre-petition property, will prevent a creditor from unreasonably demanding full payment from a debtor. The absolute priority rule keeps the balance of power in check. If the balance of power were disrupted by the elimination of the absolute priority rule the only protection an unsecured creditor would have from a cram down would be the best interests test. 11 U.S.C. 1129(a)(7)(A)(ii) (2010). Unfortunately for creditors, the best interest test removes the decision making ability from the creditor with a stake in the case and places it solely on the discretion of the judge overseeing the case. Taking the decision of whether the plan is fair from the creditor and giving it to the judge is problematic because the judge is not in a position to properly evaluate the future performance of a debtor s ability to follow the proposed plan. The judge would often be called upon to predict the future with regard to the debtor s ability to follow the plan. The creditor/debtor relationship usually gives the creditor a better indication about the debtor s ability to manage their financial affairs and the plan s chances of success than a judge. Additionally, the creditor can at least choose whether they want to risk receiving a larger distribution by chancing their repayment on the proposed plan instead of the immediate 15

26 liquidation value of the debtor s estate. The creditor is in a better position to determine their risk/reward tolerance than a disinterested judge could ever be. 16

27 ARGUMENT Standard of Review: To the extent that this Court s review requires it to determine if a plan that provides for the sale of the secured creditor s collateral but denies him the right to credit bid, can be confirmed over the secured creditor s objection, this Court is reviewing a question of law regarding the proper interpretation of the Bankruptcy Code 1129 under a de novo standard. See In re M & L Bus. Mach. Co., Inc., 84 F.3d 1330, (10th Cir. 1996). II. THE CORRECT INTERPRETATION OF 1129 IS THAT WHENEVER A SECURED CREDITOR S COLLATERAL IS BEING CRAMMED DOWN AND SOLD PURSUANT TO A PLAN FREE OF EXISTING LIENS, THE LENDER HAS THE RIGHT TO CREDIT BID, WHICH IS CONSISTENT WITH LEGISLATIVE INTENT AND PUBLIC POLICY A Chapter 11 reorganization plan that proposes to sell a secured creditor s crammed down property, free and clear of existing liens should only be confirmed if the creditor is allowed to credit bid, which is consistent with legislative intent and public policy. Credit bidding allows a secured creditor to bid up to the amount of its outstanding claim at an auction for the sale of the creditor s colllateral, as if the claim is cash. See In re SubMicron Systems Corp., 432 F.3d 448 (3d Cir. 2006) (holding that credit bidders in a 363(b) sale could bid up to the full value of their loan). In the event that a credit bid is the winning bid, the secured creditor takes possession of the collateral and the secured creditor s claim against the debtor is reduced by the amount of the credit bid. See id. The ability to credit bid, allows a secured creditor protection against the sale of collateral for less than the amount that the secured creditor would agree to sell the collateral. Creditors usually reject a reorganization plan that reduces the present value of the collateral because the remainder of the debt becomes unsecured, forcing the secured creditor to accept less than the full value of its claim. This process is called a cramdown. Section 1129(b), known as the cramdown statue of the Bankruptcy Code, governs the treatment of claims under a plan and permits a debtor to confirm a plan of reorganization over the objection of an impaired 17

28 class of creditors that has voted against the plan as long as the dissenting class is treated fairly and equitably. 11 U.S.C. 1129(b)(2)(A) (2006). Section 1129(b)(2)(A) lists three circumstances by which a plan may be fair and equitable to a secured creditor: (i) the creditor retains liens on the property, whether kept by the debtor or sold, and receives deferred cash payments equal to the allowed amount of its claim; (ii) property is sold free and clear of the creditor s liens in a process that gives the creditor the opportunity to bid on the property using his or her credit; or (iii) the creditor receives the indubitable equivalent of its claims. Id. Section 1129(b)(2)(A)(ii) incorporates the 363(k) provision that allows for credit bidding. Until recently, a secured creditor could be confident that in the event of a sale of its collateral, it retained the right to credit bid in order to either retain the collateral or else ensure that the collateral was not being sold off at an unconscionable low price. Section 363(k) of the Bankruptcy Code grants a secured creditor the right to credit bid when collateral is going to be sold outside the ordinary course of the debtor s business. 11 U.S.C. 363(k). The right to credit bid is not absolute and may be limited by the bankruptcy court for cause. 2 Id. This right provided for in 1129(b)(2)(A)(ii) has recently come under attack by a few courts that have decided a debtor can sell the creditor s collateral as part of a reorganization plan, without allowing the creditor to credit bid, as long as the creditor receives the indubitable equivalent of 2 In text of 363(k) it states the right to credit bid is not absolute. A secured lender has the right to credit bid unless the court for cause orders otherwise. 11 U.S.C. 363(k). Courts have denied secured lenders the right to bid their credit in cases for cause. See In re Aloha Airlines, No , 2009 WL , at *8 (Bankr.D.Hawaii May 14, 2009) (determining that it could not allow credit bidding to be misused in a way that would reward the competing airline for its misconduct); Greenblatt v. Steinberg, 339 B.R. 458, 463 (N.D.Ill.2006) (the bankruptcy judge did not err by refusing the creditor to credit bid, where the creditor did not follow the requirement of the sale procedures order after previous warnings from the judge to do so) In re Antaeus Technical Servs., Inc., 345 B.R. 556, 565 (Bankr.W.D.Va.2005) (forbidding a creditor to bid at a cash auction of intellectual property due to his bad behavior under a court approved settlement agreement); In re Theroux, 169 B.R. 498, 499 n. 3 (Bankr.D.R.I.1994) (secured creditor was denied the right to credit bid, not only because of his bad behavior of colluding with the trustee for financial gain, but also because of the financial damage to the taxing authority). In all these cases the court found cause to deny credit bidding, where there had been bad behavior by the secured creditor. This is not the case here, Mr. Azoff s behavior has been straight forward, and as such should not fall under the 363(k) for cause exception. 18

29 their collateral under 1129(b)(2)(iii). See In re Pacific Lumber Co., 584 F.3d 229 (5 th Cir. 2009); In re Philadelphia Newspaper, 599 F.3d 298 (3d Cir. 2009). The traditional interpretation of 1129(b)(2)(A) is that the Code provides for three distinct routes that specifically apply depending on the proposed treatment of the secured creditors collateral. See In re Kent Terminal, 166 B.R. 555, (Bankr. S.D.N.Y. 1994) (holding that the lienholder has the unconditional right to credit bid its lien amount under subsection (ii)). For example 1129(b)(2)(A)(i) applies only in situations where the secured creditor will retain its lien on the sold collateral, securing its claim in a given class. 11 U.S.C. 1129(b)(2)(A)(i). Subsection (ii) only applies to plan sales where collateral will be sold without the secured creditor retaining its lien. 11 U.S.C. 1129(b)(2)(A)(ii). Subsection (iii) only applies in situations not covered by subsections (i) and (ii), notably when there is a substitution of collateral. 11 U.S.C. 1129(b)(2)(A)(iii). This interpretation holds that the or found at the end of 1129(b)(2)(B)(ii) is only triggered when a proposed treatment of the secured creditor s collateral is not covered in subsections (i) or (ii). For example, subsection (iii) would be activated if the lender was given a substitution of like-kind collateral or property had been abandoned, causing the court to decide if the substitute collateral was the indubitable equivalent of the original collateral. See 7 Collier [2][c] & nn. 38, 52 at , Only when the collateral is being treated in a way not contemplated by subsections (i) and (ii) can the or be used to activate subsection (iii). See Id. In the Bankruptcy Code there are examples of statutes that employ the disjunctive or in a context where the or must be exclusive. For example in In re Williams, the court held that 1325(a)(5)(B) & (C) required an exclusive-or construction to avoid creating an option that Congress did not intend to create). See Williams v. Tower Loan of Miss., Inc. (In re Williams), 19

30 168 F.3d 845, (5 th Cir. 1999). Also 1112(b) s disjunctive or must be read to be exclusive because [i]t would be impossible for the court to do both [actions]. 2 Collier on Bankruptcy & n. 1, at (Alan N. Resnick & Henry J. Somme eds., 16 th ed A few courts have recently interpreted the or in 1129(b)(2)(A) in subsection (ii) to mean that all three subsections of 1129(b)(2)(A) can be used as equally available alternatives, and a debtor may choose to proceed under subsection (i), (ii) or (iii) and needs to only satisfy one subsection to make the plan fair and equitable (a requirement of a plan being approved under any of the three subsections of 1129(b)(2)(A) is that it is fair and equitable). See Philadelphia Newspaper, 599 F.3d 298, 310; Pacific Lumber, 584 F.3d 229, 244. This interpretation gives the debtor a choice to use subsection (iii) to cram down collateral and sell it free of liens, leaving the objecting, secured creditor without the remedy of credit bidding. 3 The Third Circuit Court in Philadelphia Newspaper reasoned this interpretation was correct because it embraced the plain meaning of the statute. 599 F.3d at 314. "The principal command of statutory construction is that the court should determine and effectuate the intent of the legislature using the plain language of the statute as the primary indicator of legislative intent." State v. Ogden, 118 N.M. 234, 242, 880 P.2d 845, 853 (1994). The Philadelphia Newspaper Court concluded that the plain meaning of the disjunctive or is that all three subsections of 1129(b)(2)(A) provide interchangeable alternatives. 599 F.3d at 314. The court used as an example in the Code 102(5) s statutory note that stated, If a party may do (a) or (b), then the party may do either or 3 If a plan proposes to sell a secured creditor s collateral, numerous Courts have held that the confirmation must be denied if the secured creditor is not afforded the right to credit bid. See e.g., In re California Hancock, Inc., 88 B.R. 226, (9th Cir. BAP 1988); In re Monarch Beach Venture, Ltd., 166 B.R. 428, 433 (C.D. Cal. 1993); In re H&M Parmely Farms v. Farmers Home Admin., 127 B.R. 644, 648 (D. S.D. 1990); In re SunCruz Casinos, LLC, 298 B.R. 833, (Bankr. S.D. Fla. 2003); In re Kent Terminal Corp., 166 B.R. 555, (Bankr. S.D. NY 1994); In re Midway Investments, Ltd., 187 B.R. 382, (Bankr. S.D. Fla. 1995); B.R. 726, 733 n9 (Bankr. S.D. NY. 1993) (when property is sold, non-recourse creditor has the right to credit bid its lien and therefore receive the benefit of its contractual bargain). 20