Heritage Bank v. Woodward (In re Woodward), 537 B.R. 894

Background

Debtor (Suzette Woodward), an individual Chapter 11 debtor and practicing pathologist, converted her case to Chapter 11 after a prior Chapter 7 filing; Heritage Bank holds an allowed unsecured claim (~$270,566).
Debtor purchased her principal residence from Leland and Marie Elliott postpetition; she executed a promissory note and the Elliotts perfected a security interest; a balloon payment was later extended by the Elliotts.
The Elliotts filed a proof of claim asserting secured status; Heritage objected to timeliness but did not appeal the Bankruptcy Court’s allowance of the Elliotts’ claim.
The Bankruptcy Court confirmed the Debtor’s Fifth Amended Chapter 11 Plan; the Elliotts (the sole members of their impaired class) voted to accept the plan; no other impaired class accepted.
Heritage appealed, arguing (1) an impaired class did not accept the plan, (2) the plan violated the absolute priority rule by allowing the debtor to retain prepetition property, and (3) the plan failed to commit all disposable income; the appellate court reversed confirmation and remanded for a new confirmation hearing.

Issues

Issue	Heritage's Argument	Debtor's Argument	Held
Whether an impaired class accepted the plan	Elliotts were postpetition lenders and not "creditors" entitled to vote, so no impaired class accepted	Elliotts hold an allowed claim (Bankruptcy Court allowed it) and thus could vote; their accepting vote satisfies §1129(a)(10)	Held: Elliotts had an allowed, impaired claim and their accepting vote satisfied §1129(a)(10); Heritage is precluded from relitigating creditor status because it failed to appeal the allowance order
Whether §1129(b)(2)(B)(ii) (absolute priority) permits debtor to retain prepetition property without paying creditors in full	The 2005 amendments (via §1115) permit individual debtors to retain property included in estate under §1115, effectively abrogating absolute priority for individuals	§1115 only brings postpetition property into the estate; prepetition property remains subject to §541 and the absolute priority rule still applies to prepetition property	Held: Absolute priority rule continues to apply to prepetition property in individual Chapter 11 cases; §1115 covers postpetition property only, so debtor may not retain prepetition property without satisfying creditors’ priorities
Whether the plan improperly treats the Elliotts’ secured claim (antimodification)	Heritage implies modification not permitted because of antimodification protections for residence-secured claims	Elliotts waived antimodification by consenting to altered terms (extension), so claim is impaired and modifiable by agreement	Held: Because the Elliotts agreed to altered treatment, their claim was impaired and could be modified/treated under the plan; creditor consent can waive antimodification protections
Whether the plan failed to commit debtor's disposable income	Heritage contended debtor’s income should be measured differently (tax return vs. six‑month average) and expenses are unreasonable	Bankruptcy Court calculated current monthly income and expenses; debtor argued plan complied	Held: Court did not decide this issue on appeal because the absolute priority holding made disposable income inquiry unnecessary; remanded for new confirmation hearing

Key Cases Cited

Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (Sup. Ct. 1988) (discusses absolute priority rule and individual debtors)
Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (Sup. Ct. 2015) (finality of certain bankruptcy orders)
In re Maharaj, 681 F.3d 558 (4th Cir. 2012) (§1115 augments §541 by adding postpetition property)
In re Lively, 717 F.3d 406 (5th Cir. 2013) (continued application of absolute priority rule in individual Chapter 11)
Dill Oil Co. LLC v. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir. 2013) (statutory interpretation of §1115 and absolute priority rule)
Ice House Am., LLC v. Cardin (In re Cardin), 751 F.3d 734 (6th Cir. 2014) (interpreting §1115 to cover postpetition property)
N. Pac. R. Co. v. Boyd, 228 U.S. 482 (Sup. Ct. 1913) (historical origin of absolute priority principle)
Hamilton v. Lanning, 560 U.S. 505 (Sup. Ct. 2010) (statutory interpretation caution against eroding past practice)