25 No 1 J Bankr L And Prac NL Art 2

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25 No. 1 J. Bankr. L. & Prac. NL Art. 2

Norton Journal of Bankruptcy Law and PracticeVolume 25, Issue 1

February 2016Norton Journal of Bankruptcy Law and Practice

Making Chapter 11 Work for Individual Debtors, While Ensuring Fairness to Creditors

By Janine Lee *

Table of Contents

I. INTRODUCTIONII. CONGRESSIONAL INTENT TO FOSTER REPAYMENT OF DEBTSIII. SYMMETRY BETWEEN CHAPTER 11 AND CHAPTER 13 PROVISIONSIV. CONGRESS SHOULD ABROGATE THE ABSOLUTE PRIORITY RULE FOR INDIVIDUALS

A. Divergent Views of the Absolute Priority RuleB. The Narrow View and AnalysisC. The Broad View and AnalysisD. The Friedman and Shat DecisionsE. Abrogation of the Absolute Priority Rule Facilitates the Goals of BAPCPA

V. AMENDMENT TO BANKRUPTCY CODE SECTION 1129(a)(15)VI. COURTS SHOULD INTERPRET A REJECTING VOTE AS AN OBJECTION OR FEDERAL RULES

OF BANKRUPTCY PROCEDURE 3020(b) SHOULD BE AMENDED TO SO PROVIDEA. Bankruptcy Courts Should Interpret Rejecting Votes as ObjectionsB. The United States Supreme Court Should Amend FRBP 3020(b)

VII. CONCLUSION

I. Introduction

Debtors who are individuals may be unable to obtain meaningful relief in bankruptcy. 1 Chapter 7 does not afford meaningfulrelief to some individual debtors because it often does not enable them to retain nonexempt property, which may be essential for

a fresh start, such as the assets they employ in a small business. 2 Although Chapter 13 provides for restructuring of a debtor'sdebts and allows for the debtor's retention of some essential property, certain debtors do not qualify for relief under Chapter

13 because of the debt limits it imposes. 3 As a result, many debtors who otherwise would qualify for a Chapter 13 must seek

relief in a Chapter 11 bankruptcy case. 4

Chapter 11 may also fail to provide relief for several debtors because of the application of the deeply rooted absolute priority

rule (“APR”), exclusive to Chapter 11 cases. 5 The APR precludes restructuring the debtor's debts unless either unsecuredcreditors are paid in full through the plan of reorganization or the holder of any claim or interest that is junior to the unsecuredclaims, including the equity interest of the debtor, will not receive anything under the plan on account of its junior claim or

interest. 6 In 2005, in connection with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),

Congress amended sections 1129(b)(2)(B)(ii) and 1115 of the Bankruptcy Code (the “Code”), pertaining to the APR. 7 Now,under section 1129(b)(2)(B)(ii), even if the plan does not provide for full payment of unsecured creditors' claims, an individual

Chapter 11 debtor may retain property included in the estate under section 1115. 8 Section 1115 may be read to include the

property specified by section 541(a)(1), which extends to “all legal and equitable interest of the debtor as of the petition date.” 9

http://www.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000611&cite=11USCAS1129&originatingDoc=Iaea7ac85d5fb11e59bbbea3847ea9119&refType=LQ&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)

http://www.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000611&cite=USFRBPR3020&originatingDoc=Iaea7ac85d5fb11e59bbbea3847ea9119&refType=LQ&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)











Prior to these 2005 amendments, in order for a Chapter 11 debtor to confirm a plan of reorganization to which an unsecured

creditor class objected, the plan had to satisfy the APR. 10 In order to satisfy the APR, the plan had to meet the “fair and

equitable” requirement under the Code. 11 This type of nonconsensual confirmation is generally referred to as a “cramdown

plan.” 12 Before 2005, the APR applied to both corporate and individual debtors alike. 13 Thus, Chapter 11 debtors only had touse assets that were property of the estate on the petition date to fund their plan of reorganization, but were not required to devote

any of their post petition earnings to pay unsecured creditor's claims. 14 This included virtually all of the debtor's pre-petitionassets, including pre-petition business assets that the individual debtor needed to continue in business. Under the text of the 2005

amendments, however, it is unclear precisely what property an individual Chapter 11 debtor must devote to his plan. 15 Mostcourts that have addressed the issue have held that the APR still applies to individual debtors, thereby requiring such debtors to

devote most of their pre-petition and post-petition assets to payment of unsecured claims. 16 The practical implication of these

decisions is that individual Chapter 11 debtors often cannot retain pre-petition property essential to stay in business. 17

Thus, these BAPCPA amendments left many individual Chapter 11 debtors without relief under Chapter 11. 18 Afterconfirmation of a Chapter 11 plan, many individual debtors have few assets with which to move forward and obtain a fresh

start. 19 As the economy continues to rebound, many individuals may still seek to reorganize under Chapter 11 in order torestructure their debts and retain business assets and properties threatened by foreclosure. The application of the APR, however,

may impede the ability of such debtors to retain valuable assets, which are essential to a successful reorganization. 20

In fact, even if a debtor is able to make payments on secured assets, the application of the APR may allow unsecured creditorsto thwart reorganization. If unsecured creditors are not paid in full or refuse to vote in favor of a plan, they can effectively blockconfirmation, unless the debtor's equity is extinguished, despite a debtor's efforts, ability, and intention to make significant andacceptable payments to secured creditors. Consequently, unsecured creditors would prevent debtors from avoiding foreclosureon their secured debts. In such a situation, a Chapter 11 case would, in essence, turn into a case of the tail wagging the dog.

This problem calls for corrective legislation. In that connection, there are two important opinions issued by courts within the

Ninth Circuit, In re Friedman and In re Shat, which provide a template through which Congress can remedy this problem. 21

Specifically, Friedman and Shat illuminate the symmetry Congress created in 2005, when it amended provisions of the Code

pertaining to individual Chapter 11 debtors, by mirroring the provisions for Chapter 13 debtors. 22 This symmetry is significantbecause it provides a model upon which the Code may be further amended, thereby removing this “absolute priority” obstacleto confirmation for individual Chapter 11 debtors.

This is not, however, the end of the matter. In Zachary v. California Bank & Trust, the Ninth Circuit Court of Appeals notedthe “heavy penalty” an absence of the APR could impose upon unsecured creditors who are “crammed down” by individual

chapter 11 debtors. 23 Congress intended that the Bankruptcy Code would (1) provide an honest and unfortunate debtor with

a fresh start; and (2) protect creditors from abuse of the bankruptcy system by debtors. 24 Therefore, while the Code shouldpermit individual debtors to retain valuable pre-petition assets, unsecured creditors also deserve payment of their debts to theextent a reorganizing debtor has available income to pay them.

Regarding the treatment of unsecured creditors' claims, the 2005 amendments also added a provision pertaining to an individual

Chapter 11 debtor's obligation to make plan payments to such creditors. 25 Under section 1129(a)(15), when the Chapter 11debtor is an individual and the holder of an allowed unsecured claim objects to confirmation, the court may confirm a plan only





if the debtor either (a) pays the unsecured claim in full or (b) distributes projected disposable income during the entire plan

payment period, or a five-year period, “whichever is longer.” 26

For an unsecured creditor to invoke its right under section 1129(a)(15), however, it must do more than simply cast a ballotrejecting the debtor's plan—it must affirmatively oppose the plan by filing an objection and asserting an argument predicated on

a provision of the Code. 27 Because unsecured creditors often receive only pennies on the dollar from a plan of reorganization,it may not be financially prudent for such creditors to hire legal counsel to object to a debtor's proposed plan. This can result ina potential windfall to individual debtors, as the failure of an unsecured creditor to object to confirmation will not trigger theapplication of section 1129(a)(15), which in turn, would allow a debtor to confirm a Chapter 11 plan without compliance withthe APR or paying any of the debtor's disposable income to unsecured creditors. However, debtors often possess the meansto repay a greater portion of their debts than pennies on the dollar. This provision, therefore, does not adequately protect theinterests of unsecured creditors.

This article urges that Congress amend the Code (a) to abrogate the APR for individual debtors; and (b) to allow either a rejectingvote or a formal objection to the plan to trigger the disposable income requirement. Alternatively, this article suggests thatbankruptcy courts, even without such amendments, should determine that an unsecured creditor's rejecting ballot is sufficient toinvoke the disposable income provision of section 1129(a)(15). Lastly, the United States Supreme Court should amend FederalRule of Bankruptcy Procedure 3020(b), to allow a rejecting ballot to constitute an objection. These changes would enableindividual Chapter 11 debtors to reorganize successfully by retaining valuable pre-petition assets, and would provide fair andequitable treatment for unsecured creditors by making it easier and less costly, for such creditors to invoke the disposable

income requirement. 28

Part II explores congressional intent to require individual debtors who are financially able, to repay at least a portion of theirdebts. Part III outlines the symmetry BAPCPA created between provisions pertaining to individual Chapter 11 debtors andChapter 13 debtors. Part IV discusses the APR, examines Friedman and Shat, and argues that an abrogation of the APR for

individual Chapter 11 debtors would help such debtors to successfully reorganize and obtain a fresh start. 29 Part V recommendsan amendment to section 1129(a)(15) and proposes that an amendment allowing either a rejecting vote or a formal objection totrigger the disposable income requirement would be in the best interest of unsecured creditors. Part VI suggests that bankruptcycourts, even without such amendments, should determine that an unsecured creditor's rejecting ballot is sufficient to invokethe disposable income provision. Alternately, the United States Supreme Court should amend Federal Rule of BankruptcyProcedure 3020(b) to allow a rejecting ballot to constitute an objection under the Code.

II. Congressional Intent to Foster Repayment of Debts 30

In 2005, Congress enacted The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA. 31 As thetitle indicates, Congress sought to reform the Code with the laudable goals of preventing the abusive use of the Code, while

protecting consumers seeking relief under its provisions. 32 Accordingly, Congress sought to require debtors, who possessed

the means to do so, to repay at least a portion of their debts. 33

Congressional attempts to require debtors, who are financially able, to repay their debts, go as far back as the 1970's. In 1973,the Commission on the Bankruptcy Laws of the United States, while endorsing the concept that repayment plans should befostered, ultimately concluded, “[F]orced participation by a debtor in a plan requiring contributions out of future income has so

little prospect for success that it should not be adopted as a feature of the bankruptcy system.” 34 As a result, the Bankruptcy












Reform Act of 1978 maintained that a debtor's decision to choose relief based on repayment to creditors should be “completely

voluntary.” 35

The 97th Congress revisited the issue in 1982, when the House Judiciary Committee held several oversight hearings on personal

bankruptcies. 36 A topic discussed at the hearings was a study conducted at Purdue University, which estimated that 29 percent

of consumer debtors were able to pay 100 percent of their debts over a five-year period. 37

Likewise, during the late 1990's, several bills were proposed in Congress, with the goal of requiring debtors who were able,

to repay portions of their debts. 38 In 1997, House members introduced the “Responsible Borrower Protection Bankruptcy

Act” (H.R. 2500), which set out a formula determining a debtor's ability to repay his debts. 39 In 1998, House membersintroduced The Bankruptcy Reform Act of 1998 (H.R. 3150), which incorporated much of H.R. 2500 and ultimately became

the foundation for the provisions reflected in BAPCPA. 40

In March 1998, the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee began formal

consideration of H.R. 3150. 41 The Subcommittee examined the results of studies that sought to quantify the percentage of

Chapter 7 debtors who were able to repay some portion of their debts. 42 On June 10, 1998, the House considered and ultimately

passed H.R. 3150, as amended. 43 The same day, the Clinton Administration issued a statement opposing the bill partly due tothe “rigid and arbitrary means test to determine whether a debtor could file to obtain a discharge of most debts under Chapter

7 or would be required to establish a repayment plan under Chapter 13 rules.” 44

On February 24, 1999, the House introduced the Bankruptcy Reform Act of 1999 (H.R. 833), which primarily consisted of text

from H.R. 3150. 45 The Subcommittee conducted hearings on H.R. 833 in March 1999, which again considered the results of

studies evaluating debtors' ability to repay their debts. 46 In May 1999, the House considered and passed H.R. 833 and once

again, the Clinton Administration expressed opposition to the bill. 47

Then in February 2005, the Senate introduced the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (S.

256). 48 The Senate passed S. 256 on March 10, 2005. 49 The House passed the bill in April 2005. 50 President George W.

Bush signed BAPCPA into law on April 20, 2005. 51 At the signing ceremony, President Bush stated:

Our bankruptcy laws are an important part of the safety net of America. They givethose who cannot pay their debts a fresh start. Yet bankruptcy should always be a lastresort in our legal system. If someone does not pay his or her debts, the rest of societyends up paying them. In recent years, too many people have abused the bankruptcylaws. They've walked away from debts even when they had the ability to repay them(emphasis added).

… Under the new law, Americans who have the ability to pay will be required to pay back at least a portionof their debts (emphasis added).

….

America is a nation of personal responsibility where people are expected to meet their obligations. We'realso a nation of fairness and compassion where those who need it most are afforded a fresh start. The act




of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud,

and bring greater stability and fairness to our financial system (emphasis added). 52

As the prior legislative history highlights, it has long been a goal of Congress to hold debtors accountable to repay their debtsto the extent they are able, while still affording debtors a fresh start. While there is no absolute priority requirement in Chapter13, however; due to the perceived ambiguity in sections 1129(b)(2)(B)(ii) and 1115, Congress failed to provide clear guidance

as to what property an individual Chapter 11 debtor must devote to plan payments. 53 Importantly, as highlighted in Friedmanand Shat, BAPCPA also created symmetry between many requirements for individual debtors under Chapters 11 and 13, which

provides a blueprint for further amendments that would clarify the repayment obligation of individual Chapter 11 debtors. 54

III. Symmetry Between Chapter 11 and Chapter 13 ProvisionsA number of academic articles support the result reached in Friedman and Shat, which point to the congruence BAPCPA created

between individual debtors under Chapters 11 and 13. 55 These similarities support the assertion that Congress, at least in part,desired to treat individual Chapter 11 debtors like Chapter 13 debtors; they also create a logical model upon which Congresscan further amend the Code. Thus, a brief overview of these changes is relevant as a basis for suggesting further congressionalaction that will result in treating individual debtors in Chapter 11 similarly as they are treated in Chapter 13 cases.

Prior to 2005, individual Chapter 11 debtors could reorganize “under more favorable terms than those available to chapter 13

debtors.” 56 For instance, upon objection of a trustee or allowed unsecured claim holder in a Chapter 13 case (where a trusteeis automatically appointed), Chapter 13 debtors must devote post-petition disposable income, including salary and earnings, to

their payment plans in order to satisfy creditor claims. 57 Prior to BAPCPA, in a Chapter 11 case (where the debtor serves as hisor her own trustee), individual Chapter 11 debtors had to use assets that were property of the estate on the petition date to fund

their plan but were not required to use their post-petition income to pay creditors. 58 BAPCPA eliminated this inconsistencyby amending the definition of “property of the estate” under section 1115 to include post-petition salary and earnings and post-

petition property acquisitions. 59 This definition is almost indistinguishable from the definition of property of the estate under

section 1306 for Chapter 13 debtors. 60

Congress also added the disposable income test of section 1325(b)(2) to section 1129(a)(15), necessitating, as a requirementfor confirmation, that individual Chapter 11 debtors devote disposable income to fund repayment plans—and borrowed the

definition of disposable income in Chapter 11 from section 1325(b)(2). 61 Congress concurrently revised the mandatory contentsof a plan under section 1123(a)(8) for individual Chapter 11 debtors, to nearly mimic section 1322(a)(1), which requires Chapter13 debtors to “provide for the submission of all or such portion of future earnings or other future income of the debtor … as

is necessary for the execution of the plan.” 62

Likewise, Congress amended provisions pertaining to an individual Chapter 11 debtor's ability to amend his plan and obtaina discharge, which parallel the Code's provisions for Chapter 13 debtors. BAPCPA added section 1127(e) to the Code, whichpermits an individual Chapter 11 debtor to modify a plan of reorganization “at any time after confirmation of the plan but before

completion of payments under the plan …,” similar to a Chapter 13 debtor under section 1329(a). 63

Furthermore, prior to 2005, individual Chapter 11 debtors received a discharge of their debts upon confirmation of a plan. In2005, however, Congress added section 1141(d)(5)(A), delaying an individual Chapter 11 debtor's discharge until completion of

all plan payments, as is the case for Chapter 13 debtors. 64 Lastly, BAPCPA added section 1141(d)(5)(B), allowing individual











Chapter 11 debtors to receive a discharge for cause after confirmation but prior to completion of all plan payments, similar to

the hardship discharge permitted in Chapter 13 cases. 65

The symmetry BAPCPA created in these provisions is logical because although individual debtors often petition as wage earners

under Chapter 13, they must resort to Chapter 11 if their debts exceed the limits permitted by Chapter 13. 66 Why, then, shouldsuch debtors suffer from the implications of the APR, when the Code does not subject Chapter 13 debtors to the rule? Ananalysis of the APR will illuminate the necessity of amending the Code to abrogate the APR for individual Chapter 11 debtors,consistent with the treatment of debtors under Chapter 13.

IV. Congress Should Abrogate The Absolute Priority Rule for Individuals

A Chapter 11 debtor can confirm a consensual plan of reorganization by meeting the requirements of section 1129(a). 67 Theserequirements include that a debtor propose a plan in good faith, the debtor's post-petition domestic support obligations must

be current and the debtor must have filed all tax returns that are due. 68 In addition, the plan must meet the “best interest ofcreditors” test, which requires that creditors receive at least as much under the plan as they would receive through Chapter

7 liquidation. 69 Alternately, if the plan satisfies all requirements under section 1129(a), except for the voting requirement, a

court may still confirm the plan as long as it is, among other things, fair and equitable. 70 In order for a nonconsensual plan

to be fair and equitable, it must satisfy the APR. 71

A. Divergent Views of the Absolute Priority RuleSection 1129(b)(2)(B) provides that, a nonconsensual plan is fair and equitable (and thus confirmable) if:

(B) With respect to a class of unsecured claims—

(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property ofa value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain underthe plan on account of such junior claim or interest any property, except that in a case in which the debtor is anindividual, the debtor may retain property included in the estate under section 1115 …(emphasis added) (the “§

1129(b) Exception”). 72

The crux of the APR debate revolves around the scope of the § 1129(b) Exception. 73 Prior to 2005, “property of the estate” ofa Chapter 11 debtor did not include property or earnings acquired post-petition. Therefore, both an individual and a corporate

debtor under Chapter 11 could retain their post-petition assets, free of absolute priority preclusion. 74 The BAPCPA amendmentto section 1115 changed the status quo by adding an individual Chapter 11 debtor's post-petition earnings and post-petition

acquired property as property of the estate. 75 Thus, since the 2005 amendment, section 1115—property of the estate, reads: (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 butbefore the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and














(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed,

dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first. (emphasis added). 76

In light of this BAPCPA amendment, courts have struggled to decipher exactly what property is “included” in the estate of

an individual Chapter 11 debtor and what property such debtors “may retain” under section 1129(b)(2)(B)(ii). 77 Specifically,

courts are divided over whether section 1115 includes pre-petition property. 78 The majority of courts have held that Congressintended to allow individual Chapter 11 debtors to retain only post-petition earnings and post-petition property (the “narrowview”), while a minority have held that all of the debtor's pre-petition and post-petition property is excepted from the operation

of the APR (the “broad view”). 79

Courts that apply the broad view hold that the APR no longer applies to individual Chapter 11 debtors. This allows suchdebtors to retain pre-petition assets and still confirm a nonconsensual plan without providing payment in full to objecting seniorcreditors, including unsecured creditors. For instance, the broad view would allow individual debtors to retain business assets,allowing them to continue to generate much needed income to move forward after bankruptcy. Alternately, under the narrowview, the APR continues to apply to individual Chapter 11 debtors, resulting in the requirement that they devote both pre-petition and post-petition property to fund their plan of reorganization. This would result in the loss by many debtors of theirbusiness assets; thereby impeding their ability to generate the income necessary to fund a plan of reorganization and obtaina fresh start. Because an application of the APR can have devastating implications for individual debtors, while affordingunsecured creditors significant leverage and control in Chapter 11, the APR may present the greatest challenge to such debtors'

ability to reorganize successfully. 80

B. The Narrow View and AnalysisIn finding that the APR still applies to individual Chapter 11 debtors, some courts base their support of the narrow view onperceived ambiguity in the relevant statutes. For instance, in In re Maharaj, the Fourth Circuit Court of Appeals found the

language of section 1129(b)(2)(B)(ii) to be ambiguous and therefore reviewed the legislative history behind the amendment. 81

Maharaj concluded there “[I]s nothing in the BAPCPA's legislative history that suggests that Congress intended to repeal the

APR.” 82 Thus, arguments for the narrow view rest largely upon perceived ambiguity in the language of the statutes, the lack

of relevant legislative history, and the presumption against implied repeal. 83

In 2014, the United States Bankruptcy Court for the District of Connecticut, in the case of In re Lucarelli, adopted the narrow

view, concluding that BAPCPA modified, but did not eliminate the APR in individual Chapter 11 cases. 84 Lucarelli determinedthe language in the § 1129(b) Exception to be ambiguous, and based on relevant canons of statutory interpretation and the lack

of legislative history, concluded the broad view would result in an implied repeal of the APR. 85 Lucarelli, however, succinctlyilluminated the conundrum faced by individual Chapter 11 debtors, stating:

This holding should not be read as a dismissal of very real concerns and reservationsregarding the practical impact and implications of adopting the narrow view. Thecourt notes that when the real—world implications of each view are compared, thebroad view leads to a more practical and functional result in individual Chapter 11cases. The narrow view will have the practical effect of making confirmation of anonconsensual plan in an individual Chapter 11 case highly unlikely, if not virtuallyimpossible (emphasis added).








….

Indeed, the narrow view effectively requires an individual debtor whose liabilities exceed the Chapter 13debt limits, and whose creditors will not consent to less than full payment of their claims, to undergothe functional equivalent of a liquidation. Additionally, as is true in this case, debtors in many individualChapter 11 cases have a pre-petition ownership interest in a business that is their primary source ofincome. How can liquidating a debtor's primary source of post-petition disposable income—his business—be reconciled with maximizing the amount returned to creditors under Section 1129(a)(15)? It appears thatthe two cannot be reconciled in a way that maximizes the return to creditors and allows an individual debtor

to successfully reorganize under Chapter 11 in the absence of a consensual plan (emphasis added). 86

This poignant observation from Lucarelli underscores the incompatibility of the Code with regard to a practical application ofthe APR, especially in light of the disposable income requirement; and the resulting obstacle the APR places upon an individual

Chapter 11 debtor's ability to reorganize successfully. 87

A Sixth Court decision addressing the applicability of the APR to individual Chapter 11 debtors, while concluding that thenarrow view is the proper one, further highlights the impediment the APR presents to such debtors. In Ice House America, LLCv. Cardin, the Sixth Circuit Court of Appeals concluded the APR applies to individual Chapter 11 debtors, thus only allowing

the debtor to retain his post-petition property. 88

Charles Cardin filed a petition for reorganization under Chapter 11 of the Code three years after creditor Ice House America

(“IHA”) obtained several judgments against him. 89 Cardin's pre-petition property included his home, eight ice-making

machines (with which he conducted his business), a vehicle and other personal property. 90 As two of Cardin's assets were

over-secured, he had approximately $200,000 in equity at the time of filing his case. 91 Alleging the plan violated the absolute-priority rule, IHA objected to confirmation of the plan, because it would allow him to retain his pre-petition assets while failing

to pay IHA in full. 92

The Bankruptcy Court for the Eastern District of Tennessee eventually confirmed Cardin's plan, allowing him to retain most

of his pre-petition assets and to pay IHA $124,000 towards its claim of $1.5 million. 93 This resulted in a payment of less

than 10 cents on the dollar to IHA. 94 The main issue on appeal was whether BAPCPA abrogated the absolute-priority rule for

individual debtors. 95 Thus, the Sixth Circuit analyzed whether Cardin could retain his pre-petition and post-petition property

and still confirm a non-consensual plan under Chapter 11. 96

Ice House began its analysis by discussing the APR, describing the rule as “a cornerstone of equitable distribution for Chapter

11 creditors for over a century.” 97 The court ultimately concluded that the use of the word “includes” in section 1115 naturallyreads as ‘property that § 1115 takes into the estate’, as opposed to property that § 1115 contains in the estate,” (emphasis

added). 98 Because “[S]ection 1115 cannot take property into the estate that was already there,” the court determined that Section

1115 “[T]akes into the estate” only post-petition property. 99 Thus, the court held that when unsecured creditors are not fully

paid, an individual Chapter 11 debtor may only retain property acquired after commencement of the case. 100 Acknowledgingthe difficulty this conclusion presents, the Sixth Circuit observed:

[A]n individual debtor in Chapter 11 is hit by a “double whammy:” he must dedicate at least five years'disposable income to the payment of unsecured creditors, and—unlike a debtor in Chapter 13—is also










subject to the APR (and thus cannot retain any pre-petition property) if he does not pay those creditors in

full (emphasis added). 101

Like Lucarelli, Ice House also also highlighted the hardship an application of the APR presents to individual Chapter 11 debtors

under the narrow view, although it adopted that view. 102 The most recent circuit to address the APR issue was the NinthCircuit. In Zachary v. California Bank & Trust, the Ninth Circuit Court of Appeals overruled In re Friedman, holding, “the

BAPCPA amendments do not impliedly repeal the long-standing absolute priority rule.” 103 In Zachary, joint individual debtors

proposed a plan paying California Bank & Trust $5,000 on its claim of nearly $2,000,000. 104 The bankruptcy court sustained

the bank’s objection, holding that “the absolute priority rule still prevails” in individual chapter 11 cases post-BAPCPA. 105

The bankruptcy court then certified the debtors’ appeal directly to the Ninth Circuit. 106

Zachary discussed Friedman and Ice House, 107 noting the basis on which each court arrived at its conclusion regarding thescope of the § 1129(b) Exception; ultimately agreeing with Ice House. Zachary opined that the history of the APR “also

strongly supports the narrow view” because Congress previously repealed the APR, and then subsequently reinstated it. 108

Thus, Congress “demonstrate[ed] that when it intends to abrogate the rule, it knows how to do so explicitly.” 109

Zachary then addressed the language in Friedman and Shat, with regard to the congruence between chapter 11 and chapter

13 provisions in the Code. 110 “But,” the court concluded, “[i]f the BAPCPA amendments were intended to abrogate theabsolute priority rule for chapter 11 individual debtors, Congress could have achieved that goal in a far more straightforward

manner.” 111 For instance, Congress could have increased the debt limits for Chapter 13 debtors to “usher[] more individuals

into that regime,” had it so intended. 112 Notably, Zachary concludes by acknowledging the “double whammy” visited upon

individual chapter 11 debtors because of application of the APR. 113

In 2013, the Fifth Circuit Court of Appeals adopted the narrow view in the case of In re Lively, concluding that “[A] plainreading of § 1129(b)(2)(B)(ii) in light of § 1115(a) is that both provisions were adopted when BAPCPA was passed in order tocoordinate individual debtor reorganization cases to some extent with Chapter 13 cases, whose debt limit may throw debtors...

into a chapter 11 reorganization (emphasis added).” 114 As highlighted by Friedman and Shat, the narrow view is not consistentwith the coordination referred to by Lively between individual Chapter 11 and 13 cases, because Chapter 13 debtors are notsubject to the APR. By contrast, the broad view presents the only viable way to assuage the “double whammy” suffered by

individual Chapter 11 debtors, thereby improving their chance to obtain a fresh start. 115

C. The Broad View and AnalysisThe broad view, as promulgated by Friedman and Shat, is based on the notion that, by referring to section 1115 in section 1129(b)(2)(B)(ii), Congress intended to allow individual Chapter 11 debtors to retain the entire bankruptcy estate, thus abrogating

the APR for individual Chapter 11 debtors. 116 In arriving at the broad view, some courts rely on a plain-meaning analysis,concluding that the plain meaning of section 1115 and section 1129(b)(2)(B)(ii), when read together, is that the APR is not

applicable to individual Chapter 11 debtors. 117 Although the broad view is the minority view among the courts, it affordsa meaningful opportunity for individual Chapter 11 debtors to reorganize their debts, because it allows them to retain assets

necessary to continue their pre-petition business operations after confirmation. 118












In 2013, in In re O'Neal, the United States Bankruptcy Court for the Western District of Arkansas, adopted the broad view. 119

In support of the broad view, O'Neal stated:

The weakness of the narrow view is illustrated if one were to ask the question: “If Congress was notattempting to write out of individual Chapter 11 cases the APR, what was the purpose of all of the BAPCPAamendments to Chapter 11, including section 1115, which were obviously borrowed from Chapter 13?”Chapter 13 has no APR and would not be of much use if it did (emphasis added) ….

….

Section 1115 is written word for word like section 1306 and courts interpreting section 1306 have neverbifurcated this section into two species of property as the narrow view does in individual Chapter 11. Toread section 1115 and section 1129(b)(2)(B)(ii) as exempting only future income from the APR rendersineffective any practical application of section 1115, especially in light of the additional requirements of

section 1129(a)(15)(B). 120

Thus, O'Neal recognized the resulting deficiency in the application of the narrow view, especially in light of the symmetryBAPCPA created between individual debtors under Chapters 13 and Chapter 11.

D. The Friedman and Shat DecisionsFriedman and Shat are significant to the thesis of this article for two reasons: 1) they articulate the reasoning behind the broadview, which provides individual debtors with a means to retain assets necessary for a successful reorganization; and 2) theyhighlight the ways Congress created symmetry between individual Chapter 11 and 13 debtors under BAPCPA. This symmetryoffers a basis upon which Congress can further amend the Code to abrogate the APR with respect to individual debtors in

Chapter 11 cases. 121 Admittedly, In re Zachary overruled Friedman with regard to its holding that the APR does not apply in

individual chapter 11 cases. 122 Zachary likewise abrogated Shat for the same reason. 123 Nonetheless, the policy rationalesarticulated in Friedman and Shat remain a sound basis for the arguments advanced in this article.

In In re Shat, the United States Bankruptcy Court for the District of Nevada held that BAPCPA abrogated the APR for individual

Chapter 11 debtors. 124 As the basis of its holding, Shat relied largely on the rehabilitative aim of Chapter 11, the similaritiesBAPCPA created between individual debtors under Chapters 13 and 11, and the “relatively simple wording” of the relevant

provisions. 125

Martin and Anjanette Shat filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code on November 5, 2008. 126

At the time of filing, the Shats owned a dry cleaning business and several residential investment properties. 127 Like manyother homeowners in 2008, the Shats' properties were underwater and they were unable to make the payments required by the

mortgages encumbering their assets. 128

The Shats' plan established eight classes of creditors. 129 Of the eight classes, seven classes either accepted the plan or did

not vote. 130 The only member of Class 5, which consisted of unsecured creditors, to vote on the plan, rejected the Shats'

plan. 131 Under the plan, the Shats proposed to pay Class 5 creditors 10% of their allowed claims without interest over a five-

year period. 132 Upon confirmation, the plan allowed the debtors to retain their assets, subject only to outstanding liens not












modified by the plan. 133 The specific question before the court was whether the Shats could retain their dry cleaning business

assets without paying their unsecured creditors in full. 134

Following a discussion of the history of the BAPCPA amendments pertaining to individual Chapter 11 debtors, Shat concluded,“The template for this effort was to adopt and adapt as much of chapter 13 as possible with respect to individual debtors in

chapter 11 (emphasis added).” 135 The court then outlined the BAPCPA amendments aligning Chapter 13 and Chapter 11provisions, concluding, “What remains is a sort of hybrid chapter 13, in which many of the provisions of chapter 13 sit uneasily

in chapter 11.” 136

With regard to the language of the § 1129(b) Exception, Shat discussed whether “included” narrowly refers only to post-petitionincome from services, or broadly also includes all (pre-petition) property originally specified in section 541, in addition to post-

petition property and income. 137 The court pointed out that the addition of section 1115 was relevant, because a debtor cannot

retain “property or income that the Code requires to be committed to plan payments.” 138 Thus, a narrow reading [of section

1129(b)(2)(B)(ii)] “only covers the debtor's income starting five years after confirmation.” 139 This is so because for five yearsafter confirmation, the debtor is required to devote his post-petition income to plan payments and can only retain the money

necessary for reasonable living expenses. 140

In its discussion of statutory interpretation, Shat stated, “[S]tatutory language cannot be construed in a vacuum. It is afundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their

place in the overall statutory scheme.” 141 It is with this perspective the court noted:

Given the relatively straightforward reading of the statute supporting the broader reading, and the generalrehabilitative aim of chapter 11, the court understands the phrase, “in addition to the property specified in541” to mean that Section 1115 absorbs and then supersedes Section 541 for individual chapter 11 cases.This construction, in turn leads to the position that Section 1129(b)(2)(B)(ii)'s exception extends to allproperty of the estate, including such things as prepetition ownership interest of nonexempt property. Thisconclusion is supported by the revisions in 2005 to bring individual chapter 11's more in line with chapter

13. 142

Shat acknowledged the broad interpretation is “[N]ot without problems,” as it “[E]ssentially reads the APR out of individualchapter 11 cases, but does so in a convoluted manner—arguably indicative that Congress did not fully appreciate the effect of

the language it chose.” 143 While acknowledging, “[T]he APR has long been a feature of American bankruptcy law,” the court

aptly stated, “[I]t is not sacrosanct,” given the fact that there is no APR in Chapter 13. 144

Had Shat determined the narrow view was the proper one, the Shats would have lost the ability to retain their dry cleaningbusiness, the lifeblood of their means to reorganize, gain a fresh start and make payments under their Chapter 11 plan. Instead,they were able to proceed with the operation of their business, while paying debtors in accordance with the terms of their plan.Thus, Shat highlights the broad view and emphasizes a salient feature of the BAPCPA amendments—the similarities betweensections pertaining to individual Chapter 11 and Chapter 13 debtors.

Like the Shats, the Friedmans were debtors with business and property interests, whose ability to retain their equity ultimatelyresulted in a successful reorganization. The Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) decided Friedman in

2012, two years after the Shat decision. 145 Friedman arose out of an appeal from the United States Bankruptcy Court for the












District of Arizona, denying confirmation of the debtors' second amended plan and converting their case to one under Chapter

7 of the Code. 146 As in Shat, the main issue on appeal was whether the APR applies to individual Chapter 11 debtors. 147

The Friedmans were entrepreneurs who founded and operated several technology and internet-related businesses. 148 Because

of several failing businesses, the Friedmans possessed substantial tax liabilities and unpaid business debts. 149 In 2007, a

creditor began foreclosure proceedings on a piece of real property owned by the Friedmans in Colorado. 150 Consequently, the

Friedmans filed an individual case under Chapter 11 of the Code. 151

In their bankruptcy schedules, the Friedmans valued the Colorado property at $750,000, declaring the property over-encumbered

by three liens. 152 Other assets of the Friedmans included interest in several businesses and a family trust. 153 At the time of

filing, the Friedmans' unsecured debt totaled $359,000. 154 The bankruptcy court eventually granted a motion for relief from stay

to the creditor holding the first lien position on the Colorado property, allowing the creditor to proceed with foreclosure. 155 Asa result, the creditor foreclosed on the property, resulting in wiping out the mortgage held by P&P LLC, the second lienholder,

and its claim becoming an unsecured claim. 156

The Friedmans' second amended plan (the “Plan”) proposed that upon confirmation, they would retain their assets, includingequity in their business assets, continue to work, contribute their disposable income to the Plan, and make monthly payments of

$634 to unsecured creditors. 157 As a result of the foreclosure, P&P, LLC was now the Friedmans' largest unsecured creditor. 158

P&P voted to reject the Plan and filed an objection under section 1129(b)(2)(B)(ii), asserting the Plan violated the APR because

it allowed the Friedmans to retain valuable property interests while paying only $634 per month to unsecured creditors. 159

The Friedmans subsequently modified the Plan and proposed increased payments to unsecured creditors, anticipating increasing

revenue from their businesses. 160 At the confirmation hearing, the bankruptcy court concluded that the APR applied to

individual debtors, thus denying confirmation of the Friedman's Plan. 161 The bankruptcy court entered an order denying

confirmation and ordered the Friedmans to file a third amended plan. 162

Instead of filing a third amended plan, the Friedmans appealed the order denying confirmation of their Plan. 163 Due to theirfailure to comply with the court order and the “absence of a reasonable likelihood of rehabilitation,” the bankruptcy court

ultimately converted the Friedmans' case to one under Chapter 7 of the Code. 164

The Friedmans then moved for a stay of the Chapter 7 case, pending appeal. 165 The bankruptcy court granted the stay, statingthat as a policy question, “[T]he public interest would be advanced by obtaining [a ruling from the BAP for the Ninth Circuit]

on the applicability of the absolute priority rule in an individual chapter 11 case.” 166

Like Shat, the BAP acknowledged the symmetry created between provisions pertaining to individual debtors under Chapters13 and 11 under BAPCPA, but it primarily relied upon a plain-meaning analysis of the statutory text to arrive at its conclusion

that the broad view is the correct one. 167 Based on its plain-meaning interpretation, the BAP concluded that property of the

estate consists of both pre-petition property and post-petition property and income.” 168 The BAP found this interpretation

consistent with the “logic of plan confirmation requirements of Chapter 11.” 169 Importantly, the BAP emphasized that it wouldbe illogical to remove an individual debtor's means of producing disposable income, which the debtor is required to devote to

plan payments, by enforcing the APR in an individual case. 170





The BAP acknowledged the lack of relevant legislative history, but concluded that recourse to legislative history is unnecessary

in light of the plain meaning of the statute. 171 Furthermore, the Code itself “does provide significant assistance,” due to the

similarities in the Code between the Chapter 13 and Chapter 11 provisions. 172 “[C]learly, the drafters of § 1129(a)(15) tried

to create symmetry between chapters 11 and 13 for individual debtors.” 173

E. Abrogation of the Absolute Priority Rule Facilitates the Goals of BAPCPA

The broad view addresses individual Chapter 11 cases “through the lens of common sense.” 174 Common sense acknowledgesthe symmetry Congress created between individual Chapter 11 and Chapter 13 cases, especially in light of the fact that the APR

originated in “early twentieth-century railroad cases” and wasn’t applicable to individual chapter 11 debtors until 1978. 175

Were it not for the debt limits imposed on Chapter 13 cases, many individual Chapter 11 debtors would file for bankruptcy

protection under Chapter 13 instead, and would not be subject to the APR. 176

Individual debtors file for bankruptcy protection for many reasons. Changes in the economy can play a major role in one'sdecision to file bankruptcy. As our nation experienced a severe economic downturn in the last decade, many Americans

experienced a loss of employment and income, and therefore, an inability to satisfy their financial obligations. 177 Some, likethe debtors in Friedman and Shat, have failing or struggling businesses, an inability to retain properties, or both. Our capitalistsociety encourages property ownership, business ownership and economic growth. When those ideals fail, the bankruptcy

system exists to rehabilitate individuals and entities unable to pay their debts. 178 By abrogating the APR for individual Chapter11 debtors, Congress would foster the goal of protecting consumers and enable such debtors to retain assets necessary toreorganize successfully and gain a fresh start.

The broad view facilitates the goals of BAPCPA by protecting consumers' ability to retain valuable assets and thereforesuccessfully reorganize. It is, however, necessary to address the second goal of the statute, which is to prevent abuse by debtors.The disposable income provision of section 1129(a)(15) is one means of preventing such abuse.

V. Amendment to Bankruptcy Code Section 1129(a)(15)It is logical to discuss the disposable income requirement in light of the APR, because, as Friedman O’Neal highlight anenforcement of the APR may remove an individual Chapter 11 debtor's means of producing income, which he must devote to

plan payments under section 1129(a)(15). 179 The disposable income requirement is salient because, in addition to the goal of

protecting consumers, Congress enacted BAPCPA to “correct perceived abuses of the bankruptcy system.” 180

Specifically, Congress adopted the means test—”[T]he heart of … consumer bankruptcy reforms,” to ensure that “[D]ebtors

repay creditors the maximum they can afford.” 181 The means test measures a debtor's projected disposable income, central

to the application of section 1129(a)(15), which Congress added as a requirement of individual Chapter 11 cases in 2005. 182

Notably, Congress borrowed the concept of disposable income from Chapter 13, to determine an individual Chapter 11 debtor's

ability to repay his debts. 183 This section will discuss the language of section 1129(a)(15) and its implications for unsecuredcreditors. It will then suggest amending the current language of section 1129(a)(15), in order to provide fair and equitabletreatment for unsecured creditors, consistent with the goals of BAPCPA.

Section 1129(a)(15) gives unsecured creditors the ability to require individual Chapter 11 debtors to devote post-petition

disposable income to their plan of reorganization. 184 As Friedman noted, this ability gives “[D]issenting creditors who are











not being fully paid under the plan absolute veto power over the plan unless the debtor contributes an amount equal to all of

his projected disposable income ….” 185 This is a powerful tool available to unsecured creditors in Chapter 11 cases, because,upon objection to the plan, individual debtors must either pay the full value of the claim or devote projected disposable income

to plan payments for a five-year period or during the period for which the plan provides payments, whichever is longer. 186

Alternately, pursuant to section 1322, a Chapter 13 plan may not exceed five years. 187

Section 1129 provides, in relevant part: (a) “The court shall confirm a plan only if all of the following requirements are met …

(15) In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objectsto the confirmation of the plan—

(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account ofsuch claim is not less than the amount of such claim; or

(B) the value of the property to be distributed under the plan is not less than the projected disposable income ofthe debtor (as defined in section 1325(b)(2)) to be received during the 5-year period beginning on the date thatthe first payment is due under the plan, or during the period for which the plan provides payments, whichever

is longer (emphasis added). 188

This section of the Code requires that individual Chapter 11 debtors pay disposable income to unsecured creditors. 189 Toinvoke this provision, however, an unsecured creditor must do more than simply cast a ballot rejecting the debtor's plan. The

creditor must affirmatively oppose the plan based on a legal argument under the Code. 190

Section 1126(a) allows a creditor (in a Chapter 11 case) to accept or reject a plan of reorganization by ballot through a voting

process. 191 The ability to vote on a plan is an indispensable aspect of the safeguards implemented in the Code to protect

creditors' rights and ensure they are treated fairly. 192 Section 1129(a)(15), however, does not adequately protect unsecuredcreditors if the APR is inapplicable and a ballot rejecting a proposed plan would not constitute an objection sufficient toinvoke the disposable income requirement. Many unsecured creditors choose to reject a proposed plan through a ballot to avoidincurring the cost of hiring counsel to file a formal objection to the plan, and may be unaware of the potential consequencesof doing so. Such failure to object, however, may result in a windfall to the individual Chapter 11 debtor if the APR is not

applicable, as the debtor is not required to satisfy the projected disposable income provision in the absence of such objection. 193

“Absent an objection from a creditor, an individual chapter 11 plan may provide for any amount—even a minimal amount—

of disposable income to fund the plan of reorganization.” 194 This outcome is inconsistent with the goal of preventing abuseby debtors who are able to repay at least a portion of their debts.

While the United States Trustee may object to a plan based on other requirements under the Code, such as good faith, lack offeasibility, best interests of creditors test, or the fair and equitable test, it appears that only an unsecured creditor can require

individual Chapter 11 debtors to pay disposable income under section 1129(a)(15). 195 In a Chapter 13 case, either a trustee

or the holder of an allowed unsecured claim may object to confirmation of the debtor's plan. 196 Therefore, in Chapter 13, anindependent trustee can ensure that unsecured creditors receive fair treatment and debtors pay adequate disposable income to

fund their repayment plan. 197 In Chapter 11 cases, however, an independent trustee is not appointed. 198 As a result, to be fair to









unsecured creditors, it is necessary to allow a rejecting vote to invoke the disposable income provision in individual Chapter 11cases. Accordingly, Congress should amend section 1129(a)(15) to allow either an objection or a rejecting vote by an unsecured

creditor to invoke the provision's requirements. 199 By doing so, Congress would provide a simple and efficient mechanism forunsecured creditors to receive fair treatment in individual Chapter 11 cases, consistent with the goals of BAPCPA.

VI. Courts Should Interpret a Rejecting Vote as An Objection or Federal Rules of Bankruptcy Procedure 3020(b) Shouldbe Amended to so ProvideIn the absence of an amendment to section 1129(a)(15), this section argues that bankruptcy courts should interpret rejecting

votes by unsecured creditors as objections, thereby invoking the disposable income provision. 200 Alternately, the United StatesSupreme Court should amend Federal Rule of Bankruptcy Procedure 3020(b) to allow a rejecting ballot to constitute an objectionunder section 1129(a)(15).

A. Bankruptcy Courts Should Interpret Rejecting Votes as ObjectionsWhile a technical objection to the plan is based on a legal argument under the Code, a rejecting ballot generally is a creditor's

expression of its disagreement with the amount of money the plan proposes to pay it back. 201 Thus, if a bankruptcy courtdetermines that a debtor has funds available for distribution to unsecured creditors, it would be both equitable and consistentwith the intent of Congress, to interpret a rejecting ballot as an objection under section 1129(a)(15), and require the debtor to pay

disposable income—just as he would had the creditor filed a formal objection. 202 In making this determination, a court couldrequire that an individual debtor provide financial statements, including bank statements and proof of income, to determine thefinancial status of the debtor at the time of the confirmation hearing and could also require an evidentiary hearing in order to

determine the amount of the debtor's disposable income. 203 These requirements would also help debtors meet the feasibility

requirement of section 1129(a)(11). 204

In an individual Chapter 11 case, the court is able to review income and expense schedules filed by the debtor, which reflect

the financial condition of the debtor at the commencement of the case. 205 Furthermore, when a Chapter 11 debtor submitsa cash flow analysis to the court with his proposed disclosure statement, it discloses the funds projected to be available for

disbursement for creditors through a plan of reorganization. 206 In the absence of an objection under 1129(a)(15), however, the

debtor will not be required to commit these funds to the repayment of debts to unsecured creditors. 207

In a Chapter 13 case, a trustee is appointed to oversee the estate, and can bring an objection to the plan. 208 Because a Chapter11 debtor is a debtor in possession, who performs the essential functions of a trustee, it may appear that this safeguard is absent

in Chapter 11 cases. 209 It is clear, however, that individual debtors have a fiduciary obligation to their creditors. 210 Thisobligation places an individual Chapter 11 debtor in possession in an awkward position, as it requires him to make decisions

on behalf of the estate, which may not be in his personal best interest. 211 Therefore, by interpreting an unsecured creditor'srejecting ballot as an objection, bankruptcy courts can ensure that unsecured creditors are treated fairly, similar to the function

of a Chapter 13 trustee. 212 By interpreting a creditor's rejecting vote as an objection under section 1129(a)(15), the courtswill also create further congruence between treatment of individual debtors under Chapters 11 and 13 by requiring individualChapter 11 debtors to pay disposable income when it is appropriate and fair to do so.

B. The United States Supreme Court Should Amend FRBP 3020(b)











Alternately, the United States Supreme Court should amend Federal Rule of Bankruptcy Procedure 3020(b) under its Title 28

authority of the United States Code to allow a rejecting ballot to constitute an objection under section 1129(a)(15). 213 Title 28U.S.C.A. § 2075 grants the United States Supreme Court the power to “prescribe by general rules, the forms of process, writs,

pleadings, and motions, and the practice and procedure in cases under title 11.” 214 Further, these rules must be consistent with

the substantive provisions of the Code and acts of Congress. 215 Here, a rule allowing a ballot to constitute an objection would

be consistent with the disposable income requirement, as well as the purpose and policy behind BAPCPA. 216 Further, such

rules “shall take effect,” unless otherwise provided by law. 217

Pursuant to section 1128(b), a party in interest may object to confirmation of a Chapter 11 plan. 218 FRBP 3020(b) governs

objections to confirmation made under section 1128(b). 219 By amending FRBP 3020(b) to allow a rejecting vote to constitutea section 1129(a)(15) objection, the United States Supreme Court would allow unsecured creditors to invoke the disposableincome requirement by their submission of a rejecting ballot.

In conjunction with an abrogation of the APR: (1) an amendment to section 1129(a)(15); (2) treatment by bankruptcy courts asproposed herein; or (3) an amendment to FRBP 3020(b), would ensure the protection of creditors' rights and that debtors pay

the amount they can afford, while still allowing Chapter 11 debtors to retain assets necessary to reorganize successfully. 220

VII. CONCLUSIONThe debate surrounding the application of the APR to individual Chapter 11 debtors will not be resolved until the Supreme Court

rules on the issue or Congress amends the Code. 221 In the meantime, Friedman and Shat provide a cogent reason for courtsto adopt the broad view of section 1115, and for Congress to amend the Code to abrogate the APR for individual debtors inChapter 11 cases. As both cases highlight, Congress patterned many of the BAPCPA amendments to create symmetry betweenindividuals under Chapter 13 and Chapter 11. Furthermore, interpreting an unsecured creditor's rejecting ballot as sufficientto trigger the disposable income requirement would ensure fair treatment to such creditors and provide a further impetus forcourts to determine that the APR does not apply in an individual Chapter 11 case.

By fashioning the remedies suggested herein, Congress and the courts would create further symmetry between individualChapter 11 debtors and Chapter 13 debtors, while advancing the goals of BAPCPA to prevent abuse and protect consumers.This would result in treating individual Chapter 11 debtors “through the lens of common sense” and “in a way to facilitate the

goals of the statute,” while ensuring fairness to creditors. 222

* Juris Doctor Candidate, 2016, William S. Boyd School of Law at the University of Nevada, Las Vegas. The author would like to

thank her family for their prayers, love and support; Professor Nancy Rapoport, who has been a constant source of encouragement

and strength, both prior to and during law school, as well as an unparalleled model of hard work and excellence; DeShun Harris, her

extraordinary mentor in the study of law and legal writing; and Professor Richard Lieb, the Editor-in-Chief of the Norton Journal of

Bankruptcy Law and Practice, for his assistance and consideration.

Footnotes1 The Bankruptcy Code does not define the term “individual,” however, for the purposes of this article, it shall refer to a “flesh-and-

blood, living human being.” See Bruce A. Markell, The Sub Rose Subchapter: Individual Debtors in Chapter 11 After BAPCPA,

67 U. Ill. L. Rev. 67, 69 n.1 (2007).















2 United States Courts: Chapter 7 — Bankruptcy Basics, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/

chapter-7-bankruptcy-basics (last visited July 5, 2015). “Commencement of a bankruptcy case creates an “estate.” The estate

technically becomes the temporary legal owner of all the debtor's property. It consists of all legal or equitable interests of the debtor

in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest

in the property. Generally speaking, the debtor's creditors are paid from nonexempt property of the estate. The primary role of a

Chapter 7 trustee in an asset case is to liquidate the debtor's nonexempt assets in a manner that maximizes the return to the debtor's

unsecured creditors.”

3 As of April 1, 2013, the debt limits for Chapter 13 cases are $383,175 for unsecured debt and $1,149,525 for secured debt. 11 U.S.C.A.

§ 109(e) (2012). See Keith M. Lundin, Chapter 13 Bankruptcy § 44.1 (3d ed. 2000 & Supp. 2007). “The Chapter 13 debtor rather

than the trustee is empowered to use, sell or lease property of the estate even outside the ordinary course of business. This power

of a Chapter 13 debtor is plainly stated in § 1303: ‘Subject to any limitations on a trustee under this chapter, the debtor shall have,

exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(l) of this title.’ In

stark contrast to a Chapter 7 case, a Chapter 13 trustee does not interrupt the debtor's possession or enjoyment of estate property.”

Keith M. Lundin, Chapter 13 Bankruptcy § 44.1 (3d ed. 2000 & Supp. 2007).

4 See Andrew G. Balbus, Does the Absolute Priority Rule Apply to Individuals in Chapter 11?, 20 J. Bankr. L. & Prac., Jan. 2011, at

79, 82. (“[M]any individuals have no alternative to filing in Chapter 11. Individuals with household incomes over the median income

for similar sized households in their state may not qualify for Chapter 7 under § 707(b). Individuals with large amounts of debt or

without regular income may not qualify for Chapter 13 under § 109(e).”).

5 See In re Lively, 717 F.3d. 406, 410 (5th Cir. 2013). See David S. Jennis & Kathleen L. DiSanto, Application of Absolute-Priority

Rule and the New-Value Exception in Individual Chapter 11s, ABI Journal, July-Aug. 2011, at 56. (“Ever since the Supreme Court

ruled in Toibb v. Radloff that chapter 11 could be used by individuals, courts have grappled with the application of the so-called

absolute-priority rule …”).

6 11 U.S.C.A. § 1129(b)(2)(B)(ii) (2012). See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988).

7 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified as amended

in scattered sections of 11 U.S.C.). See 11 U.S.C.A. §§ 1115(a)(1)(2), 1129(b)(2)(B)(ii) (2005). Unless otherwise noted, references

herein to sections and subsections are to sections and subsections of the Bankruptcy Code, 11 U.S.C.A. § 101 et seq.

8 See 11 U.S.C.A. §§ 1115(a), 1129(b)(2)(B)(ii) (2012).

9 See 11 U.S.C.A. §§ 541(a)(1), 1115(a) (2012). See also In re Lively, 717 F.3d at 409.

10 Stanley E. Goldich, Plain-Meaning Rules: Did BAPCPA Abolish the Absolute-Priority Rule?, ABI Journal, June 2012, at 34; 11

U.S.C.A. § 1129(b)(1)(2)(B)(ii) (2000).

11 See Goldich, supra note 10, at 34.

12 See Goldich, supra note 10, at 34; see also Balbus, supra note 4, at 80.

13 Michael P. Coury, et al., Sweat Equity Redux: Does the APR Survive for Individual Chapter 11 Cases?, Norton Bankr. L. Adviser,

Feb. 2011, at 1.2. Under the Bankruptcy Reform Act of 1978, Chapter 11 became the sole vehicle for businesses to file bankruptcy,

but also provided for the reorganization of individuals. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, tit. IV, § 401(a), 92

Stat. 2682 (1978)). Previously, Congress created Chapters 10 and 11 of the Bankruptcy Code through The Chandler Act of 1938. The

Chandler Act created Chapter 10 for publicly held companies and Chapter 11 for non-publicly held businesses. See Chandler Act of

1938, ch. 575, 52 Stat. 840 (repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, tit. IV, § 401(a), 92 Stat. 2682 (1978)).

14 In re Lively, 717 F.3d at 409.

15 Lundin, supra note 3, at § 363.12 (“For 25 years, we have worked with a bankruptcy law that was substantially consistent in

its implementation of familiar principles and often elegant in its technical construction. BAPCPA is fundamentally different in




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both respects: the drum beats of its proponents are not carried into the score, and the nomenclature of this law is obscure at best,

incomprehensible often.”).

16 See, e.g., Zachary v. California Bank & Trust, 2016 WL 360519 at *7 (9th Cir. 2016); Ice House America, LLC v. Cardin, 751 F.3d

734, 736, 59 Bankr. Ct. Dec. (CRR) 138, 71 Collier Bankr. Cas. 2d (MB) 1121, Bankr. L. Rep. (CCH) P 82630 (6th Cir. 2014); In re

Lively, 717 F.3d 406, 408–09, 57 Bankr. Ct. Dec. (CRR) 278, 69 Collier Bankr. Cas. 2d (MB) 1423, Bankr. L. Rep. (CCH) P 82488

(5th Cir. 2013); In re Stephens, 704 F.3d 1279, 1287, 57 Bankr. Ct. Dec. (CRR) 125, 68 Collier Bankr. Cas. 2d (MB) 1760, Bankr.

L. Rep. (CCH) P 82366, 78 A.L.R. Fed. 2d 719 (10th Cir. 2013); In re Maharaj, 681 F.3d 558, 563, 56 Bankr. Ct. Dec. (CRR) 166,

67 Collier Bankr. Cas. 2d (MB) 1429, Bankr. L. Rep. (CCH) P 82289 (4th Cir. 2012).

17 See generally Balbus, supra note 4; Goldich, supra note 10; Coury, et al., supra note 13. See also Robert G. Harris, et al., BAPCPA's

Impact On Application Of The APR In Individual Chapter 11 Cases, Bus. L. News, Feb. 17, 2011, at 17 (“The ability of individuals

such as these to fund a plan often depends on their ability to retain these non-exempt assets ….”). See also Ice House America,

LLC v. Cardin, 751 F.3d 734, 739, 59 Bankr. Ct. Dec. (CRR) 138, 71 Collier Bankr. Cas. 2d (MB) 1121, Bankr. L. Rep. (CCH)

P 82630 (6th Cir. 2014).

18 Luis Salazar, Too Rich for Bankruptcy: Some Pitfalls of Chapter 11 Filings by Individual, 9 J. Bankr. L. & Prac. 527 (2000); “Chapter

11 provides an imperfect fit for the individual debtor ….” Salazar, Too Rich for Bankruptcy: Some Pitfalls of Chapter 11 Filings by

Individual, 9 J. Bankr. L. & Prac. at 544. American bankruptcy institute, Commission to Study the Reform of Chapter 11, 2012–2014

Final Report and Recommendations 318 (2014) [hereinafter Commission Report] (“The “fit” of chapter 11 and all its complexity

has also presented significant hurdles to individual debtors seeking reorganization.”); Markell, supra note 1, at 69. (“Individuals and

chapter 11 have a rocky history.”); Christopher M. Broussard, Protecting Bankruptcy in an Economic Crisis: Why an Individual

Debtor's Expenses Should Be Use to Prevent Abuse in Chapter 11, Ann. Surv. Bankr. L. 537, __ (2010) (“After BAPCPA, Chapter

11 has become a dysfunctional faceoff between individual debtors and their creditors.”); see generally Sally S. Neely, How BAPCPA

Changes Chapter 11 for Individuals—or—No, This is Not Your Mother's Chapter 11! (unpublished materials prepared for New York

University's Workshop on Bankruptcy and Business Reorganizations on Sept. 14–16, 2005) (on file with author).

19 Ice House, 751 F.3d at 740; see generally Debra Grassgreen, Individual Chapter 11 Cases After BAPCPA: What Happened to the

“Fresh Start?”, Ann. Surv. Bankr. L. 309 (2006). “Regrettably, these changes created more confusion than they cleared up and stripped

Chapter 11 individual debtors of many of benefits of the coveted “fresh start.” Debra Grassgreen, Individual Chapter 11 Cases After

BAPCPA: What Happened to the “Fresh Start?”, Ann. Surv. Bankr. L. at 311.

20 Goldich, supra note 10, at 35. (“[T]he continued existence or nonexistence of the absolute priority rule may dictate whether plans

can be confirmed in many individual chapter 11 cases.”). See also Ice House, 751 F.3d at 740.

21 In re Friedman, 466 B.R. 471, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232

(B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 at * 4 (9th Cir. 2016)); In re Shat, 424

B.R. 854, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated by, Zachary v.

California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)).

22 In re Friedman, 466 B.R. at 483; In re Shat, 424 B.R. at 862.

23 Zachary v. California Bank & Trust, 2016 WL 360519 at *7 (9th Cir. 2016).

24 Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 366, 127 S. Ct. 1105, 166 L. Ed. 2d 956, 47 Bankr. Ct. Dec. (CRR) 221,

57 Collier Bankr. Cas. 2d (MB) 1, Bankr. L. Rep. (CCH) P 80850 (2007) (citing Grogan v. Garner, 498 U.S. 279, 287, 111 S. Ct.

654, 655, 112 L. Ed. 2d 755, 21 Bankr. Ct. Dec. (CRR) 342, 24 Collier Bankr. Cas. 2d (MB) 1, Bankr. L. Rep. (CCH) P 73746A, 70

A.F.T.R.2d 92-5639 (1991); Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 231–232, 130 S. Ct. 1324, 1329, 176 L. Ed.

2d 79, 52 Bankr. Ct. Dec. (CRR) 232, 63 Collier Bankr. Cas. 2d (MB) 910, Bankr. L. Rep. (CCH) P 81703 (2010).

25 11 U.S.C.A. § 1129(a)(15) (2012); In re Shat, 424 B.R. 854 at 862.

26 11 U.S.C.A. § 1129(a)(15)(B) (2012). Section 1129(a)(15)(B) refers to 11 U.S.C.A. § 1325(b)(2) (2012), which defines “disposable

income” as current monthly income received by the debtor (excluding specific support payments), less amounts reasonably necessary

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to be expended: (i) for the maintenance or support of the debtor or dependent of the debtor; (ii) for a domestic support obligation

payable post-petition; (iii) for charitable contributions that do not exceed 15% of the debtor's annual gross income; and (iv) in the

case of a business debtor, for the payment of amounts necessary for the continuation, preservation, and operation of its business.)

See Lundin, supra note 3, at §§ 466.1, 467.1 for a thorough discussion of the problems associated with the calculation of projected

disposable income under BAPCPA. See also Lundin, supra note 3, at § 164.1 for a discussion of various methods of calculation of

“projected disposable income” under section 1325(b)(2).

27 See In re Shat, 424 B.R. at 857.

28 See Harris, et al., supra note 17, at 17 (“[A] successful exit from Chapter 11 almost always requires confirmation of a plan.”). See

also infra Parts V and VI.

29 See In re Friedman, 466 B.R. 471, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232

(B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 at *4 (9th Cir. 2016)); see also In re Shat,

424 B.R. 854, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010); Grassgreen, supra note

19 (“As a result of the changes, Chapter 11 individual debtors no longer receive a “fresh start” and receive even fewer protections

and benefits than are afforded Chapter 13 debtors.”).

30 This section is not an exhaustive history of bankruptcy legislation. It discusses specific portions of legislative history, which focused

on amending the Code with the goal of requiring debtors to repay their debts when possible.

31 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified as amended

in scattered sections of 11 U.S.C.).

32 H.R. REP. NO. 109-31, pt. 1, at 2 to 3, 10 to 18, (2005); Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 231–232, 130

S. Ct. 1324, 1329, 176 L. Ed. 2d 79, 52 Bankr. Ct. Dec. (CRR) 232, 63 Collier Bankr. Cas. 2d (MB) 910, Bankr. L. Rep. (CCH)

P 81703 (2010).

33 See generally Lundin, supra note 3 at § 363.2 (describing the “Make ‘em Pay Principle” in BAPCPA).

34 See, e.g., REPORT OF THE COMM'N ON THE BANKR. LAWS OF THE U.S.—JULY 1973, H.R. DOC. NO. 93-137, pt. I, at

159 (1973).

35 Pub. L. No. 95-598, § 707, 1978 U.S.C.C.A.N. (92 Stat.) 2549, 2606.

36 Hearings on Personal Bankruptcy Before the Subcomm. on Monopolies and Commercial Law of the H. Comm. on the Judiciary,

97th Cong. (1982).

37 See id. at 430–432.

38 Lundin, supra note 3, at § 11.1 (quoting legislative history from 1994 pertaining to debt limits in Chapter 13, “We encourage greater

reliance on Chapter 13 of the Bankruptcy Code—an alternative to liquidation—by making a broader range of debtors eligible to file

under that chapter and contribute income under a repayment plan.”).

39 H.R. 2500, 105th Cong. (1997).

40 Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr.

L.J. 485, 496 (2005).

41 Bankruptcy Reform Act of 1998; Responsible Borrower Protection Act; and Consumer Lenders and Borrowers Bankruptcy

Accountability Act of 1998 — Parts I-IV: Hearings on H.R. 3150, H.R. 2500, and H.R. 3146 Before the Subcommittee on Commercial

and Administrative Law of the H. Comm. on the Judiciary, 105th Cong. (1998).

42 Jensen, supra note 40, at 502.









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43 144 Cong. Rec. H4440-42, at H4442 (daily ed. June 10, 1998).

44 Executive Office of the President — Office of Management and Budget, Statement of Administration Policy — H.R. 3150 —

Bankruptcy Reform Act of 1998, at 1 (June 10, 1998), available at http:// clinton2.nara.gov/OMB/legislative/sap/105-2/HR3150-

h.html.

45 H.R. 833, 106th Cong. (1999); Jensen, supra note 40, at 519.


47 145 Cong. Rec. H2771 (daily ed. May 5, 1999); Executive Office of the President — Office of Management and Budget, Statement

of Administration Policy — H.R. 833 — Bankruptcy Reform Act of 1999, at 1 (May 5, 1999), available at http:// clinton2.nara.gov/

OMB/legislative/sap/HR833-h.html; 145 Cong. Rec. H2771 (daily ed. May 5, 1999).

48 S. 256, 109th Cong. (2005).


50 151 Cong. Rec. H2074-76, at H2076 (daily ed. Apr. 14, 2005).

51 Pub. L. No. 109-8, 119 Stat. 23 (2005).

52 Press Release, White House Press Office, President Signs Bankruptcy Abuse Prevention, Consumer Protection Act (Apr. 20, 2005),

available at http://www.whitehouse.gov/news/releases/2005/04/20050420-5.html.

53 See generally Markell supra note 1 (“BAPCPA's provisions have created and will continue to create unexpected anomalies in

individual chapter 11 cases, due in large part to the manner in which BAPCPA provisions affecting such individuals are scattered

throughout the Code,” and asserting that individual chapter 11 debtors should have a separate subchapter to Chapter 11 in the Code);

Id. at 67. Lundin, supra note 3, at § 360.1 (“For more than a quarter century, bankruptcy petitioners have been spoiled by a Bankruptcy

Code that makes sense …. BAPCPA is a mess—almost beyond the worst nightmares of those who followed its progress from the

outside.”).

54 In re Friedman, 466 B.R. 471, 484, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232

(B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 at * 4 (9th Cir. 2016)); In re Shat, 424

B.R. 854, 862, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated by, Zachary

v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)).

See generally Balbus, supra note 4 (discussing the APR's application to individual Chapter 11 debtors, the author argues that

“Congress intended to place an individual debtor in Chapter 11 in a similar position to an individual debtor in Chapter 13 …”); Id.

at 82.

55 See Balbus, supra note 4, at 94–96; Harris, et al., supra note 17, at 20; see generally Neely, supra note 18.

56 In re Lively, 717 F.3d 406, 409, 57 Bankr. Ct. Dec. (CRR) 278, 69 Collier Bankr. Cas. 2d (MB) 1423, Bankr. L. Rep. (CCH) P

82488 (5th Cir. 2013).

57 11 U.S.C.A. § 1325(b) (2012). See id.; see also supra note 26 for a discussion of disposable income.

58 In re Lively, 717 F.3d at 409.

59 11 U.S.C.A. § 1115 (2012).

60 11 U.S.C.A. §§ 1115, 1306 (2012).

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61 11 U.S.C.A. §§ 1129(a)(15)(B); 1325(b)(2) (2012) (this calculation is used in Chapter 13 cases, except for higher income debtors,

in which case a means test analysis is applied). See 11 U.S.C.A. §§ 707(b)(2), 1325(b)(3) (2012). See also In re Shat, 424 B.R. 854,

862 (Bankr. D. Nev. 2010).

62 11 U.S.C.A. §§ 1123(a)(8), 1322(a)(1) (2012). 11 U.S.C.A. § 1123 (a)(8) requires individual Chapter 11 debtors to “provide for

the payment to creditors under the plan of all or such portion of earnings from personal services performed by the debtor after the

commencement of the case or other future income of the debtor as is necessary for the execution of the plan.” In re Shat, 424 B.R.

854 at 862.

63 11 U.S.C.A. §§ 1127(e), 1329(a) (2012). 11 U.S.C.A. § 1329(a) allows a Chapter 13 debtor to amend a plan “At any time after

confirmation of the plan but before completion of payments under such plan ….” In re Shat, 424 B.R. 854 at 862.

64 11 U.S.C.A. § 1141(d) (2000), amended by BAPCPA, Pub. L. No. 109-8, § 321(d), 119 Stat. 23, 95 to 96 (2005). 11 U.S.C.A. §§

1141(d)(5)(A), 1328(a) (2012). In re Friedman, 466 B.R. 471, 483, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB)

752, Bankr. L. Rep. (CCH) P 82232 (B.A.P. 9th Cir. 2012).

65 11 U.S.C.A. §§ 1141(d)(5)(B), 1328(b) (2012); In re Friedman, 466 B.R. 471 at 483.

66 See Harris, supra note 17, at 17. See also Balbus, supra note 4, at 82; Lundin, supra note 3, at § 4.5 for a discussion of the benefits

of Chapter 13 versus Chapter 11. But see Lundin, supra note 3, at § 536.1 for a discussion of incentives for a Chapter 13 debtor to

convert their case to one under Chapter 11.

67 11 U.S.C.A. § 1129(a) (2012).

68 11 U.S.C.A. § 1129(a) (2012). See generally Judith K. Fitzgerald, et al., consensual plan confirmation requirements) (Practice Guide

Bankruptcy, Nat. Ed. 2014) [hereinafter Plan Requirements] (providing a comprehensive overview of all Chapter 11 nonconsensual

plan confirmation requirements).

69 11 U.S.C.A. § 1129(a) (2012). See also Plan Requirements, supra note 68.

70 11 U.S.C.A. § 1129(b)(1) (2012). See also Goldich, supra note 10, at 35.

71 11 U.S.C.A. § 1129(b)(2)(B) (2012). See also Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202, 108 S. Ct. 963, 99 L. Ed. 2d

169, 17 Bankr. Ct. Dec. (CRR) 201, 18 Collier Bankr. Cas. 2d (MB) 262, Bankr. L. Rep. (CCH) P 72186 (1988).

72 11 U.S.C.A. § 1129(b)(2)(B) (2012).

73 11 U.S.C.A. § 1129(b)(2)(B)(ii) (2012). See also In re Lucarelli, 517 B.R. 42, 47–48, 72 Collier Bankr. Cas. 2d (MB) 336 (Bankr.

D. Conn. 2014).

74 See, e.g., In re Karlovich, 456 B.R. 677, 681 (Bankr. S.D. Cal. 2010).

75 In re Karlovich, 456 B.R.at 681; see also Grassgreen, supra note 19, at 311. (“The most drastic (and, some argue, unconstitutional)

change is that an individual's earnings from personal services after the commencement of the bankruptcy case are not part of the

estate.”). Referring to the amendment to Section 1115, she states, “[T]his portion of the new law will encourage debtors to select

Chapter 7 liquidations rather than Chapter 11 repayment plans -a result directly at odds with what has been a stated purpose of the

BAPCPA amendments.” Grassgreen, supra note 19, at 312.

76 11 U.S.C.A. § 1115 (2012).

77 In re Lucarelli, 517 B.R. at 47–48.

78 See In re Lucarelli, 517 B.R. at 47–48; see also Goldich, supra note 10, at 3.












































79 See Zachary v. California Bank & Trust, 2016 WL 360519 at *7 (9th Cir. 2016); Ice House America, LLC v. Cardin, 751 F.3d 734,

736, 59 Bankr. Ct. Dec. (CRR) 138, 71 Collier Bankr. Cas. 2d (MB) 1121, Bankr. L. Rep. (CCH) P 82630 (6th Cir. 2014); In re

Lively, 717 F.3d 406, 408–09, 57 Bankr. Ct. Dec. (CRR) 278, 69 Collier Bankr. Cas. 2d (MB) 1423, Bankr. L. Rep. (CCH) P 82488

(5th Cir. 2013); In re Stephens, 704 F.3d 1279, 1287, 57 Bankr. Ct. Dec. (CRR) 125, 68 Collier Bankr. Cas. 2d (MB) 1760, Bankr. L.

Rep. (CCH) P 82366, 78 A.L.R. Fed. 2d 719 (10th Cir. 2013); In re Maharaj, 681 F.3d 558, 563, 56 Bankr. Ct. Dec. (CRR) 166, 67

Collier Bankr. Cas. 2d (MB) 1429, Bankr. L. Rep. (CCH) P 82289 (4th Cir. 2012); In re Friedman, 466 B.R. 471, 482, 56 Bankr. Ct.

Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232 (B.A.P. 9th Cir. 2012) (overruled by, Zachary

v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)); In re Shat, 424 B.R. 854, 868, 63 Collier Bankr. Cas. 2d (MB) 748,

Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated by, Zachary v. California Bank & Trust, 2016 WL 360519 (9th Cir.

2016)); In re Tegeder, 369 B.R. 477, 480, 48 Bankr. Ct. Dec. (CRR) 88 (Bankr. D. Neb. 2007). See also Goldich, supra note 10, at 3.

80 Ralph Brubaker, Individual Chapter 11 Debtors, BAPCPA, and the APR, 30 No. 4 Bankruptcy Law Letter 1, April 2010, at __ (“Given

the bedrock importance of the APR to Chapter 11's entire scheme of distributional checks and balances, one would think that Congress

would take great pains to leave no doubt as to whether the APR is or is not applicable in any given case. Careful draftsmanship,

though, is not a hallmark of the 2005 BAPCPA amendments (to put it mildly), and the available legislative history is, in a (wildly

understated) word, unhelpful.”). Markell, supra note 1, at 88 (“How that rule applies to individuals, however, is a puzzle.”).

81 In re Maharaj, 681 F.3d at 56–68.

82 In re Maharaj, 681 F.3d at 568, 572. See also In re Lively, 717 F.3d 406, 410, 57 Bankr. Ct. Dec. (CRR) 278, 69 Collier Bankr. Cas.

2d (MB) 1423, Bankr. L. Rep. (CCH) P 82488 (5th Cir. 2013); In re Lucarelli, 517 B.R. 42, 51–52, 72 Collier Bankr. Cas. 2d (MB)

336 (Bankr. D. Conn. 2014). But see, Goldich, supra note 10, at 83 (“A close analysis of the published cases, however, indicates that

determinations that the statutes are ambiguous and/or that § 1115 only includes post-petition property appear to be the product of an

incorrect reading of the actual language of the statutes, speculation about congressional intent that is not in the legislative history and/

or questionable arguments that the abrogation of the APR would lead to absurd results or render other Code sections superfluous.”).

83 In re Lucarelli, 517 B.R. at 49–52; see also Zachary v. California Bank & Trust, 2016 WL 360519 at *5 (9th Cir. 2016).

84 In re Lucarelli, 517 B.R. at 53.

85 In re Lucarelli, 517 B.R. at 51–52.

86 In re Lucarelli, 517 B.R. at 52.

87 See Goldich, supra note 10, at 3 (“The interpretation of §§ 1129(b)(2)(B)(ii) and 1115 has been a roller coaster ride.”). In re Gbadebo,

431 B.R. 222, 229, 63 Collier Bankr. Cas. 2d (MB) 1293, Bankr. L. Rep. (CCH) P 81753 (Bankr. N.D. Cal. 2010) (“No one who

reads BAPCPA as a whole can reasonably conclude that it was designed to enhance the individual debtor's fresh start.”).

88 Ice House America, LLC v. Cardin, 751 F.3d 734, 739–40, 59 Bankr. Ct. Dec. (CRR) 138, 71 Collier Bankr. Cas. 2d (MB) 1121,

Bankr. L. Rep. (CCH) P 82630 (6th Cir. 2014).

89 In re Cardin, 2013 WL 1092118 (Bankr. E.D. Tenn. 2013).

90 Ice House, 751 F.3d at 736–37.

91 Ice House, 751 F.3d at 737.


93 Ice House, 751 F.3d at 736–37.






















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96 Ice House, 751 F.3d at 738–40.

97 Ice House, 751 F.3d at 737 (quoting In re Lively, 717 F.3d. 406, 410 (5th Cir. 2013).



100 Ice House, 751 F.3d at 739.

101 Ice House, 751 F.3d at 740.

102 Ice House, 751 F.3d at 740.

103 Zachary v. California Bank & Trust, 2016 WL 360519 at *4 (9th Cir. 2016); In re Friedman, 466 B.R. 471, 56 Bankr. Ct. Dec. (CRR)

57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232 (B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California

Bank & Trust, 2016 WL 360519 (9th Cir. 2016)).


105 Zachary, 2016 WL 360519 at *1.

106 Zachary, 2016 WL 360519 at *1.

107 Zachary, 2016 WL 360519 at *4–5.

108 Zachary, 2016 WL 360519 at *5.

109 Zachary, 2016 WL 360519 at *5.

110 Zachary, 2016 WL 360519 at *6.

111 Zachary, 2016 WL 360519 at *6.

112 Zachary, 2016 WL 360519 at *6.

113 Zachary, 2016 WL 360519 at *6.

114 In re Lively, 717 F.3d 406, 57 Bankr. Ct. Dec. (CRR) 278, 69 Collier Bankr. Cas. 2d (MB) 1423, Bankr. L. Rep. (CCH) P 82488

(5th Cir. 2013).

115 See Gregory R. Schaff, Ghosts of Individual Ch. 11 Debtors Yet to Come: Part II: Confirming an Individual Debtor's Chapter 11

Plan under BAPCPA, ABI Journal, Feb. 2007, at 71 (“These changes leave an individual that exceeds the chapter 13 debtor criteria

and fails the chapter 7 means test without a viable reorganization or liquidation option under the Code.”).

116 See In re Friedman, 466 B.R. 471, 482, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH)

P 82232 (B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)); see also In

re Shat, 424 B.R. 854, 868, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated

by, Zachary v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)).

117 In re Friedman, 466 B.R. at 482; see also In re Tegeder, 369 B.R. 477, 480, 48 Bankr. Ct. Dec. (CRR) 88 (Bankr. D. Neb. 2007).

118 See Balbus, supra note 4, at 82; see also Harris, et al., supra note 17, at 17.

119 In re O'Neal, 490 B.R. 837, 850 (Bankr. W.D. Ark. 2013).

120 In re O'Neal, 490 B.R. at 850–51.







































121 Schaff, supra note 115, at 71. (“Unlike the muse for this article, Charles Dickens' A Christmas Carol, there is no happy ending at

the present time for individual chapter 11 debtors. While some debtors may have access to sufficient exempt assets to live on while

in bankruptcy and to fund a chapter 11, most individual chapter 11 debtors do not have such convenient resources. BAPCPA has

made the already-difficult lives of individual chapter 11 debtors and their lawyers much more challenging, without offering many

solutions to these difficulties. However, unless the new provisions concerning BAPCPA are either revised by Congress or ruled

unconstitutional by the Supreme Court (topics far outside the scope of this article), these ‘shadows’ will remain unchanged. Therefore,

like Tiny Tim, we will have to press on and make the best of a bad situation.”)


123 In re Shat, 424 B.R. 854, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated by,

Zachary v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016))).

124 In re Shat, 424 B.R. at 856.

125 In re Shat, 424 B.R. at 865, 868. See supra Part III.

126 In re Shat, 424 B.R. at 856.

127 In re Shat, 424 B.R. at 856.

128 Voluntary Petition, Schedules A, D, I, J, at 15, 20–22, 28–29, In re Shat, 424 B.R. 854, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr.

L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (on file with author).

129 In re Shat, 424 B.R. at 856.

130 In re Shat, 424 B.R. at 856–57.

131 In re Shat, 424 B.R. at 857.

132 In re Shat, 424 B.R. at 857.

133 In re Shat, 424 B.R. at 857.

134 In re Shat, 424 B.R. at 859.

135 In re Shat, 424 B.R. at 862.

136 In re Shat, 424 B.R. at 862.

137 In re Shat, 424 B.R. at 863–64.

138 In re Shat, 424 B.R. at 864.

139 In re Shat, 424 B.R. at 864.

140 In re Shat, 424 B.R. at 864, 868; see also Markell, supra note 1, at 90.

141 In re Shat, 424 B.R. at 865 (citing Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 128 S. Ct. 2326, 2336, 171

L. Ed. 2d 203, 50 Bankr. Ct. Dec. (CRR) 34, 59 Collier Bankr. Cas. 2d (MB) 1316, Bankr. L. Rep. (CCH) P 81257 (2008).

142 In re Shat, 424 B.R. at 865. The court went on to discuss other case law supporting its position. Importantly, it quoted In re Roedemeier,

stating, “[t]he broader view of the exception, on the other hand, helps to explain why a number of changes, including the exception,

were made to Chapter 11, namely so that it could function for individual debtors much like Chapter 13 does.” In re Roedemeier, 374

B.R. 264, 271, 48 Bankr. Ct. Dec. (CRR) 196 (Bankr. D. Kan. 2007).































143 In re Shat 424 B.R. at 867.

144 In re Shat 424 B.R. at 867. (citing In re Pacific Lumber Co., 584 F.3d 229, 244, 52 Bankr. Ct. Dec. (CRR) 46, Bankr. L. Rep. (CCH)

P 81642 (5th Cir. 2009).

145 In re Friedman, 466 B.R. 471, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P 82232

(B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 at *4 (9th Cir. 2016)).

146 In re Friedman, 466 B.R. at 472–73.

147 In re Friedman, 466 B.R. at 473.



















166 In re Friedman, 466 B.R. at 477..











































174 In re Friedman, 466 B.R. at 479. Goldich, supra note 10, at 35. (“[T]he Friedman holding did not eliminate the ‘fair and equitable’

standard in § 1129(b)(1) for which the absolute priority rule was a minimum requirement. A number of other creditor protections

remain, including requirements that the plan be proposed in good faith; and the ‘best interests’ liquidation test and new creditor

protections relating to individual chapter 11 cases were added by BAPCPA, including a requirement to distribute property that is at

least in value to the debtor's projected disposable income for five years if an unsecured creditor objects to the plan.”).

175 Harris, et al., supra note 17, at 20. (“Such an analysis [the nearly identical language sections of 1115 and 1306] should be critical

to a discussion of what property of the estate is excepted from the Absolute Priority Rule.”). “Congress has an obligation to revisit

the APR as it applies to individuals and express its intent in an unambiguous amendment supported by clear legislative history. Until

it does so, reviewing courts should consider which view most fairly treats the competing interests of debtors and creditor without

unduly burdening the limited prospects for reorganization of individual Chapter 11 debtors, and they should not ignore the nearly

identical wording of sections 1306 and 1115.” Harris, et al., supra note 17, at 20. See Zachary v. California Bank & Trust, 2016

WL 360519 at *2 (9th Cir. 2016).

176 See Harris, et al., supra note 17, at 17; see also Ice House America, LLC v. Cardin, 751 F.3d 734, 736, 59 Bankr. Ct. Dec. (CRR)

138, 71 Collier Bankr. Cas. 2d (MB) 1121, Bankr. L. Rep. (CCH) P 82630 (6th Cir. 2014).

177 Broussard, supra note 18, at __. (“As the ripples of financial crisis flow through this country, many Americans … found themselves

unemployed.”).

178 Markell, supra note 1, at 67. (“Reorganization under the Bankruptcy Code serves the public interest by providing worthy debtors a

mechanism to gain relief from crushing debt while maintaining some measure of fidelity to creditors.”). See In re Interstate Bakeries

Corp., 751 F.3d 955, 961, 59 Bankr. Ct. Dec. (CRR) 172, 71 Collier Bankr. Cas. 2d (MB) 1878 (8th Cir. 2014). (“The goal of Chapter

11 of the Bankruptcy Code is ‘the ultimate rehabilitation of the debtor’.”) (citing Nicholas v. U.S., 1966-2 C.B. 511, 384 U.S. 678,

687, 86 S. Ct. 1674, 16 L. Ed. 2d 853, 66-1 U.S. Tax Cas. (CCH) P 9465, 17 A.F.T.R.2d 1194 (1966). See Anne Lawton, Chapter

11 Triage: Diagnosing a Debtor's Prospects for Success, 54 Ariz. L. Rev. 985, 988 (2012) (“A central purpose of Chapter 11 is the

rehabilitation, through the Code's plan process, of financially distressed debtors.”).

179 11 U.S.C.A. § 1129(a)(15) (2012). See In re Friedman, 466 B.R. at 482; In re O'Neal, 490 B.R. 837, 850-51 (Bankr. W.D. Ark. 2013).

180 Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 232, 130 S. Ct. 1324, 176 L. Ed. 2d 79, 52 Bankr. Ct. Dec. (CRR) 232, 63

Collier Bankr. Cas. 2d (MB) 910, Bankr. L. Rep. (CCH) P 81703 (2010). See supra Part II.

181 Ransom v. FIA Card Services, N.A., 131 S. Ct. 716 at 721 (citing H. R. Rep. No. 109-31, pt. 1, p. 2 (2005)).

182 11 U.S.C.A. § 1129(a)(15) (2005).

183 11 U.S.C.A. § 1325(b)(2) (2012). See supra Part III. See also supra, note 26 for a discussion of disposable income. In Chapter 13

cases, the disposable income provision of section 1325(b) is “applicable only upon objection to confirmation by the Chapter 13 trustee

or by ‘the holder of an allowed unsecured claim.’” Lundin, supra note 3, at § 163.1.

184 11 U.S.C.A. § 1129(a)(15) (2012).

185 In re Friedman, 466 B.R. 471, 483, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P

82232 (B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 (9th Ci.

186 11 U.S.C.A. § 1129(a)(15) (2012).
























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187 11 U.S.C.A. § 1322 (2012). See Lundin, supra note 3, at § 194.1. “[T]he duration of a Chapter 13 plan is specifically addressed in

§§ 1322(d) and 1325(b)(1). Somewhat oversimplified, the plan must commit all of the debtor's disposable income for at least three

years; for cause, the debtor may extend the plan to a maximum of five years.” But see Lundin, supra note 3, at § 500.1. See also

Lundin, supra note 3, at § 199.1 (“The Code does not mandate that a Chapter 13 plan be any particular length.”).

188 11 U.S.C.A. § 1129(a)(15)(A)(B) (2012).

189 11 U.S.C.A. § 1129(a)(15) (2012).

190 In re Shat, 424 B.R. 854, 863, 63 Collier Bankr. Cas. 2d (MB) 748, Bankr. L. Rep. (CCH) P 81701 (Bankr. D. Nev. 2010) (abrogated

by, Zachary v. California Bank & Trust, 2016 WL 360519 (9th Cir. 2016)). See also Ashley Dillman Bruce & Arthur J. Spector,

Tenth Circuit Retains APR for Individuals: Is it Right?, Norton Bankr. L. Adviser, Apr. 2013, at 60–61 (This article provides a more

fulsome explanation of the difference between an objection and rejection of a plan).

191 11 U.S.C.A. § 1126(a) (2012).

192 Mark G. Douglas, Disenfranchising Creditors in Chapter 11: In Search of the Meaning of “Bad Faith” under Section 1126(e). March/

April (2007), available at http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=4127.

193 Schaff, supra note 115, at 36. (“[I]f no creditor holding an allowed unsecured claim objects, this section does not apply.”)

194 Christopher J. Panos & Brendan C. Recupero, Obtaining Confirmation of an Individual Chapter 11 Debtor's Plan of Reorganization,

in High-income, High-debt Reorganization: Chapter 11 for the People, abi Northeast Consumer Forum, Conference Materials (July

16-18, 2009). (“Unlike other requirements for confirmation, section 1129(a)(15) appears to apply only if a holder of an allowed

unsecured claim objects. Assuming no such creditor objects, an individual chapter 11 debtor should be able to obtain confirmation

of a plan that does not meet the requirements of 1129(a)(15).” (citing In re Meyrowitz, 2008 Bankr. LEXIS 1976 (Bankr. N. D.

Tex. 2008)).

195 Christopher J. Panos & Brendan C. Recupero, Obtaining Confirmation of an Individual Chapter 11 Debtor's Plan of Reorganization,

in High-income, High-debt Reorganization: Chapter 11 for the People, abi Northeast Consumer Forum, Conference Materials (July

16–18, 2009); see 11 U.S.C.A. §§ 1129(a)(3), 1129(a)(7) (2012).

196 See 11 U.S.C.A. § 1325(b)(1) (2012).

197 11 U.S.C.A. §§ 1302, 1325(b)(1) (2012). See Lundin, supra note 3, at § 163.1. “[I]n many jurisdictions, the Chapter 13 trustee polices

compliance with § 1325(b) and objects to confirmation if not satisfied that the debtor has committed all projected disposable income

…”

198 11 U.S.C.A. §§ 1101, 1106, 1107(a) (2012). A party must meet a high bar in order to have a court appoint a trustee in a Chapter 11 case.

11 U.S.C.A. § 1104 (2012). 11 U.S.C.A. § 1104(a)(1) permits a court to order the appointment of a trustee “for cause, including fraud,

dishonesty, incompetence or gross mismanagement of the affairs of the debtor …” The United States Trustee ultimately oversees all

Chapter 11 cases, however. 28 U.S.C.A. § 586 (2012).

199 Individual Chapter 11 subcomm. for the bus. bankr. comm. of the bus. law section of the am. bar ass'n, recommendation for reform

of the bankr. code for individual Chapter 11 cases (on file with author) (recommending that Congress change the language of section

1129(a)(15) to require only a rejecting vote to trigger the provision's disposable income requirement, that Congress eliminate the

APR as to individual Chapter 11 debtors, and that, if Congress eliminates the absolute priority rule “as it applies to individual Chapter

11 debtors … that the provisions of section 1129(a)(15) be required in all nonconsensual individual Chapter 11 cases in order to

ensure that the debtor's plan is fair and equitable.”).

200 See supra Part V.

201 See supra notes 188 and 189.




























202 See supra Part II.

203 In a case pertaining to a Chapter 13 debtor, the United States Supreme Court held that a bankruptcy court may account for changes

in a debtor's income that are known or virtually certain at confirmation, when calculating a debtor's projected disposable income.

Hamilton v. Lanning, 560 U.S. 505, 524, 130 S. Ct. 2464, 177 L. Ed. 2d 23, 53 Bankr. Ct. Dec. (CRR) 67, Bankr. L. Rep. (CCH) P

81780 (2010). Arguably, bankruptcy courts could do the same in an individual Chapter 11 case.

204 11 U.S.C.A. § 1129(a)(11) (2012).

205 11 U.S.C.A. § 521(a)(1)(B)(ii) (2012).

206 Chapter 11 debtors submit cash flow analyses by directive of the Office of the United States Trustee, U.S. DOJ. See OVERVIEW

OF THE UNITED STATES TRUSTEE PROGRAM POLICY AND PRACTICES MANUAL, available at http://www.justice.gov/

ust/united-states-trustee-program-policy-and-practices-manual.

207 See supra notes 186 and 187.

208 11 U.S.C.A. § 1325(b)(1). See supra note 196.

209 11 U.S.C.A. §§ 1101, 1106, 1107(a) (2012).

210 11 U.S.C.A. §§ 1101, 1106, 1107(a) (2012). The United States Trustee ultimately oversees all Chapter 11 cases, however. 28 U.S.C.A.

§ 586 (2012).

211 See 11 U.S.C.A. §§ 1106, 1107(a) (2012).

212 See supra note 197.

213 “The Supreme Court prescribes rules of bankruptcy procedure for the district courts pursuant to section 2075 of Title 28, United

States Code. Pursuant to that section, the Supreme Court transmits to Congress (not later than May 1 of the year in which the rule

is to become effective) a copy of the proposed rule. The rule takes effect no earlier than December 1 of the year in which the rule is

transmitted unless otherwise provided by law.” See Historical note, fed. r. bankr. p. (2014).

214 28 U.S.C.A. § 2075 (2012).

215 In re Itel Corp., 17 B.R. 942, 944, 8 Bankr. Ct. Dec. (CRR) 961, 6 Collier Bankr. Cas. 2d (MB) 4 (B.A.P. 9th Cir. 1982).

216 See supra Parts II and V. See also supra note 195.

217 28 U.S.C.A. § 2075 (2012).

218 11 U.S.C.A. § 1128(b) (2012).

219 Fed. R. Bankr. P. 3020(b).

220 See supra Parts IV, V, and VI.

221 Commission Report, supra note 18, at 318. (“Until these issues are addressed and definitively resolved, the utility of chapter 11 for

individual debtors cannot be fully realized.”).

222 In re Friedman, 466 B.R. 471, 479, 56 Bankr. Ct. Dec. (CRR) 57, 67 Collier Bankr. Cas. 2d (MB) 752, Bankr. L. Rep. (CCH) P

82232 (B.A.P. 9th Cir. 2012) (overruled by, Zachary v. California Bank & Trust, 2016 WL 360519 at *4 (9th Cir. 2016)). See Jean

Braucher, A Guide to Interpretation of the 2005 Bankruptcy Law, 16, Am. Bankr. Inst. L. Rev., 349, 349 (2008) (noting a third

purpose of BAPCPA, supported by legislative history—fairness to creditors and debtors).

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