In re Maharaj

• Citation: 681 F.3d 558,56 Bankr.Ct.Dec. 166,67 Collier Bankr.Cas.2d 1429
• Decision Date: 14 June 2012
• Docket Number: No. 11–1747.,11–1747.
• Parties: In re Ganess MAHARAJ; Vena Maharaj, Debtors. Ganess Maharaj; Vena Maharaj, Plaintiffs–Appellants. Stubbs & Perdue, P.A.; National Association of Consumer Bankruptcy Attorneys, Amici Supporting Appellants, Steven Harris Goldblatt, Court–Assigned Amicus Counsel.
• Court: U.S. Court of Appeals — Fourth Circuit

681 F.3d 558

67 Collier Bankr.Cas.2d 1429

56 Bankr.Ct.Dec. 166

In re Ganess MAHARAJ; Vena Maharaj, Debtors. Ganess Maharaj; Vena Maharaj, Plaintiffs–Appellants. Stubbs & Perdue, P.A.; National Association of Consumer Bankruptcy Attorneys, Amici Supporting Appellants, Steven Harris Goldblatt, Court–Assigned Amicus Counsel.

No. 11–1747.

United States Court of Appeals, Fourth Circuit.

Argued: March 22, 2012.

Decided: June 14, 2012.

ARGUED:Daniel Mark Press, Chung & Press, PC, McLean, Virginia, for National Association of Consumer Bankruptcy Attorneys, Amicus Supporting Appellants. Ann Elizabeth Schmitt, Culbert & Schmitt, PLLC, Leesburg, Virginia, for Appellants. Nilam Ajit Sanghvi, Georgetown University Law Center, Washington, D.C., for Steven Harris Goldblatt, Court–Assigned Amicus Counsel. ON BRIEF:Trawick H. Stubbs, Jr., Amy Marvine Currin, Rodney A. Currin, Laurie B. Biggs, William H. Kroll, Heather Kelly Pierce, Ashley Baxter Curry, John W. King, Stubbs & Perdue, P.A., New Bern, North Carolina, for Stubbs & Perdue P.A., Amicus Supporting Appellants. Brett Weiss, Chung & Press, LLC, Greenbelt, Maryland; Tara Twomey, National Association Of Consumer Bankruptcy Attorneys, San Jose, California, for National Association of Consumer Bankruptcy Attorneys, Amicus Supporting Appellants. Steven H. Goldblatt, Director, Doug Keller, Supervising Attorney, Derek Young, Emily Giarelli, Jina Moon, Georgetown University Law Center, Appellate Litigation Program, Washington, D.C., for Steven Harris Goldblatt, Court–Assigned Amicus Counsel.

Before DUNCAN, AGEE, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge AGEE wrote the opinion, in which Judge DUNCAN and Judge DIAZ joined.

OPINION

AGEE, Circuit Judge:

In this direct appeal from the Bankruptcy Court, we address a question of first impression in the circuit courts of appeal: whether, in light of the 2005 amendments to the Bankruptcy Code, 11 U.S.C. § 101 et seq. (“the Code”), codified by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), Pub.L. No. 109–8, 119 Stat. 23 (2005), the absolute priority rule continues to apply to individual debtors in possession proceeding under Chapter 11.¹ Because we answer that question in the affirmative, we affirm the bankruptcy court's order denying plan confirmation.

I.

Because this appeal requires us to resolve a pure question of law that has divided the nearly two dozen bankruptcy and district courts that have faced it, we begin by setting forth that background in detail. In subpart A, we recite the history of the absolute priority rule. In subpart B, we describe the statutory provisions relevant to determining whether the BAPCPA abrogated the absolute priority rule for individual debtors proceeding under Chapter 11. In subpart C, we discuss the judicial decisions to date addressing that question.

A.

We begin by setting forth the history of the absolute priority rule, which for reasons that will become clear, is significant for our disposition here. The absolute priority rule traces its origins to the latter half of the nineteenth century. The Supreme Court articulated the earliest version of the rule in response to widespread collusion in the context of railroad reorganizations, just after the Civil War. The Court announced that “stockholders are not entitled to any share of the capital stock nor to any dividend of the profits until all the debts of the corporation are paid.” Chi., Rock Island & Pac. R.R. v. Howard, 74 U.S. 392, 409–10, 7 Wall. 392, 19 L.Ed. 117 (1868). As the Supreme Court later described, “[t]he rule had its genesis in judicial construction of the undefined requirement of the early bankruptcy statute that reorganization plans be ‘fair and equitable.’ ” See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); see also Pub.L. No. 73–296, 48 Stat. 911, 919 (1934) (amending the Bankruptcy Act to require a finding that a plan is “fair and equitable and does not discriminate unfairly in favor of any class of creditors or stockholders” for confirmation). In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 117, 60 S.Ct. 1, 84 L.Ed. 110 (1939), the Court for the first time used the term “absolute priority” to describe the rule.

Although based on the “fair and equitable” requirements found in § 77B of the Bankruptcy Act (“the Act”), the absolute priority rule had itself never been codified under the Act.² In fact, Congress expressly prohibited its further judicial application by passing the 1952 amendments to the Act. See Pub.L. 456, 66 Stat. 420, 433 (1952). In modifying the requirements for confirmation of a plan of reorganization under what was then Chapter XI of the Act, Congress amended the Act such that: “[c]onfirmation of an arrangement shall not be refused solely because the interests of a debtor, or if the debtor is a corporation, the interest of its stockholders or members will be preserved under the arrangement.” Id. Instead, Congress provided for confirmation if the plan “is for the best interest of the creditors and is feasible.” Id.

The legislative history to the 1952 amendments to the Act reflects that Congress intended an express repeal of the judicially created absolute priority rule in the context of Chapter XI (which was designed for small, privately held businesses).³ “[T]he fair and equitable rule ... cannot realistically be applied.... Were it so applied, no individual debtor, [and] no corporate debtor where the stock ownership is substantially identical with management could effectuate an arrangement except by payment of the claims of all creditors in full.” H.R.Rep. No. 82–2320 (1952)reprinted in 1952 U.S.C.C.A.N. 1960, 1982.

In 1978, Congress passed the Bankruptcy Reform Act of 1978, replacing the Act with the Code and creating the structure of modern bankruptcy practice. In enacting the Code, Congress merged many aspects of Chapters X and XI (as well as the infrequently-used Chapter XII) of the Act into the newly created Chapter 11. SeeH.R.Rep. No. 95–595 at 223 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6183 (“This bill adopts a consolidated chapter for all business reorganizations.”). In doing so, Congress specifically incorporated the absolute priority rule into § 1129(b)(2)(B)(ii).⁴Ahlers, 485 U.S. at 202, 108 S.Ct. 963. The absolute priority rule, as provided in § 1129, remained unchanged until the passage of BAPCPA in 2005.

B.

Under the now-operative provisions of the Code, a bankruptcy case under Chapter 11 commences with the filing of a Chapter 11 petition in the bankruptcy court. 11 U.S.C. § 301. Commencement of the case creates the bankruptcy estate, which includes, pursuant to 11 U.S.C. § 541(a)(1), “all legal or equitable interests of the debtor in property as of the commencement of the case.”

After filing a voluntary petition under Chapter 11, a debtor may file a plan of reorganization with the bankruptcy court. 11 U.S.C. § 1121(a). In addition to numerous other requirements, a reorganization plan must specify classes of claims against the debtor based on specific statutory requirements. 11 U.S.C. § 1123(a)(1). To be operative, a Chapter 11 reorganization plan must be confirmed by the bankruptcy court. A precondition of plan confirmation is that it meet the requirements set forth in 11 U.S.C. § 1129(a).

Of particular import to this case is the requirement, found at § 1129(a)(8)(A), that each impaired class of creditors accept the plan. Pursuant to § 1129(b), however, a plan of reorganization may be confirmed over the dissent of an impaired class of creditors using a procedure commonly known as a “cram down.” The plan can avoid the requirements of § 1129(a)(8) in a cram down procedure “if the plan does not discriminate unfairly, and is fair and equitable” to the dissenting creditors. 11 U.S.C. § 1129(b)(1).

The Code inclusively sets forth, at § 1129(b)(2), specific requirements that must be met for a plan to be “fair and equitable.” Among those requirements is the absolute priority rule, the construction of which is central to the disposition of this appeal. Prior to 2005, the absolute priority rule (as codified) was simply that, in order to be fair and equitable, a proposed Chapter 11 plan must provide: “the holder of any claim or interest that is junior to the claims of such [dissenting] class will not receive or retain under the plan on account of such junior claim or interest any property.” 11 U.S.C. § 1129(b)(2)(B)(ii). In other words, if the proposed plan allowed the debtor to retain property, any dissenting creditors must be paid in full in order for the plan to be “crammed down.” See Ahlers, 485 U.S. at 202, 108 S.Ct. 963.

In 2005, Congress enacted BAPCPA, which we have previously described as an “attempt[ ] to reduce the spiraling costs to society of bankruptcies.” In re Ciotti, 638 F.3d 276, 279 (4th Cir.2011). Although Congress, in enacting BAPCPA, altered the Code in numerous respects, our focus is the amendment to § 1129(b)(2)(B)(ii), which contains the absolute priority rule. The Code, after BAPCPA, now states that to be fair and equitable, a proposed plan must provide 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 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.

Id. (2005 amendment emphasized).

Section 1115 (which was added to the Code by BAPCPA) in turn provides:

(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...