In re Kamell

Decision Date04 May 2011
Docket NumberNo. 8:10–bk–15501–TA.,8:10–bk–15501–TA.
Citation54 Bankr.Ct.Dec. 197,451 B.R. 505
CourtU.S. Bankruptcy Court — Central District of California
PartiesIn re Rafik Youssef KAMELL, Debtor(s).

OPINION TEXT STARTS HERE

Robert P. Goe, Goe & Forsythe, LLP, Irvine, CA, for Debtor.Michael J. Hauser, Santa Ana, CA, for U.S. Trustee.Christopher M. McDermott, San Diego, CA, Ramesh Singh, Recovery Systems Management Corp, Miami, FL, for Courtesy NEF.Nathan F. Smith, Malcolm–Cisneros, Irvine, CA, for Central Mortgage Company.Eric J. Testan, Pite Duncan LLP, San Diego, CA, for JPMorgan Chase Bank and National Association.

AMENDED ORDER DENYING CONFIRMATION OF DEBTOR'S FIRST AMENDED CHAPTER 11 PLAN OF REORGANIZATION

THEODOR C. ALBERT, Bankruptcy Judge.

This case involves the perplexing question of whether the “absolute priority rule” survives the BAPCPA 1 amendments to individual Chapter 11 proceedings. This question has divided bankruptcy courts across the country. The court appreciates the learned and eloquent opinions of some judges to the contrary. But this court finds that there is no good reason to conclude that Congress intended to abrogate this long-standing and important centerpiece of Chapter 11 jurisprudence based on the ambiguous language of the BAPCPA amendments.

The Chapter 11 debtor, Rafik Youssef Kamell, is a lawyer with an active personal injury practice. The debtor also owns three real properties, his Whittier residence and two rental properties, one in Anaheim and the other in Newport Beach. The confirmation hearing was continued for further briefing on the question of whether the plan is “fair and equitable” within the meaning of 11 U.S.C. § 1129(b) 2 and/or feasible within the meaning of § 1129(a)(11). The debtor has provided additional declaration testimony which seems to resolve the feasibility question. The remaining “fair and equitable” issue is raised because the objecting creditor, JP Morgan Chase Bank (“the bank”), is an unsecured creditor by reason of the § 506 bifurcation of its claim under the court's valuation at $1.6 million of its collateral, commonly known as 4004 W. Ocean Front, Newport Beach. The valuation order results in two claims of the bank, one a claim secured by a trust deed at $1.6 million and the second is an unsecured claim of $1,324,062 for the deficiency. Although not made clear in the papers, it would appear that the dissent and objection to confirmation from the bank on account of its $1,324,062 unsecured claim is large enough to prevent the Class 5 unsecured class from accepting the plan within the meaning of § 1126(c).

There is no dispute that the plan does not provide for payment in full of the Class 5 unsecured claims. Instead, Class 5, including the bank's deficiency, is promised only a pro rata portion of the debtor's projected disposable income for the period of five years following confirmation. Because of the dissent of Class 5, not all impaired classes have accepted the plan as required in § 1129(a)(8), so the debtor to confirm must resort to the cram down provisions of § 1129(b). Cram down may be accomplished under § 1129(b)(1) if only compliance with § 1129(a)(8) is lacking and “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under and has not accepted the plan ...” Unfair discrimination is not contested here; the bank only contends that the plan as to Class 5 is not “fair and equitable.” “Fair and equitable” is defined when applied to a dissenting class of impaired unsecured creditors at § 1129(b)(2)(B), to allow confirmation notwithstanding the dissent if:

(B)(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section. (Italics and emphasis added).

The provisions not italicized in subsection (ii) are commonly referred to as the “absolute priority rule.” The question arises whether the language italicized above, which was added under BAPCPA, has effectively abrogated the absolute priority rule entirely for individual Chapter 11s. This question has engendered a split of authority because the additional language in this section and in new § 1115, also added under BAPCPA and referenced in § 1129(b)(2)(B)(ii), is worded vaguely. Section 1115 in pertinent part reads:

(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; and

(2) earnings from service performed by the debtor 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 ...

An ambiguity arises over what is meant by the term included in the estate under section 1115 (emphasis added) as used in § 1129(b)(2)(B)(ii) since § 1115 begins by providing that the usual definition of “property of the estate” defined at § 541 is now augmented in individual 11s by certain after-acquired property and post-petition earnings. Indeed, new § 1115 echoes this question by use of the very word “includes” in the initial paragraph, suggesting that new categories of property are “in addition to” what has historically defined property of the estate in § 541.

The first three courts to take up the issue as well as some of the commentators ascribe to the “broad view” that Congress intended to entirely abrogate the absolute priority rule in individual cases. See In re Tegeder, 369 B.R. 477 (Bankr.Neb.2007); In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan.2007) and In re Shat, 424 B.R. 854 (Bankr.D.Nev.2010). The “broad view” holds that the entirety of § 1129(b)(2)(B), including both subsections (i) and (ii) 3, simply have no continued application at all in individual cases. Courts ascribing to the “broad view” infer a Congressional intent to make individual Chapter 11's parallel to Chapter 13, which has never contained any version of the “absolute priority rule.” Some BAPCPA additions do show intent to make some aspects of individual Chapter 11's more parallel to Chapter 13. For example: post petition earnings and acquisitions are now property of the estate under § 1115, similar to § 1306; under § 1123(a)(8) debtors are now called upon to contribute all or a portion of post-petition earnings to repay creditors, not unlike § 1322(a); like § 1328, discharge is now delayed in most cases until all payments are made under § 1141(d)(5), and modification, notwithstanding substantial consummation, is permitted in individual 11's just like in § 1329. So the “broad view” courts read into the language of §§ 1129(b)(2)(B)(ii) and 1115 an intent to abrogate the absolute priority rule entirely, like in Chapter 13. However, this may be a “bridge too far.” 4 As discussed herein, that reading seems rather convoluted and strained considering the language Congress actually used and further considering that, in general, BAPCPA has been read to tighten, not loosen, the ability of debtors to avoid paying what can reasonably be paid on account of debt. In re Gbadebo, 431 B.R. 222, 229 (Bankr.N.D.Cal.2010). It seems to the court that had such a major protection for creditors as the absolute priority rule been abrogated, not only would this have been a theme counter to the rest of BAPCPA, but Congress would have said so more clearly.

The more recent trend, and now the clear majority of courts, ascribe to the so-called “narrow view.” See e.g. In re Gbadebo, 431 B.R. 222; In re Mullins, 435 B.R. 352 (Bankr.W.D.Va.2010); In re Steedley, No. 09–50654, 2010 WL 3528599 (Bankr.S.D.Ga. Aug.27, 2010); In re Gelin, 437 B.R. 435 (Bank.M.D.Fla.2010); In re Karlovich, ––– B.R. –––– (Bankr.S.D.Cal.2010); In re Stephens, 445 B.R. 816 (Bankr.S.D.Tex.2011); In re Walsh, 447 B.R. 45 (Bankr.D.Mass.2011). Many of the “narrow view” courts observe that had Congress intended to abrogate the absolute priority rule entirely, rather than only partly, they could scarcely have chosen a more convoluted and ambiguous way to go about it. As several “narrow view” courts have observed, it would have been easier and more logical to simply insert “except in individual cases at the beginning of § 1129(b)(2)(B). Karlovich, 2010 WL 5418872 at *4.

The court disagrees with both debtor's and the bank's arguments that the “plain meaning rule” has any application here. See e.g. Lamie v. United State Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); In re Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). The language used in both §§ 1129(b)(2)(B)(ii) and in 1115 is ambiguous as many of the “narrow view” and “broad view” courts have noted. Moreover, the legislative history is also scarce, equivocal and altogether unhelpful. In re Gbadebo, 431 B.R. at 228–29 citing In re Roedemeier, 374 B.R. at 264–65 and In re Shat, 424 B.R. at 859–60. The court is left unaided by any general precepts of statutory interpretation in its task of making some sense of ambiguous language.5 Does “included in” as used at § 1129(b)(2)(B)(ii) mean the equivalent of “added to” through § 1115, since property of the estate has long been defined under § 541? This interpretation would be somewhat consistent with the language of § 1115 itself which begins with an introductory reference of in...

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