David Zachary v. California Bank & Trust, 811 F.3d 1191

Debtors David Zachary and Annmarie Snorsky filed a joint individual Chapter 11 in Sept. 2011 and proposed a plan that paid California Bank & Trust $5,000 on an almost $2,000,000 unsecured claim. The bank’s claim was impaired and objected under 11 U.S.C. § 1129(b)(2)(B)(ii).
The bankruptcy court sustained California Bank’s objection, ruling that the absolute priority rule still applies in individual Chapter 11 cases after BAPCPA; debtors appealed directly to the Ninth Circuit.
Pre-BAPCPA, the absolute priority rule prohibited junior claimants (including the debtor) from retaining any property unless dissenting unsecured creditors were paid in full (11 U.S.C. § 1129(b)(2)(B)(ii) pre-2005).
BAPCPA (2005) added § 1115 (bringing certain postpetition property/earnings of individual debtors into the estate) and amended § 1129(b)(2)(B)(ii) to allow an individual debtor to retain "property included in the estate under section 1115." This generated dispute over the scope of that exception.
Two interpretive camps arose: the "broad view" (§ 1115/§1129 amendment allows retention of the entire estate, effectively abrogating the absolute priority rule for individuals) and the "narrow view" (the amendment permits retention only of postpetition property that § 1115 newly brings into the estate).
The Ninth Circuit panel here adopts the narrow view, aligning with several other circuits, and affirms the bankruptcy court’s order sustaining the bank’s objection.

Issue	Debtors' Argument	California Bank's Argument	Held
Whether BAPCPA eliminated the absolute priority rule for individual Chapter 11 debtors	BAPCPA’s cross-reference to §1115 and amended §1129(b)(2)(B)(ii) lets individuals retain estate property (pre- and postpetition) and thus permit cramdown without full payment to unsecured creditors	The amendment only permits retention of property that §1115 adds to the estate (postpetition property/earnings); absolute priority still bars retention of prepetition estate property unless unsecured creditors are paid in full	Court holds absolute priority rule continues to apply; §1129(b)(2)(B)(ii) permits retention only of property included by §1115 (i.e., principally postpetition property) — narrow view affirmed
Scope of "property included in the estate under §1115" — does "include" broaden or limit estate property	"Include" is not limiting; §1115/§1129 together expand the set of estate property debtors may retain	"Include" is best read as referring to property that §1115 takes into the estate (postpetition acquisitions/earnings), not as a license to retain all estate property	Court adopts the narrow grammatical and textual reading: the term refers to property §1115 brings into the estate (postpetition), not a repeal of absolute priority for prepetition property

Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988) (describing the absolute priority rule and its role in Chapter 11 cramdown)
Dewsnup v. Timm, 502 U.S. 410 (1992) (courts should be reluctant to find implied repeal of longstanding pre-Code practices absent clear congressional intent)
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988) (major statutory changes should appear in text or legislative history; canon against implied repeal)
Ice House Am., LLC v. Cardin, 751 F.3d 734 (6th Cir. 2014) (adopts narrow view: §1115 covers postpetition property and the absolute priority rule still applies to prepetition property)
In re Maharaj, 681 F.3d 558 (4th Cir. 2012) (rejects broad view; holds BAPCPA did not abrogate the absolute priority rule for individual Chapter 11 debtors)
In re Lively, 717 F.3d 406 (5th Cir. 2013) (reaffirms absolute priority rule remains applicable to prepetition property in individual Chapter 11 cases)
In re Stephens, 704 F.3d 1279 (10th Cir. 2013) (declines to find implied repeal of absolute priority rule under BAPCPA)