No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM IN RE MARTIN MANVILLE Debtor. MARTIN MANVILLE Petitioner

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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 THE RESPONDENTS R20 Counsel for the Respondent i

2 QUESTIONS PRESENTED I. Whether BAPCPA completely abrogates the Absolute Priority Rule, giving an individual debtor a free pass through bankruptcy and the right to retain every single asset in the estate. II. Whether the debtor, when selling collateral free and clear of existing liens under a plan of reorganization, may completely disregard a secured creditor's right to credit bid at the sale. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED.... i TABLE OF CONTENTS..ii TABLE OF AUTHORITIES...v STATEMENT OF JURISDICTION... ix STATUTORY PROVISIONS ix OPINIONS BELOW....ix STATEMENT OF FACTS 1 SUMMARY OF THE ARGUMENT...3 ARGUMENT I. BAPCPA did not completely abrogate the Absolute Priority Rule in a chapter 11 cramdown...5 A. The narrow interpretation is the only interpretation that preserves the equality between all types of chapter 11 debtors....7 B does not replace 541 to define the property of the estate C. To interpret the language of BAPCPA to eliminate the Absolute Priority Rule for individual debtors is quite possibly the most convoluted interpretation of the language D. The broad interpretation, eliminating the Absolute Priority Rule for individuals, contradicts the legislative history of BAPCPA E. With the addition of the disposable income requirement, the abrogation of the Absolute Priority Rule would lead to absurd results The broad interpretation s application of the disposable income requirement renders the voting requirements of 1126 meaningless 12 ii

4 2. Without the Absolute Priority Rule, the disposable income requirement can expose individual debtors to indentured servitude F. The abrogation of the Absolute Priority Rule would severely impair future individuals from securing the loans necessary to start their own business II. Under chapter 11, a plan of reorganization that proposes to sell assets free and clear of existing liens must provide the secured creditor the right to credit bid in order to be crammed down...15 A. Reading 1129(b)(2)(A) to preserve a creditor s right to credit bid is consistent with sections of the Code that provide similar, if not identical, safeguards for creditors..18 B. Although 11 U.S.C. 102(5) states that or is not exclusive, it does not follow that Congress intended the word or to create three equally applicable alternatives in 1129(b)(2)(A)..22 C. Canons of statutory interpretation dictate that a creditor s right to credit bid must be honored under 1129(b)(2)(A) Because specific provisions prevail over general provisions, 1129(b)(2)(A)(ii) must prevail over 1129(b)(2)(A)(iii) in this case Allowing subsection (iii) of 1129(b)(2)(A) to apply when a debtor seeks to sell assets free and clear of existing liens would render the other subsections of the 1129(b)(2)(A) superfluous 24 D. Legislative history confirms Congress s intent to provide creditors the right to credit bid when their collateral is sold free and clear of existing liens under a plan..25 E. Denying a secured creditor the right to credit bid would have adverse effects for creditors and debtors alike..26 CONCLUSION APPENIDIX A.... I APPENIDIX B... II APPENIDIX C.....III APPENIDIX D.....IV APPENIDIX E... V APPENIDIX F. VI APPENIDIX G VII APPENIDIX H......VIII iii

5 APPENIDIX I IX APPENIDIX J....XV APPENIDIX K... XVI APPENIDIX L.....XVII APPENIDIX M...XVIII APPENIDIX N..XIX APPENIDIX O... XX APPENIDIX P XXI APPENIDIX Q....XXII APPENIDIX R.....XXIII APPENIDIX S....XXIV iv

6 TABLE OF AUTHORITIES CASES UNITED STATES SUPREME COURT Bulova Watch Co. v. United States, 365 U.S. 753 (1961) Connecticut Nat. Bank v. Germain, 503 U.S. 249 (1992) Corley v. United States, 129 S. Ct (2009) Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469 (1992) Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000)... 7 Hibbs v. Winn, 542 U.S. 88 (2004) , 25 Kelly v. Robinson, 479 U.S. 36 (1986) Kepner v. United States, 195 U. S. 100 (1905) Jarecki v. G. D. Searle & Co., 367 U.S. 303 (1961) McCarthy v. Bronson, 500 U.S. 136 (1991) Morton v. Mancari, 417 U.S. 535 (1974) Nat'l R.R. Passenger Corp. v. Atchison Topeka & Santa Fe Ry. Co., 470 U.S. 451 (1985) Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988) Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976) Robinson v. Shell Oil Co, 519 U.S. 337 (1997) Rodgers v. United States, 185 U.S. 83 (1902) , 24 Rousey v. Jacoway, 544 U.S. 320 (2005) Schwab v. Reilly, 130 S. Ct (2010) Till v. SCS Credit Corp., 541 U.S. 465 (2004) Wiggins v. Smith, 539 U.S. 510 (2003) v

7 UNITED STATES COURT OF APPEALS Dobrek v. Phelan, 419 F.3d 259 (3d Cir. 2005) Kahm & Nate's Shoes, No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990)...15 Hirschfeld v. Spanakos, 104 F.3d 16 (2d Cir. 1997) In re Bonner Mall P'ship, 2 F.3d 899 (9th Cir. 1993) In re Johnston, 21 F.3d 323 (9th Cir. 1994) In re Mehta, 310 F.3d 308 (3d Cir. 2002) In re Perez, 30 F.3d 1209 (9th Cir. 1994) In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010) (Ambro, dissenting)...17, 19-20, 22, 23 In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir. 2006) In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363 (5th Cir. 1987) In re Williams, 168 F.3d 845 (5th Cir. 1999) In re Windsor on the River Assoc., Ltd., 7 F.3d 127 (8th Cir. 1993) New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492 (3d Cir.1996)...25 Williams v. Tower Loan of Miss., 168 F.3d 845 (5th Cir. 1999) UNITED STATES BANKRUPTCY COURT In re 222 Liberty Associates, 108 B.R. 971 (Bankr. E.D. Pa. 1990) In re Future Energy Corp., 83 B.R. 470,(Bankr. S.D. Ohio 1988)...17 In re Gbadebo, 431 B.R. 222 (Bankr. N.D. Cal. 2010) , 8-13 In re Gelin, 437 B.R. 435 (Bankr. M.D. Fla. 2010) , 9-11, 13 In re Hoffman, 52 B.R. 212, 217 (Bankr. D.N.D. 1985) In re Karlovich, PB11, 2010 WL (Bankr. S.D. Cal. Nov. 16, 2010)....7, 11 vi

8 In re Mullins, 435 B.R. 352 (Bankr. W.D. Va. 2010) In re Shat, 424 B.R. 854, 866 (Bankr. D. Nev. 2010) , 10 In re Steedley, , 2010 WL (Bankr. S.D. Ga. Aug. 27, 2010)....9 In re Zaruba, 384 B.R. 254 (Bankr. D. Alaska 2008) SECONDARY SOURCES Collier On Bankruptcy (15th ed. 1989) David H. Kleiman, Alternatives for Awarding Break-Up Fees to Stalking-Horse Bidders, Am. Bankr. Inst. J., October 2010, at Dylan Trache, Rapid Developments in Bankruptcy Law and the Impact on Reorganization and Case Stategy, Aspatore, 2010 WL (2010).. 27 Gregory R. Schaaf & C.R., Ghosts of Individual Ch. 11 Debtors Yet to Come Part II: Confirming an Individual Debtor's Chapter 11 Plan Under Bapcpa, Am. Bankr. Inst. J., February Robert J. Keach, Dead Man Filing Redux: Is the New Individual Chapter Eleven Unconstitutional?, 13 Am. Bankr. Inst. L. Rev. 483 (2005) William P. Weintraub, Gregory W. Fox, and Kizzy L. Jarashow. Third Circuit Bids Credit Bidding Adieu, 19 J. Bankr. L. & Prac. 3 Art. 4 (2010) , 28 Hollace T. Cohen. Is the Philadelphia Newspapers, LLC Decision the Death Knell to Credit Bidding in a Sale Under a Plan? 20 J. Bankr. L. & Prac. 1 Art. 1 (2010) Sanjyot P. Dunung, Starting Your Business (Scott Shane, ed., Business Expert Press, LLC 2010)...14 STATUTES AND RULES 11 U.S.C. 102(5) (1978) U.S.C. 103(a) (1978) U.S.C. 362(d)(2)(A) (1978) U.S.C. 363(k) (1978) , 22, U.S.C.A. 365(g)(2)(B)(i)-(ii) (1978) U.S.C.A. 502(b)(5)(1978) vii

9 11 U.S.C.A. 502(e)(1978) U.S.C.A. 506(d)(1)-(2) (1978) U.S.C. 541 (1978) , U.S.C. 1104(a)(1) (1978) U.S.C. 1111(b) (1978) , U.S.C. 1112(b)(1) (1978) , 13, U.S.C 1115 (2005) , USCS 1126 (1978) U.S.C. 1129(a)(15) (2005) U.S.C. 1129(b)(1) (1978) , 15, U.S.C. 1129(b)(2)(A) (1978) , U.S.C. 1129(b)(2)(B)(ii) (2005) , 8, U.S.C. 1325(a)(5)(1978) 22 BANKRUPTCY TECHNICAL CORRECTIONS ACT OF 2010, PL LEGISLATIVE HISTORY H.R.Rep. No , pt. 1, at 2 (2005) H.R.Rep. No , p. 3 (1977) Cong.Rec. H (Daily Ed. Sept. 28, 1978) viii

10 STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS The statutory Provision involved in this case are: 11 U.S.C. 102(5); 11 U.S.C. 103(a); 11 U.S.C. 362(d)(2)(A); 11 U.S.C. 363(k); 11 U.S.C. 365(g)(2)(B)(i)-(ii): 11 U.S.C. 502(b)(5); 11 U.S.C. 502(e); 11 U.S.C. 506(d)(1)-(2); 11 U.S.C. 541; 11 U.S.C. 1104(a)(1); 11 U.S.C. 1111(b); 11 U.S.C. 1112(b)(1); 11 U.S.C 1115; 11 USCS 1126; 11 U.S.C. 1129(a)(15); 11 U.S.C. 1129(b)(1); 11 U.S.C. 1129(b)(2)(A); 11 USC 1129(b)(2)(B)(ii); and 11 U.S.C. 1325(a)(5). These statutes are provided in Appendices A through S. OPINIONS BELOW On order and decision, The United States Bankruptcy Court for the District of Moot approved the Petitioner s cramdown. The Respondent appealed to the United States District Court. The District Court for the District of Moot affirmed without opinion. On Respondent s subsequent appeal to the United States Court of Appeals for the Thirteenth Circuit, the court reversed the holdings of the lower courts. The Court of Appeals held that Manville s plan cannot approve the cramdown of Petitioner s plan for two reasons. First, the plan allows Manville to retain pre-petition property in violation of the Absolute Priority Rule, which has not been completely abrogated. Second, the plan denies the creditor of his right to credit bid. ix

11 STATEMENT OF THE FACTS Before Jonathan Azoff s recent $10 million loan, Martin Manville s portable toilet business, Manville Johns, consisted of little more than a pick-up truck and a couple of toilets. R. 3. For 25 years, Manville Johns provided portable toilets to local festivals, outdoor concerts and construction projects, but the business lacked the capital to expand. R. 3. Without the resources to further grow his sole proprietorship, Manville turned to his then brother-in-law Azoff for help. R. 3. Manville told Azoff that he needed money to buy and renovate a warehouse in the Bronx. R.3. The renovations included the construction of an expensive special sewer hookup necessary to handle the immense volume of sewage that results from the portable toilet business. R. 3. Azoff generously agreed to loan Manville $10 million to buy the warehouse on the condition that Azoff hold the first mortgage, which was properly recorded. R. 3. The terms of the loan required Manville to repay Azoff through one balloon payment of principal on the loan s tenth anniversary, with mandatory monthly payments of interest in the interim. R.3. Azoff was guaranteed the repayment of the $10 million plus interest income or, if the loan was not repaid, the opportunity to foreclose on the property and obtain the warehouse. R. 3. After foreclosure, in addition to owning the warehouse, Azoff would be entitled to any potential rental income from the building. R. 3. As the economy began to decline, so did the amount of festivals and construction projects in the area, lowering the need for portable toilets. R.3-4. Watching his liquid assets get flushed away and his accounts get wiped clean, Manville decided to stop paying the mandatory interest on Azoff s loan. R. 4. After consistently not receiving the interest payments, Azoff properly 1

12 declared a default on the mortgage loan and instituted a foreclosure action against the warehouse, which was within his right as a mortgage holder. R. 4. Manville s bad luck not only clogged his finances, but it also overflowed into his personal life, as his monetary woes eventually led to a divorce and domestic support payments. R.4. Despite Manville divorcing Azoff s sister, both Azoff s declaration of default and foreclosure action were found not to constitute a lack of good faith. R.5 Manville responded to the foreclosure by filing for bankruptcy under chapter 11. R.4. Knowing the title of the warehouse would therefore pass to Azoff, Manville approached Azoff about leasing the first floor. R.4. After the negotiations failed, Manville resorted to proposing a plan of reorganization. R. 4. Under this plan, Manville would sell the warehouse for $6 million to Kevin Baum free and clear of Azoff s first mortgage. R. 4. The $6 million appraisal of the warehouse is not contested. R Manville and Baum also agreed to a side deal where Baum would lease the first floor of the warehouse to Manville and Baum would receive all profits from renting the upper two floors. R Thus, Manville s plan would deprive Azoff s ability to capture both the warehouse s future appreciation and rental proceeds. R. 6. Due to Manville s failure to pay the agreed upon interest payments, the value of Azoff s claim had grown to $11 million by the petition date. R.5. Manville structured his plan so that he would retain all of his property, both business and personal, while splitting Azoff s claim into unsecured and secured portions. R. 5. Under the plan, Azoff would have $5 million in an unsecured class and $6 million in a secured class. R. 5.The plan further provided that claims in the unsecured class would receive deferred cash payments. R. 5. Manville s plan failed to obtain creditor approval. R. 5. Azoff s $5 million claim, the largest unsecured claim in the plan, constituted two-thirds of the class, giving Azoff the 2

13 controlling vote for that class. R. 5. Azoff s secured claim comprised the entirety of the secured class, giving him the controlling vote for that class as well. R. 5. With these controlling votes, Azoff exercised his right to reject the plan. R.5. Under 1129(a) the plan could not be confirmed because 1129(a)(8) requires the approval of all classes of impaired creditors to accept the plan. R.5. As a last resort, Manville is improperly manipulating 1129(b) to attempt an unfair cramdown of the plan over the objection of both a secured and unsecured class. R SUMMARY OF THE ARGUMENT Bankruptcy has the potential to be a tool for a debtor to obtain a fresh start; however, ignoring certain safeguards in the Bankruptcy Code ( the Code ) can result in bankruptcy morphing into a weapon capable of crippling creditors. This Court is presented with the opportunity to preserve two of these critical safeguards: (1) The Absolute Priority Rule, which protects the creditor s right to receive the debtor s property before a creditor with a junior claim receives any property, and (2) the creditor s right to credit bid at a sale of his collateral where the collateral is being sold free and clear of the creditor s lien. The Absolute Priority Rule, which protects creditors in during a cramdown, was not completely abrogated in regard to individual chapter 11 debtors. To find this time honored rule and safeguard had been abrogated would not only directly violate the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ( BAPCPA ), but would also contradict parts of the Code not amended by BAPCPA. Reading BAPCPA to abrogate the Absolute Priority Rule is the most convoluted interpretation of the BAPCPA s language and directly violates BAPCA s legislative history. Without the Absolute Priority Rule s protection, individual debtors could be exposed to the perils of indentured servitude, and the chapter 11 voting requirement would be rendered meaningless. Abrogating the Absolute Priority Rule would significantly increase the 3

14 risk creditors assume when giving loans. Thus, creditors will either choose not to give loans or raise their interest rates astronomically to absorb these risks. Abrogating the Absolute Priority Rule is simply not fair and equitable. Depriving a secured creditor of the right to credit bid at a sale of his or her collateral free and clear of existing liens is also unfair. The right to credit bid is a quintessential safeguard that Congress has provided creditors not only in 1129(b)(2)(A)(ii), but in other sections of the Code as well. It is an essential right that protects creditors from the devaluation of their collateral. The legislative history proves that Congress intended to preserve a creditor s right to credit bid and interpreting the Code to deprive the creditor this right is contrary to years of precedent and canons of construction. This court should affirm the decision of the Thirteenth Circuit Court of Appeals and hold that the Absolute Priority rule has not been completely abrogated for chapter 11 individual debtors and that the creditor retains the right to credit bid at the sale of his collateral free and clear of existing liens. 4

15 ARGUMENT In a civil appeal, lower courts findings of fact are afforded the clearly erroneous standard of deference. Hirschfeld v. Spanakos, 104 F.3d 16, 19 (2d Cir. 1997). This Court reviews all matters of law de novo. Wiggins v. Smith, 539 U.S. 510, 531 (2003). I. BAPCPA did not completely abrogate the Absolute Priority Rule in a chapter 11 cramdown. If a debtor wishes to confirm a plan over the objection of classes of impaired creditors, the debtor may attempt a cramdown. 11 U.S.C. 1129(b)(1). A cramdown allows the court to confirm a plan of reorganization over the objection of a class of impaired creditors, so long as the plan is fair and equitable. Id. It has long been understood that for a cramdown to be found fair and equitable it must satisfy the Absolute Priority Rule codified in 11 U.S.C. 1129(b)(2)(B)(ii), which still controls in all individual chapter 11 cases like the case at bar. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 199 (1988) (applying the Absolute Priority Rule to individual debtors). The Absolute Priority Rule provides either that a class of impaired creditors will receive property equal to that class s claim or that all parties with a junior claim, including the debtor, will not be permitted to retain any property. In re Gbadebo, 431 B.R. 222, 227 (Bankr. N.D. Cal. 2010). Congress amended 1129(b) and several other sections of the Bankruptcy Code ( the Code ) with the Bankruptcy Abuse Prevention and Consumer Protection Act of ( BAPCPA ). BAPCPA added to 1129(b)(2)(B)(ii) that a plan may still be fair and equitable even if the individual debtor retains property included in the estate under U.S.C. 1115; In re Gbadebo, 431 B.R. at 227 (holding the property included in 1115 is only post-petition property). The applicable portions of 1115 state: 1 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. NO , 119 Stat. 23 (2005). 5

16 (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- (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 converted to a case under chapter 7, 12, or 13, whichever occurs first. 11 U.S.C (emphasis added). The case law has interpreted the clause from 1115(a), in addition to the property specified in section 541, the clause from 1115(a)(1), all property of the kind specified in section 541, and the clause from 1129(b)(2)(B)(ii), included in, in two different ways. In re Gelin, 437 B.R. 435, 440 (Bankr. M.D. Fla. 2010). The first interpretation, deemed the narrow interpretation, reads 1115 narrowly to exempt only post-petition property from the Absolute Priority Rule. Id. This in turn allows debtors to retain post-petition property in bankruptcy even though their claims may be junior to creditors who have not received their fair and equitable share of the estate. Id. The second interpretation, deemed the broad interpretation, allows an individual debtor to retain not only 1115 s post-petition property, but also the pre-petition property that is defined by 11 U.S.C Id. The broad interpretation gives debtors a free pass through bankruptcy by allowing debtors to retain every single piece of their property free and clear of any liens, thus abrogating the Absolute Priority Rule. Id. In the present case, the narrow interpretation would allow Martin Manville, the debtor, to keep only his post-petition property, while the broad interpretation would allow Manville to retain every single piece of property he owns. Cases that support the narrow interpretation, including the Lower Court in this case, and cases that support the broad interpretation both cite to the plain meaning of the pertinent language in 1115 and 1129(b)(2)(B)(ii). In re Gbadebo, 431 B.R. at 229 (finding the plain language dictates the narrow interpretation); see also In re Shat, 424 B.R. 854, 866 (Bankr. D. 6

17 Nev. 2010) (finding the plain language dictates the broad interpretation). Because both sides to this argument rely on the plain meaning to reach contrary results, it follows that the language does not possess one clear meaning. In re Gelin, 437 B.R. at 441. The language at issue is ambiguous and therefore the courts must give the statutes their most sensible meaning in the context. Id. The narrow interpretation, which allows the debtor to retain only post-petition property, is the most sensible because interpreting this section narrowly is not only consistent with BAPCPA s amendments and additions, it is also consistent with the legislative history and the parts of the Code that were untouched by BAPCPA. Id. This Court held that a court must interpret parts of a statute to be consistent and harmonious with the statute as a whole. Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000). The broad interpretation, allowing an individual debtor to keep all property, runs contrary to BAPCPA and several sections of the Code, and, most importantly, fails to satisfy the fair and equitable prong of 1129(b)(1). Therefore, the narrow interpretation, which retains the Absolute Priority Rule for individuals, is the only fair and equitable interpretation under the Code, and thus, must be applied. A. The narrow interpretation is the only interpretation that preserves the equality between all types of chapter 11 debtors. The language in the Code should be interpreted to give equal treatment to all chapter 11 debtors. In re Karlovich, PB11, 2010 WL (Bankr. S.D. Cal. Nov. 16, 2010). Before Congress passed BAPCPA, an individual debtor was allowed to retain post-petition property because it was not part of the debtor s estate. In re Gelin, 437 B.R. at 441. Congress, through 1115, which was added to the Code by BAPCPA, included post-petition property in the estate for individual chapter 11 debtors, but not for non-individual chapter 11 debtors. In re Karlovich, PB11, 2010 WL (Bankr. S.D. Cal. Nov. 16, 2010). However, 7

18 Congress also changed the language of the 1129(b)(2)(B)(ii), also through BAPCPA, to exempt post-petition property from the Absolute Priority Rule for individuals. Id. The new language of 1129(b)(2)(B)(ii) maintains equality in chapter 11 for the different types of debtors. Without BAPCPA s changes to the Absolute Priority Rule, an individual debtor would have been forced to give up post-petition earnings in a cramdown, while non-individual debtors post-petition earnings would be exempted in a cramdown. Id. Likewise, interpreting the changes under the broad interpretation would lead to unequal treatment of chapter 11 debtors. Id. The broad interpretation implicitly causes a disparity in the treatment of chapter 11 debtors by allowing individual debtors to retain all property in a cramdown and allowing non-individuals debtors to retain only post-petition property in a cramdown. Id. Before BAPCPA all chapter 11 debtors were treated equally, and the narrow interpretation preserves this equality by exempting only post-petition property from the Absolute Priority Rule for an individual, thereby aligning the treatment for all chapter 11 debtors and satisfying the fair and equitable prong of 1129(b)(1). Id. B does not replace 541 to define the property of the estate. Rather than intending to replace 541 with 1115, as the broad interpretation would dictate, Congress included 541 in 1115 for two distinct reasons, which are both in accordance with the narrow interpretation. First, 541 is referenced to elucidate the type of post-petition property that is to be included in the estate. In re Gbadebo, 431 B.R. at 229. Section 1115(a)(1) reads all property of the kind specified in section 541 that the debtor acquires after the commencement of the case. 11 U.S.C. 1115(a)(1) (emphasis added). Congress simply meant to reference the section of the code that already defined the types of property that are included in the estate. In re Gbadebo, 431 B.R. at 229. Second, 1115 references 541 because, without the 8

19 reference, 1115 could be dangerously interpreted to exclude pre-petition property from the bankruptcy estate, which is obviously antithetical to the Code. In re Gbadebo, 431 B.R. at 229. Also, 1115, under the broad interpretation, directly contradicts 103(a) of the Code, which was untouched by BAPCPA. In re Steedley, , 2010 WL (Bankr. S.D. Ga. Aug. 27, 2010). The broad interpretation proffers that 1115 completely subsumes 541. Id. However, because Courts should interpret a statute to effectuate all its provisions, so that no part is rendered superfluous, this broad interpretation cannot be applied. Hibbs v. Winn, 542 U.S. 88, 89 (2004). Section 103(a) states that 541, as opposed to 1115, defines the bankruptcy estate of a chapter 11 debtor. 11 U.S.C. 103(a). If 1115 is broadly interpreted to now define the property in the estate, 103(a), which says that 541 serves that same function, would be rendered unnecessary. Therefore, the broad interpretation would make the relevant provisions of 103(a) superfluous and cannot be used. Hibbs, 542 U.S. at 89; 11 U.S.C. 103(a). The canon of statutory interpretation, noscitur a sociis, means a section of a statute must be interpreted in the context of the rest of the statute to preserve a unified statutory scheme. Jarecki v. G. D. Searle & Co., 367 U.S. 303, 307 (1961). BAPCPA is in the context of the rest of the Code and the broad interpretation would render 1115 incompatible with parts of the code that were untouched by BAPCPA. In re Gbadebo, 431 B.R at 230. In contrast, the narrow interpretation harmonizes 1115 with the rest of the code. In re Gelin, 437 BR 440. The broad interpretation also contradicts the doctrine which disfavors implied repeals of a statute. See Rodgers v. United States, 185 U.S. 83, 88 (1902) (citing the canon of construction generalia specialibus non derogant). To interpret 1115 broadly so that it subsumes 541 results in the implied repeal of the Absolute Priority Rule because it places all of the individual 9

20 debtor s property outside of the creditors grasp. In re Gelin, 437 BR 440. The narrow interpretation allows BAPCPA and the 1129(b)(2)(B)(ii) to be read together without resulting in the implicit repeal of the Absolute Priority Rule. See In re Zaruba, 384 B.R. 254 (Bankr. D. Alaska 2008). Therefore, this doctrine provides yet another reason why the narrow interpretation is the only proper interpretation. C. To interpret the language of BAPCPA to eliminate the Absolute Priority Rule for individual debtors is quite possibly the most convoluted interpretation of the language. The court in In re Shat, the principal case in support of interpreting BAPCPA to abrogate the time-honored Absolute Priority Rule, admits that its own broad interpretation is made in a convoluted manner. In re Shat, 424 B.R. at 867 (Bankr. D. Nev. 2010). Because this case, the seminal case for the broad interpretation, acknowledges that its interpretation is convoluted, it is uncertain what weight subsequent courts should give Shat. In re Gbadebo, 431 B.R at 230. It is hard to imagine a more convoluted way of eliminating the absolute priority rule than the interpretation the courts in favor of the broad interpretation proffer. In re Gelin, 437 B.R. at 442. Had it been the intent of Congress to allow an individual debtor to keep the entire estate, Congress would have mentioned both 541 and 1115 in the Absolute Priority Rule. Id. The broad interpretation forces property included in the estate under section 1115, found in 1129(b)(2)(B)(ii), to mean all of the property of the estate. Id. Without a reference to the prepetition property, through a mention of 541, it is much more likely that Congress only meant to exempt post-petition property from the Absolute Priority Rule through the phrase included in the estate under section 1115, which explicitly only mentions post-petition property. Id. To follow the rule adopted by the prior decisions, which holds that the convoluted language of BAPCPA completely abrogates the Absolute Priority Rule, requires this Court to ignore the fact that there are many easier, more concise and less convoluted ways by which 10

21 Congress could have abrogated the rule. In re Karlovich, PB11, 2010 WL (Bankr. S.D. Cal. Nov. 16, 2010). Congress could have simply written in 1129(b)(2)(B)(ii) except that in a case in which the debtor is an individual, this provision shall not apply instead of except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, which Congress actually used. In re Mullins, 435 B.R. 352, (Bankr. W.D. Va. 2010); see also In re Karlovich, PB11, 2010 WL (Bankr. S.D. Cal. Nov. 16, 2010). D. The broad interpretation, eliminating the Absolute Priority Rule for individuals, contradicts the legislative history of BAPCPA. Reading the legislative history of BAPCPA to abrogate the Absolute Priority Rule completely disregards the legislative history. In re Gelin, 437 B.R. at 442; R. 17. The narrow reading of BAPCPA is the most consistent interpretation of the legislative history. In re Gbadebo, 431 B.R. at 230. The House Report of the Judiciary Committee states that BAPCPA is intended to ensure that debtors repay creditors the maximum they can afford. H.R.Rep. No , pt. 1, at 2 (2005). While the legislative history acknowledges that a debtor can only afford to pay so much to creditors, no reasonable person can conclude that BAPCPA was intended to violate one of the foundational tenants of bankruptcy keeping a debtor from having to place pre-petition property in the estate. In re Gbadebo, 431 B.R. at 229. A debtor s fresh start cannot be limitless and cannot be a free pass through bankruptcy. Rousey v. Jacoway, 544 U.S. 320, 325 (2005); Schwab v. Reilly, 130 S. Ct. 2652, 2656 (2010). To let Manville retain all of the assets that the broad interpretation would allow would give him a free pass through bankruptcy, which is neither fair nor equitable. See In re Mullins, 435 B.R. 352,

22 E. With the addition of the disposable income requirement, the abrogation of the Absolute Priority Rule would lead to absurd results. The chapter 11 disposable income requirement, codified in 11 U.S.C. 1129(a)(15), states that individual debtors must pay creditors their projected disposable income for at least a five year period. 11 U.S.C. 1129(a)(15). By abrogating the Absolute Priority Rule, the broad interpretation allows an individual debtor, attempting a cramdown, to retain all pre-petition assets and do nothing more than pay his or her projected disposable income for a five year period. Gregory R. Schaaf & C.R., Ghosts of Individual Ch. 11 Debtors Yet to Come Part II: Confirming an Individual Debtor's Chapter 11 Plan Under Bapcpa, Am. Bankr. Inst. J., February 2007, at 36; see also Robert J. Keach, Dead Man Filing Redux: Is the New Individual Chapter Eleven Unconstitutional?, 13 Am. Bankr. Inst. L. Rev. 483 (2005). Further, the broad interpretation would make chapter 11 s voting requirement meaningless and expose the debtor to becoming indentured to the creditor. 1.The broad interpretation s application of the disposable income requirement renders the voting requirements of 1126 meaningless. The broad interpretation creates a procedural anomaly by rendering the voting requirement codified in 11 U.S.C meaningless. In re Gbadebo, 431 B.R. at USCS Section 1126 states that creditors are entitled to vote in favor of or against a debtor s reorganization plan. 11 U.S.C. 1126; see In re Gbadebo, 431 B.R. at 230. The broad interpretation, which allows an individual debtor to retain pre-petition property in a cramdown, would send the message to creditors that if they choose to exercise their right to vote against the reorganization plan, they lose access to the debtor s pre-petition assets and are left with only the debtor s meager future disposable income as a potential recovery. See In re Gbadebo, 431 B.R. at 230. This, in effect, would force creditors to vote in favor of the plan to obtain the debtor s 12

23 prepetition property. Id. Denying a creditor the free will to reject an unfair plan of reorganization is not fair and equitable. In re Gelin, 437 B.R. at Without the Absolute Priority Rule, the disposable income requirement can expose individual debtors to indentured servitude. The broad interpretation also exposes the debtor to the precarious situation of becoming indentured to the creditor. There are two situations in which the debtor can no longer liquidate his or her assets by converting the bankruptcy proceeding to chapter 7 and is exposed to the disposable income requirement of chapter 11, which requires the debtor to keep working to pay a portion of his or her disposable income into the estate. First, Section 1104(a)(1) states that a trustee to the bankruptcy estate can be appointed by the court. 11 U.S.C. 1104(a)(1). With the trustee now functioning as the debtor-in-possession, the original debtor has no control over whether he continues the bankruptcy in chapter 11 and will thereby be subjected to the disposable income requirement involuntarily. See Gregory R. Schaaf & C.R., Ghosts of Individual Ch. 11 Debtors Yet to Come Part II: Confirming an Individual Debtor's Chapter 11 Plan Under Bapcpa, Am. Bankr. Inst. J., February 2007, at 36. Second, 1112(b)(1) states that courts cannot convert a chapter 11 case to a chapter 7 case if that court determines that converting or dismissing the case is not in the best interests of creditors and the estate. BANKRUPTCY TECHNICAL CORRECTIONS ACT OF 2010, PL , December 22, In these two situations, a debtor will be stuck in chapter 11. Robert J. Keach, Dead Man Filing Redux: Is the New Individual Chapter Eleven Unconstitutional?, 13 Am. Bankr. Inst. L. Rev. 483, (2005). Unlike in chapter 13, where the debtor can simply quit his or her job or dismiss his or her case to avoid the disposable income requirement, failure to fund the plan under 13

24 chapter 11 would result not only in a breach of contract but also in the debtor being held in contempt, resulting in fines or incarceration. Id. F. The abrogation of the Absolute Priority Rule would severely impair future individuals from securing the loans necessary to start their own business. Although the abrogation of the Absolute Priority Rule at first glance seems to help debtors, it is actually to the debtors detriment. Just as in this case, many sole-proprietors turn to banks, family and friends for the money necessary to start their business. Sanjyot P. Dunung, Starting Your Business (Scott Shane, ed., Business Expert Press, LLC 2010) [hereinafter Starting Your Business]. Without Mr. Azoff s loan, Mr. Manville would not have been able obtain both the warehouse and the special sewer hookup. R.3. Loans normally come with certain conditions, such as the payment of interest or a mortgage on the property purchased with the loan. Starting Your Business at 50. Applying the broad interpretation sends the message to creditors and that they might not only lose their investment, but that the debtor would also be able to keep the property free and clear of any liens. This will result in fewer creditors risking their own capital to invest the money entrepreneurs need to start up or expand a business. See Till v. SCS Credit Corp., 541 U.S. 465, 497 (2004). If a creditor does give the loan, the interest rate is going to increase as a way to justify the risk. Id. BAPCPA did not completely abrogate the Absolute Priority Rule. Interpreting BAPCPA to completely abrogate the Absolute Priority Rule would result in giving the debtor a free pass through bankruptcy, which is plainly not fair and equitable. 14

25 II. Under chapter 11, a plan of reorganization that proposes to sell assets free and clear of existing liens must provide the secured creditor the right to credit bid in order to be crammed down. Azoff s rights as a secured creditor will be violated if he is not permitted to credit bid on the warehouse under Manville s proposed plan of reorganization and the plan is crammed down. Under a cramdown, a court can confirm a plan of reorganization despite the objection of a secured creditor. 11 U.S.C. 1129(b)(1). But when the plan proposes to sell the creditor s assets free and clear of existing liens, it must satisfy the requirements set forth in 1129(b)(2)(A)(ii) and give the creditor the right to credit bid at the sale before it can be crammed down. 11 U.S.C. 1129(b)(2)(A)(ii). In the instant case, Azoff has rejected the plan, which proposes to sell the warehouse free and clear of his existing mortgage on the property. R. 5. Therefore, Manville s plan must meet the requirements in 1129(b)(2)(A)(ii) and Azoff must be permitted to credit bid at the sale of the warehouse. Some courts have expressed the view that a cramdown essentially shoves a plan of reorganization down the throats of its objectors, but in fact Congress has provided particular safeguards in the Code that, when followed, ensure the plan will not discriminate unfairly and will be fair and equitable to creditors. See In re Johnston, 21 F.3d 323, 329 (9th Cir. 1994); In re Windsor on the River Assoc., Ltd., 7 F.3d 127, 130 (8th Cir. 1993); In re Bonner Mall P'ship, 2 F.3d 899, 906 (9th Cir. 1993); Kahm & Nate's Shoes, No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1359 (7th Cir. 1990). Had Manville simply proposed a plan that followed these safeguards, Azoff s rights as a creditor would have been preserved, and a cramdown as to his secured claims would have been fair and equitable. Section 1129(b)(2)(A) of the Code sets forth requirements for what constitutes fair and equitable treatment of a class of secured claims during the cramdown process. 1129(b)(2)(A). It provides: 15

26 (i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property; (ii) (iii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or for the realization by such holders of the indubitable equivalent of such claims. 11 U.S.C. 1129(b)(2)(A). Section 1129(b)(2)(A) supplies three separate and distinct requirements that apply to a plan of reorganization depending on how the plan treats the secured creditor s claims. See 1129(b)(2)(A). Essentially, a plan of reorganization can only be crammed down when: (1) the creditor retains liens in the property, whether kept by the debtor or sold, and the creditor gets deferred cash payments equal to the amount of their claim; (2) the property is sold free and clear of the creditor s liens and the creditor gets the opportunity to credit bid on the property; or (3) the creditor receives the indubitable equivalent of his or her claims. Id. Given that Manville s plan, which proposes to sell the warehouse free and clear of Azoff s lien falls under (2), Azoff has the right to bid the amount of his lien at the sale. Because Azoff s lien is worth $6 million, he must be permitted to credit bid that amount. 16

27 Manville argues that 1129(b)(2)(A) allows him to proceed under any of the three subsections. But in actuality, the facts of the sale dictate which subsection will satisfy a creditor s rights. For example, if a plan proposes to let a creditor keep his or her lien on the property, the debtor must proceed under subsection (i). If a plan proposes to sell property free and clear of existing liens, the debtor must proceed under subsection (ii). Subsection (iii) is a catch-all that only applies when the conditions giving rise to subsections (i) and (ii) are not present. In re Future Energy Corp., 83 B.R. 470, 494 (Bankr. S.D. Ohio 1988). Manville s interpretation is incorrect because it fails to consider the statute in context of the Code as a whole, and ignores legislative history, Congressional intent, and canons of statutory interpretation. See In re Philadelphia Newspapers, LLC, 599 F.3d 298, 319 (3d Cir. 2010) (Ambro, dissenting). His interpretation would have adverse results for lenders and debtors alike and would be detrimental to the lender-debtor relationship even beyond the bounds of bankruptcy proceedings. Id. However, even if this Court chooses to follow Manville s interpretation, Manville s proposed plan would still not meet the requirements of subsection (iii) because it would not provide Azoff with the indubitable equivalent of his secured claims. Offering Azoff the $6 million Baum would pay for the warehouse would not be equivalent to allowing Azoff his right to credit bid at the sale and have the opportunity to obtain the warehouse himself. R- 4. If Azoff is denied this right and is therefore unable to purchase the building, he will be deprived of the building s potential future appreciation and rental income. Thus, although Azoff may receive $6 million under Manville s proposed plan, this amount would be less than the income Azoff would earn as the owner of the building. 17

28 Confirming Manville s plan and denying Azoff s right to credit bid at the sale will turn a cramdown into the iron maiden of bankruptcy reorganizations instead of the fair, 2 protective procedure Congress intended. In re Perez, 30 F.3d 1209, 1212 (9th Cir. 1994). Manville should not be permitted to manipulate 1129(b)(2)(A), in complete disregard of Congressional intent, well-settled maxims of statutory interpretation and years of precedent, as he is trying to do in this case. A. Reading 1129(b)(2)(A) to preserve a creditor s right to credit bid is consistent with sections of the Code that provide similar, if not identical, safeguards for creditors. Because the Code provides a structured and unified statutory scheme, a proper interpretation of 1129(b)(2)(A) involves reading the section not in a vacuum, but in context of other sections and the Code as a whole. This Court has long upheld this view, noting that courts must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy. Kelly v. Robinson, 479 U.S. 36, 43 (1986). A holistic interpretation of 1129(b)(2)(A) considers the section in conjunction with other sections in the Code, particularly those it explicitly references. Id. Section 1129(b)(2)(A)(ii), which should apply to Manville s proposed plan, says that property may be sold under a plan of reorganization pursuant to 363(k). Section 363(k) provides that at a sale of property subject to a lien, the lien holder may offset his or her claim against the purchase price of the property, that is, he may credit bid. Specifically, 363(k) provides: 2 The court in In re Perez compared the dreaded cramdown to a medieval torture device. 18

29 (k) At a sale... of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property. 11 U.S.C. 363(k). Section 363(k) applies in both liquidation and reorganization cases. In re SubMicron Sys. Corp., 432 F.3d 448, 459 (3d Cir. 2006). Therefore, it applies to sales of collateral made outside of a plan of reorganization as well as to sales of collateral made under a plan of reorganization. Id. Because 1129(b)(2)(A)(ii) incorporates 363(k) by reference, a plan of reorganization under 1129(b)(2)(A)(ii) must provide the creditor the right to credit bid. Further, all sales conducted pursuant to 363(k) permit credit bidding unless the court for cause orders otherwise. 363(k). A debtor should not be given the same power as the courts to order otherwise and deprive a secured creditor of his or her right to credit bid. Yet this is precisely what Manville is trying to do by asserting he can proceed under 1129(b)(2)(A)(iii), the catchall provision that only requires a creditor be provided with the indubitable value of his or her claim and does not provide the creditor the right to credit bid. Also, giving the debtor the power to pick and choose between the three alternatives provided in 1129(b)(2)(A) could potentially create a disparity in the treatment of secured creditors depending on whether the sale is conducted under a plan of reorganization. In re Philadelphia Newspapers, 599 F.3d at 333 (Ambro, dissenting). If the secured creditor s collateral is not sold under a plan of reorganization and the sale is conducted free and clear of existing liens, 363(k) will automatically apply and the creditor may credit bid at the sale. In re SubMicron Sys. Corp., 432 F.3d at

30 But according to Manville s argument, if the secured creditor s collateral is sold under a plan of reorganization and the sale is conducted free and clear of existing liens, the debtor can choose to satisfy the indubitable equivalent requirement set forth in 1129(b)(2)(A)(iii) and deprive the creditor of his or her right to credit bid. Without the right to credit bid, a creditor cannot protect the value of his or her collateral because a debtor can steer the sale to a favored purchaser, such as a stalking horse bidder 3, who may try to pay little as possible and obtain the assets for far below market value. In re Philadelphia Newspapers 599 F.3d at 320 (Ambro, dissenting). With the right to credit bid under 363(k), creditors can bid their liens at the sale and have a competitive edge against any other bidders who bid unreasonably low amounts. But a creditor s interest in protecting the value of collateral remains the same whether collateral is sold outside of a plan pursuant to 363(k) or under a plan pursuant to 1129(b)(2)(A), and Congress would not have intended the Code to offer this protection to creditors only in one of those two situations. In re Hoffman, 52 B.R. 212, 217 (Bankr. D.N.D. 1985). By explicitly providing creditors the right to credit bid under 1129(b)(2)(A)(ii) and 363(k), Congress demonstrated its intent to provide a method for a secured creditor to protect itself from an undervaluation of its collateral regardless of the method of sale and drafted the Code accordingly. See William P. Weintraub, Gregory W. Fox, and Kizzy L. Jarashow. Third Circuit Bids Credit Bidding Adieu, 19 J. Bankr. L. & Prac. 3 Art. 4 (2010). The theme of creditor protection runs throughout the Code, as Congress has provided other protections for the secured creditor in addition to the right to credit bid. In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363, 373 (5th Cir. 1987). For example, where there is 3 An entity that reaches an agreement with the debtor to purchase the assets prior to a court-ordered auction and bid first at the sale is commonly called a stalking horse. See David H. Kleiman, Alternatives for Awarding Break-Up Fees to Stalking-Horse Bidders, Am. Bankr. Inst. J., October 2010, at

31 no reasonable likelihood of reorganization or where the debtor unreasonably delays in its efforts to reorganize, the Bankruptcy Code affords several avenues for relief to all creditors. Id. In that situation, 362(d)(2)(A) demands that a debtor show a reasonable prospect of successful reorganization within a reasonable time. Id. at 370. Just as Congress intended the credit bid to safeguard creditors, Congress also aimed to protect creditors with this section, which prevents undue delays in collecting money owed to them. Id. at 371. If the debtor unreasonably delays the effectuation of a plan of reorganization, 1112(b)(1) provides a secured creditor another safeguard, specifically that the creditor may convert the chapter 11 reorganization to a chapter 7 liquidation, allowing him or her to collect a share of the debtor s liquidated assets. 11 U.S.C. 1112(b)(1). Section 1112(b)(1) is written plainly with creditor s interests in mind, as it defers to whichever situation is in the best interest of creditors. 1112(b)(1). Thus, 1112(b)(1) provides secured creditors yet another safeguard to prevent the undervaluation of their collateral. Id. The safeguards in the Code protect not only creditors secured claims, but also their unsecured claims. See 11 U.S.C. 1111(b). Section 1111(b) gives the secured creditor an opportunity to elect to have his or her unsecured claims treated as secured claims in a chapter 11 reorganization, subject to certain limitations. In re 222 Liberty Associates, 108 B.R. 971, 977 (Bankr. E.D. Pa. 1990). Like the right to credit bid, the option to have unsecured claims treated as secured claims under 1111(b) maximizes recovery for creditors and is further evidence of Congress s intent to protect creditors from the undervaluation of their collateral. Id. (Quoting Collier On Bankruptcy, [5], at (15th ed. 1989)). Allowing Manville to proceed with the cramdown without providing Azoff the right to credit bid will strip away one of the Code provisions that Congress intentionally inserted to protect secured lenders from the risk of 21