Dill Oil Co. v. Stephens (In re Stephens), 11–6309.

• Decision Date: 15 January 2013
• Docket Number: No. 11–6309.,11–6309.
• Citation: 704 F.3d 1279
• Parties: Arvin E. STEPHENS; Karen J. Stephens, f/d/b/a Ninnekah Quick Mart, Debtors. Dill Oil Company, LLC; Danny Dill; Nancy Dill, Appellants, v. Arvin E. Stephens; Karen J. Stephens, f/d/b/a Ninnekah Quick Mart, Appellees, National Association of Consumer Bankruptcy Attorneys, Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

704 F.3d 1279

Arvin E. STEPHENS; Karen J. Stephens, f/d/b/a Ninnekah Quick Mart, Debtors.Dill Oil Company, LLC; Danny Dill; Nancy Dill, Appellants,

v. Arvin E. Stephens; Karen J. Stephens, f/d/b/a Ninnekah Quick Mart, Appellees,National Association of Consumer Bankruptcy Attorneys, Amicus Curiae.

No. 11–6309.

United States Court of Appeals, Tenth Circuit.

Jan. 15, 2013.

James Bellingham of Bellingham & Loyd, P.C., Oklahoma City, OK, for Appellants.

James Brunson of AG–LAW, PC, Oklahoma City, OK, for Appellees.

Tara Twomey of National Consumer Bankruptcy Rights Center, San Jose, CA, for Amicus Curiae.

Before KELLY and HOLMES, Circuit Judges, and MARTINEZ ^*, District Judge.

PAUL KELLY, JR., Circuit Judge.

This appeal presents an issue of first impression for our circuit: whether the 2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors from the absolute priority rule. The bankruptcy court answered this question in the affirmative. It therefore confirmed the Debtors' proposed plan of reorganization over certain creditors' objections that the plan violated the absolute priority rule. On appeal, the bankruptcy appellate panel certified the case for direct appeal. Exercising our jurisdiction under 28 U.S.C. §§ 158(d)(2)(A) & 158(a)(1), we now reverse the bankruptcy court's order confirming the plan and remand for further proceedings.

Background

On June 30, 2010, Arvin E. Stephens and Karen J. Stephens, f/d/b/a/ Ninnekah Quick Mart, LLC (collectively, “Debtors”) filed for relief under Chapter 11 of the Bankruptcy Code. Aplt.App. 28. Dill Oil Company, LLC and Danny and Nancy Dill (collectively, “the Dills”) objected to confirmation on the ground that the proposed plan violated the absolute priority rule (“APR”), ¹ which bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full. Id. at 28, 30; see Search Mkt. Direct, Inc. v. Jubber (In re Paige), 685 F.3d 1160, 1183 (10th Cir.2012) (discussing APR).

Debtors owned a chain of convenience stores for which the Dills were the primary supplier of gasoline and gas station products. Aplt.App. 28. Due to the rising price of gas and a diminishing customer base, Debtors' stores began operating at a loss. Id. at 120. Eventually, Debtors became liable to the Dills for approximately $1.8 million. Id. at 28. In December 2008, Debtors executed mortgages in favor of the Dills on various tracts of real estate, including a house and farmlands. Id. at 28, 120. The Dills' mortgages, however, were subordinate to existing mortgages on the properties. Id. at 28.

On December 30, 2010, Debtors filed a proposed plan of reorganization. Id. at 17. Pursuant to the plan, the Dills would be paid approximately $15,000 as a secured creditor, but their remaining claim would be considered unsecured. Id. at 28. Under the plan, Debtors would retain possession and control of their property; the Dills would receive a monthly payment for five years, totaling about 1% of their unsecured claim. Id. at 29, 76.

The Dills subsequently filed an objection to Debtors' proposed plan. Id. at 29, 97, 198. Because their vote constituted approximately 96% of Class 8's claims, the Dills' rejection precluded approval of the plan under § 1129(a). Id. at 102, 132.

On May 20, 2011, the bankruptcy court entered an order confirming the plan under § 1129(b)'s “cram down” mechanism. Id. at 17, 29. The Dills argued that the plan was unconfirmable because it violated the APR. Id. at 29. The bankruptcy court rejected this contention, holding instead that the plain language of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) abrogated the APR as to individual Chapter 11 debtors. Id. at 21–22.

The Dills timely filed a notice of appeal on June 1, 2011, seeking reversal of the confirmation order. Id. at 25, 32. The Dills proceeded to the bankruptcy appellate panel (“BAP”), which sua sponte issued a certification of final order for direct appeal to this court based on its determination that the case presents a question of public importance for which there is no controlling law. Id. at 25. We granted permission to appeal. Id. at 15.

Discussion

A. Should this Appeal Be Dismissed Under the Doctrine of Equitable Mootness?

Debtors urge us to dismiss this appeal under the doctrine of equitable mootness, which “allows a court to decline to hear a bankruptcy appeal, even when relief could be granted, if implementing the relief would be inequitable.” In re C.W. Mining Co., 641 F.3d 1235, 1239–40 (10th Cir.2011). Equitable mootness is a discretionary, prudential doctrine. See id. at 1240. We have held that a court should apply the doctrine when reaching the merits would be unfair or impractical, taking into consideration the following questions:

(1) Has the appellant sought and/or obtained a stay pending appeal? (2) Has the appealed plan been substantially consummated? (3) Will the rights of innocent third parties be adversely affected by reversal of the confirmed plan? (4) Will the public-policy need for reliance on the confirmed bankruptcy plan—and the need for creditors generally to be able to rely on bankruptcy court decisions—be undermined by reversal of the plan? (5) If appellant's challenge were upheld, what would be the likely impact upon a successful reorganization of the debtor? And (6) based upon a quick look at the merits of appellant's challenge to the plan, is [the argument] legally meritorious or equitably compelling?

In re Paige, 584 F.3d 1327, 1339 (10th Cir.2009). The party seeking to prevent the court from reaching the merits bears the burden of proving these factors weigh in favor of dismissal. See id. at 1339–40.

The Dills did not seek a stay pending their appeal, but this factor alone does not preclude the court from granting relief. See id. at 1339 (citing In re Inv. Co. of the Sw., Inc., 341 B.R. 298, 308 (10th Cir. BAP 2006)). And although the plan has, according to Debtors, been substantially consummated, this does not act as a “blanket discharge of [the] judicial duty to examine carefully each request for relief.” In re AOV Indus., Inc., 792 F.2d 1140, 1148 (D.C.Cir.1986); see also In re Paige, 584 F.3d at 1342 (explaining that substantial consummation is “not dispositive”).

Instead, “[t]he effects that reversal will have on non-party creditors is probably the foremost concern in our analysis.” In re Paige, 584 F.3d at 1343 (emphasis added); see also In re SI Restructuring, Inc., 542 F.3d 131, 135–36 (5th Cir.2008). “The other factors are often given much less weight and, in some cases, completely ignored.” In re Paige, 584 F.3d at 1339. Here, reversal will likely compel conversion to a Chapter 7 proceeding. See11 U.S.C. § 1112; Aplee. Br. 27–28. According to Debtors, the Dills will receive little or nothing under Chapter 7 due to superior liens on non-exempt assets. See Aplee. Br. 28. But the Dills' argument—which Debtors have not disputed—is that under Chapter 7 either: 1) the secured creditors will receive their property; or 2) Debtors will reaffirm the creditors' secured debts and retain the property. See Aplt. R. Br. 14. In either scenario, we find it unlikely that non-party creditors will be adversely affected in any significant way, and Debtors have failed to convince us otherwise. See In re Paige, 584 F.3d at 1343–44.

Although we recognize that Debtors have devoted substantial time and resources toward the plan's implementation, and we appreciate that reversing the confirmation order will likely preclude a successful reorganization, we also note that the Dills have approximately $1.8 million at stake. Moreover, this case involves a “matter of public importance” for which “there is no controlling decision” in this circuit, Aplt.App. 25, and we believe the Dills' argument is legally meritorious. As the BAP emphasized in its certification order, “[u]ntil the meaning of the BAPCPA amendments to Chapter 11 is clarified, debtors and creditors in every individual Chapter 11 case must anticipate the possibility of the expense and delay associated with litigation over this issue.” Id. at 34. Because of the private and public interest in resolving this legal issue, we decline to apply the doctrine of equitable mootness. See In re Paige, 584 F.3d at 1348.

B. Does BAPCPA Repeal the Absolute Priority Rule with Respect to Individual Chapter 11 Debtors?

This appeal presents a question of statutory interpretation. Accordingly, we review the bankruptcy court's determination de novo. In re Kirkland, 572 F.3d 838, 840 (10th Cir.2009). “[T]he starting point is always the language of the statute itself. If the language is clear and unambiguous, the plain meaning of the statute controls.” United States v. Quarrell, 310 F.3d 664, 669 (10th Cir.2002) (citation omitted). If, on the other hand, the text is ambiguous—i.e., “capable of being understood by reasonably well-informed persons in two or more different senses”—we must inquire further to discern Congress's intent. See id. (quotation omitted).

1. Is the statutory language clear and unambiguous?

We begin our analysis by focusing exclusively on the language of the Bankruptcy Code. See Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 723, 178 L.Ed.2d 603 (2011). Section 1129 of the Code sets out the general requirements for confirmation of a reorganization plan. Section 1129(a) allows for confirmation where each class of creditors consents. Alternatively, § 1129(b) provides a “cram-down” mechanism, whereby a plan may be confirmed without the consent of each class if, among other things, the plan is “fair and equitable.” Section 1129 outlines the “fair and equitable” criteria, which include the absolute priority rule. Specifically, § 1129(b)(2)(B)(ii), as amended by BAPCPA, provides that:

the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of...