MEMORANDUM DECISION AND ORDER SUSTAINING THE OBJECTION BY THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO CONFIRMATION OF THE DEBTOR’S AMENDED CHAPTER 11 PLAN BY MEANS OF CRAMDOWN
THIS MATTER came before the Court on June 5, 2002 upon one of the objections raised by the Official Committee of Unsecured Creditors (the “Committee”) to the approval of the Debtor’s Amended Disclosure Statement. The specific issue before the Court (the “Cramdown Issue”) concerns the Debtor’s ability, as a matter of law, to confirm his Amended Plan of Liquidation (the “Debtor’s Plan”) by means of cramdown under 11 U.S.C. § 1129(b)(2)(B)(ii) without contributing all of his exempt property under such Plan.
The Court, considering the arguments of the parties, the Memorandum of Law by the Committee in Support of Its Objection to Confirmation of The Debtor’s Amended Chapter 11 Plan by Means of Cramdown Under Section 1129(b) of The Bankruptcy Code, the Memorandum of Law filed by the Debtor in connection with the Cram-down Issue, the record and pleadings filed in this case and otherwise being fully advised in the premises, hereby makes the following findings of fact and conclusions of law.
FINDINGS OF FACTS
On March 2, 2001, the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The Committee was formed by the Office of the United States Trustee on April 9, 2001. Thereafter, the meeting of creditors, pursuant to 11 U.S.C. § 341, was held on April 19, 2001.
Under the Debtor’s Plan, the Debtor proposes to liquidate all of his non-exempt assets for the benefit of his creditors and at the same time partially retain his interests in several itеms of valuable exempt property, including without limitation, a mansion on the ocean in Palm Beach, Florida valued on the Debtor’s schedules at $40 million, a collection of artwork valued on the Debtor’s schedules at approximately $11 million, a valuable collection of antique furniture and an interest in a corporation
Under the Debtor’s Plan, the Debtor would retain the Exempt Property, but would contribute the proceeds from a portion thereof to the unsecured creditors, the amount of which depended on certain conditions under the Debtor’s Plan. The Cramdown Issue arises because the Debt- or’s Plan did not provide that the Debtor would contribute all of the Exempt Property to pay unsecured creditors.
On March 13, 2002, the Court conducted a hearing on the approval of the competing disclosure statements filed by the Debtor and the Committee. In connection with such hearing, the Committee filed an extensive objection to the Debtor’s disclosure statement. The Debtor also filed an extensive objection to the Committee’s disclosure statement. In the Committee’s objection, the Committee raised several issues concerning the legal structure of the Debtor’s Plan and argued that because the Committee believed that the Debtor’s Plan was not confirmable on its face, the Debt- or’s disclosure statement should not be approved.
At the March 13, 2002 hearing, the Court resolved certain of the objections raised by both parties to the other’s disclosure statement, but instructed the parties to submit legal memoranda on the Cram-down Issue, namely, whether the Debtor, who does nоt propose to pay all of his unsecured creditors in full under the Debt- or’s Plan, was able, as a matter of law, to confirm the Debtor’s Plan, which is a plan of liquidation, by means of a cramdown under Section 1129(b) of the Bankruptcy Code over a dissenting class of unsecured creditors while at the same time retain some or all of the Exempt Property.
In its pleadings on the Cramdown Issue, the Committee objected to the Debtor’s Plan on the ground that it violated the absolute priority rule under the Bankruptcy Code. The Committee argues that the Debtor’s attempt to retain Exempt Property under the Debtor’s Plan is not authorized by the plain language of the Bankruptcy Code, namely Section 1129(b)(2)(B)(ii), or the case law thereunder unless the Debtor is able to obtain the acceptance of the class of unsecured creditors under the Debtor’s Plan. 1 Thus, according to the Committee, the Debtor cannot confirm the Debtor’s Plan by means of cramdown under Section 1129(b)(2)(B)(ii) of the Bankruptcy Code unless he contributes all of the Exempt Property to the Debtor’s Plan for the benefit of creditors on the basis that the Debtor’s retention of any property (even Exempt Property) would constitute a violation of the absolute priority rule.
The Debtor disagrees with the Committee and argues that there is amрle case law supporting the proposition that a debt- or may retain exempt property via the cramdown provisions of the Bankruptcy Code. The Debtor also relies on bankruptcy policy, arguing that an unfavorable ruling would deny individual debtors effective relief under Chapter 11.
CONCLUSIONS OF LAW
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b),
In order to obtain confirmation of a Chapter 11 plan, a debtor must meet, the requirements of 11 U.S.C. § 1129(a). In connection therewith and subject to the exception contained in Section 1129(a)(8), all impaired classes under the plan must vote in favor of and accept the plan. In the event one impaired class votes to reject the plan, then the debtor is left with the alternative of achieving confirmation of the plan through the means of the cram-down provisions of 11 U.S.C. § 1129(b). In order to achieve a cramdown against a dissenting class of unsecured creditors, a debtor must satisfy the “fair and equitable” requirement of Section 1129(b) (2)(B)(ii) as to such dissenting class of unsecured creditors. This section provides:
With respect to a class of unsecured creditors' — •
(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 proрerty.
(emphasis added). As such, if unsecured creditors do not receive payment in full on their allowed claims, then no holder of a claim or interest junior to those of the unsecured creditors may retain any property under the plan. This provision is commonly referred to as the “absolute priority rule.”
There can be no question that the Debtor in this case is a “holder of an interest that is junior” to the claims of unsecured creditors. The Debtor owns an interest in the Exempt Property.
See In re Unruh v. Rushville State Bank,
I. The Plain Language of § 1129(b)(2)(B)(ii)
As a result of the above, the core dispute in this matter centers on whether the term “any property” as used in Section 1129(b) (2) (B) (ii) encompasses property which is “exempt property.” The Committee contends that the statutory section is clear and unambiguous on its face and therefore should be afforded its plain meaning. • The Court agrees.
The interpretation of the Bankruptcy Code first begins with the language itself.
See In re Griffith,
Here, the Court looks no further than the words “any property.” The term “property,” while not defined under the Bankruptcy Code, is meant to be broad in scope and all encompassing.
See Norwest Bank of Worthington v. Ahlers,
485 U.S.
Notwithstanding this lack of distinction, the Debtor would have this Court conclude that Congress intended to make a distinction between exempt and non-exempt property in Section 1129(b)(2)(B)(ii) when it chose to use the word “property.” The Debtor’s position is simply not supported by the four corners of the text in Section 1129(b)(2)(B)(ii).
See In re Fross,
In the context of an individual Chapter 11 proceeding, there is no dispute that if the Debtor were to retain certain
property of the estate,
i.e., non-exempt property, then the Debtor would be in violation of the absolute priority rule if the dissenting class of unsecured creditors are not paid in full because he would be the holder of a “junior interest” retaining property at the expense of unsecured creditors.
See Ahlers,
Had Congress intended to exclude exempt property from the effect of the “absolute priority rule,” then the term “property” would not have been used under Section 1129(b)(2)(B)(ii), rather Congress would have used “non-exempt property” or “property of the estate.” Congress could also have usеd any other qualifying word to indicate its desire to provide a distinction between exempt and non-exempt property. For example, Congress could have referenced 11 U.S.C. § 522 if it meant to exclude exempt property. Instead, Section 1129(b)(2)(B)(ii) uses the term “property” and such term is modified by the word “any,” a word which, by any definition, sets no boundaries. “Any” does not refer to certain things and not others. “Any” means “every” and “all.” It is unlimited. By having the word “any” modify “property,” there is no reason, or implication, whatsoever to support the Debtor’s argument that Section 1129(b)(2)(B)(ii) is limited to non-exempt assets.
In fact, the Supreme Court in
Bank of America National Trust and Savings
Assoc.
v. 203 North LaSalle Street Partnership,
II. Structure of the Bankruptcy Code
In drafting the Bankruрtcy Code, Congress was meticulous with its choice of words. This is demonstrated through the use of the phrase “property of the estate,” which is repeatedly used throughout the Bankruptcy Code. In Sections 541, 1207 and 1306 of the Bankruptcy Code, all appropriately entitled “Property of the Estate,” Congress defined what it meant by the term “property of the estate.” As such, Congress leaves no doubt that a reader of the Bankruptcy Cоde must refer to these sections whenever “property of the estate” is used in other provisions.
The Supreme Court in
203 North LaSalle Street Partnership
was faced with a similar task of statutory construction in interpreting Section 1129(b) (2) (B) (ii). There, the Supreme Court had to determine the meaning of the term “on account of.” Disagreeing with the debtor’s reading that “on account of’ means “in exchange for,” the Supreme Court stressed that the phrase “in exchange for” already appears in Section 1123(a)(5)(J). The Supreme Court stated: “It is unlikely that the drafters of legislation so long and minutely contemplated as the 1978 Bankruptcy Code would have used two different forms of words for the same purpose.”
LaSalle,
III. Legislative History
While Chapter 11 is a publicly perceived form of bankruptcy relief for companies, Congress made Chapter 11 equally avаilable for individuals. Therefore, Congress was fully aware of the impact that the “absolute priority rule” may have on an individual debtor at the time Section 1129(b)(2)(B)(ii) was drafted. Only an individual debtor can exempt property. Had Congress intended to protect an individual’s right to exempt property, the “absolute priority rule” would have been made inapplicable to such property.
The foregoing result is further bolstered by the legislativе history behind the “absolute priority rule.”
In re Fross
provides an excellent discussion on this topic, illustrating how and why the provisions of Section 1129(b)(2)(B)(ii) were enacted by Congress.
Fross
concluded that Congress’ decision in 1978 in
making
the “absolute priority rule” applicable to both individual and cоrporate Chapter 11 cases was not inadvertent or a mere scrivener’s error. Citing to
Dewsnup v. Timm,
Although Fross is an unpublished opinion, the analysis set forth in that decision is extensive and compelling. If this Court were to conduct a similar investigation on the history of the “absolute priority rule,” the result would be the same. The language of Section 1129(b)(2)(B)(ii) is plain, clear and unequivocal, and legislative history does not suggest otherwise.
IV. The Debtor’s Case Law Supporting His Argument.
The Debtor has cited five cases in support of his contention that the “absolute priority rule” does nоt extend to exempt property.
See In re Haas,
Of the five cases, three were decided by the Honorable David A. Scholl, U.S. Bankruptcy Judge for the Eastern District of Pennsylvania. The fact that Judge Scholl in three separate occasions stated that the “absolute priority rule” only applies to a debtor’s retention of non-exempt assets does not make the Debtor’s argument in this case any more persuasive or correct. In fact, the issue at hand was only addressed and discussed at some length by Judge Scholl in Egan. Judge Scholl’s statements in Harman and Custer were purely dicta, involving conclusory statements. Harman and Custer add nothing to the analysis of whether the term “any property” incorporates exempt property.
The same can be said of Rocha, which merely states: “[S]ince the unsecured creditors have rejected the Plan, the Debtors must pay their claims in full, before they retain any non-exempt property.” The issue of exempt property was not before the Court in Rocha, mainly becаuse the Chapter 11 debtor there sought to retain his interest in non-exempt property, as opposed to exempt property. As a result, Rocha is not persuasive authority.
What remains are the discussions in
Egan
and
Haas.
There, both courts provide the same explanation by focusing on the nature of exempt property. According to them, because the retention of exempt property is an absolute right already afforded to a debtor by way of 11 U.S.C. § 522, the “absolute priority rule” does not come into play. Essentially, the argument is that Section 522 trumps Section 1129(b)(2)(B)(ii).
See Egan,
What
Egan
and
Haas
fail to recognize, however, is that Section 522 is a provision of general applicability pursuant to 11 U.S.C. § 103. It is a canon of statutory construction that provisions of general applicability within a statute prevail, unless they are contradicted by or are inconsistent with a specific provision.
See In re McKeon,
Furthermore, the courts in Egan and Haas did not undertake the thorough analysis that was conducted in Fross and Yas-parro. For whatever reason, perhaps because the issue was not hotly contested by the parties, Egan and Haas fall short, in particular failing to address the plain meaning of “any property” in Section 1129(b)(2)(B)(ii).
As result of the foregoing, the Court will follow the holdings of those cases cited by the Committee. The Court finds them to be more persuasive in their reasoning.
At the hearing, the Debtor also argued that his position that he could retain the Exempt Property in the contеxt of a cram-down was supported by the provisions of Section 1128(c) of the Bankruptcy Code. Section 1123(c) provides that “[i]n a case concerning an individual, a plan proposed by an entity other than the debtor may not provide for the use, sale, or lease of property exempted under section 522 of this title, unless the debtor consents to such use, sale, or lease.” The Court disagrees. In fact, the Court finds that this рrovision actually supports the position asserted by the Committee in that Congress was clearly aware of the issue of exempt versus non-exempt property under the Bankruptcy Code for an individual debtor and as such could have qualified the term “property” in Section 1129(b)(2)(B)(ii) if it chose to do so.
V. Consequences of the Absolute Priority Rule
Under limited circumstances, the plain meaning of a statute controls unless the language leads to an absurd result.
See In re Fretz,
Chapter 7 relief is just as effective as providing adequate relief to a debtor in financial straits, although certain debtors would prefer to proceed under Chapter 11 to retain certain property. It is well established that a discharge of one’s debts is a privilege, not a right afforded by Congress.
See Matter of Juzwiak,
Just because the Debtor in this case is unhappy with the plain meaning of the “absolute priority rule,” this Court should not conclude in favor of an absurd result. As disсussed, Congress was well aware of the distinction between exempt and nonexempt property when drafting Section 1129(b) (2) (B) (ii). If the Court were to rewrite the Code every time a debtor was dissatisfied with a specific provision of the Bankruptcy Code, there would be no Bankruptcy Code.
ORDER
In light of the foregoing, and with the Court being otherwise fully advised in the premises, it is hereby ORDERED AND ADJUDGED that:
1. The Committee’s Objection in relation to the Cramdown Issue is SUSTAINED.
2. The disclosure statement in relation to the Debtor’s Plan is Denied without prejudice.
3. The Debtor cannot confirm a Chapter 11 plan by means of cramdown over a dissenting class of unsecured creditors under Section 1129(b)(2)(B)(ii) of the Bankruptcy Code unless the Debtor’s Plan provides for a contribution of all of the Exempt Property to and for the benefit of unsecured creditors.
Notes
. Because of the composition of the Committee, whose members potentially hold allowable unsecured claims in excess of $210 million, and the pendency of the Committee’s plan of liquidation, it is unlikely that the Debt- or will obtain the acceptance of the class of unsecured claims, which is an impaired class under the Debtor's Plan. Therefore, confirmation of the Debtor’s Plan is probably only possible through the cramdown provisions of the Bankruptcy Code.