Dill Oil Co., LLC v. Stephens (In re Stephens)

Appellate Case Number 11-6309 (Bankruptcy Case No. 10-14028-WV), Document Number 01018983694, entered on January 15, 2013.
The 10th Circuit reversed the bankruptcy court's ruling that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) abrogated the absolute priority rule (APR), in its entirety as to individual Chapter 11 debtors. Section 1129(b)(2)(B)(ii) of the Bankruptcy Code codifies the APR by generally providing, among other things, that in the event of an attempted "cram down" of a Chapter 11 plan due to a debtor's failure to obtain acceptance of the plan by each class of claims or interests, the debtor may not retain any of the debtor's property (that is, "property of the estate") under the plan. Following BAPCPA, this section now adds the following proviso: "except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under Section 1115 ...." Section 1115 is a provision also added by BAPCPA, which adds, at sub-parts (a)(1) and (a)(2), certain post-petition property to the definition of "property of the estate" in Section 541 of the Bankruptcy Code, and makes reference to Section 541 in the process. Many courts have interpreted this new provision broadly, concluding that its reference to Section 541 "incorporates and supercedes" Section 541, meaning that Section 1115 encompasses all property of an individual's Chapter 11 estate, not simply the new, post-petition property added by sub-parts (a)(1) and (a)(2), and Section 1129(b)(2)(B)(ii) therefore abrogates the APR in its entirety in individual Chapter 11 cases. Other courts have adopted a narrower interpretation, concluding that only the post-petition property added by Section 1115 is exempt from the APR. While acknowledging that the correct interpretation of this statute is unclear - as Section 1115 can plausibly be ready either way and the case law is divided - the 10th Circuit adopted the narrow approach, and reversed the bankruptcy court's confirmation order. The 10th Circuit based its decision on the fact that a repeal of the APR, in its entirety in individual Chapter 11 cases, would be a drastic change in the law, and "the statutory language and legislative history lack any clear indication that Congress intended to erode a pillar of creditor bankruptcy protection." In the absence of compelling evidence that such a drastic change was intended, the Court declined to interpret an implied repeal into the language of Sections 1115 and 1129(b)(2)(B)(ii). Before reaching the merits of the appeal, the Court considered and rejected the Debtors' argument that the appeal should be dismissed under the doctrine of "equitable mootness" because their plan had been substantially consummated by the time the appeal reached the 10th Circuit. The Court rejected this argument based on its findings that (1) non-party creditors would not likely be adversely affected by a reversal of the bankruptcy court's confirmation order, and, more importantly, (2) the case involved a "matter of public importance" for which "there is no controlling decision" in the 10th Circuit, and the "private and public interest in resolving this legal issue" outweighed any factors in favor of dismissing the appeal under the "equitable mootness" doctrine.
Procedural context: 
Appeal to the 10th Circuit Bankruptcy Appellate Panel (BAP) from an order confirming a Chapter 11 plan of reorganization proposed by individual debtors, entered by the United States Bankruptcy Court for the Western District of Oklahoma. The BAP sua sponte issued a certification of final order for direct appeal to the 10th Circuit Court of Appeals, based on its determination that the case presents a question of public importance for which there is no controlling law. Decision by the 10th Circuit.
Debtors Arvin and Karen Stephens filed for Chapter 11 bankruptcy protection and proposed a plan of reorganization, which failed to pay, in full, the unsecured claim of certain creditors (the Dills), which held approximately 96% of the claims of one of the creditor classes (Class 8). The Dills (and Class 8) rejected the plan, but the plan was nonetheless confirmed under the "cram down" mechanism of 11 U.S.C. Section 1129(b). The Dills argued that the plan could not be confirmed because it violated the "absolute priority rule" (APR), which bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full. Under the proposed plan, the Debtors would retain possession and control of their property. The bankruptcy court rejected the Dills' argument based on its interpretation of the Bankruptcy Abuse Prevention and Consumer Protection Act, which it held abrogated the APR, in its entirety as to individual Chapter 11 debtors.
Kelly and Holmes, Circuit Judges, and William J. Martinez, District Judge (sitting by designation). Opinion by Judge Kelly.