Individual debtors have the right to retain and use pre-petition property to reorganize under chapter 11 without first getting creditors’ consent or proposing to pay them off — at least according to the Bankruptcy Code.[1] 11 U.S.C. § 1129(b)(2)(B)(ii) expressly spares individual chapter 11 debtors from the absolute priority rule[2] when they propose in their plans to retain property “included in the estate under § 1115.” Under 11 U.S.C. § 1115(a), “property of the estate includes, in addition to the property specified in section 541 — all property of the kind specified in section 541 that the debtor obtains after the commencement of the case but before the case is closed, dismissed, or converted ... and earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted.”[3]
Like with other BAPCPA[4] provisions, the courts are having trouble enforcing these words as written. They all recognize that § 1115(a) brings post-petition property into an individual debtor’s chapter 11 estate, but only a few comprehend that § 1115(a) also acts as a conduit for pre-petition property, too. The courts that believe that § 1115(a) is limited to only post-petition property — including all opining circuit courts[5] — exhibit a “narrow view,” and find that the absolute priority rule does not apply only to post-petition property.[6] The few courts that interpret § 1115(a) to also be a conduit for pre-petition property have a “broad view,” and rightly find that the absolute priority rule does not apply to both post-petition and pre-petition property.[7] The application of nondiscretionary principles of statutory interpretation shows why the Bankruptcy Code does not subject individual chapter debtors to the absolute priority rule and the broad-view courts are getting it right.
Statutory Interpretation
The Bankruptcy Code must be interpreted and enforced like all other federal statutes.[8] “We start, as we must, with the language of the statute.”[9] Unless defined within the statute, words are understood to have their ordinary and natural meanings.[10] We consider not only those meanings, but also the placement and purpose of the words in the statutory scheme.[11]
“We are not at liberty to construe any statute so as to deny effect to any part of its language. It is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.”[12] This “canon against surplusage[13] assists only where a competing interpretation gives effect to every clause and word of a statute.”[14] “The canon requiring a court to give effect to each word ‘if possible’ is sometimes offset by the canon that permits a court to reject words ‘as surplusage’ if inadvertently inserted or if repugnant to the rest of the statute.”[15] This standard for statutory interpretation is well established, yet somehow a majority of courts are failing to follow it.
Once again, the language of § 1115(a) provides that “property of the estate includes, in addition to the property specified in section 541....” The ordinary and natural meanings of “includes” and the phrase “property specified in section 541” are not problematic. “Includes” means “to take in, enfold, or comprise as a discrete or subordinate part or item of a larger aggregate, group, or principle.”[16] “[T]he property specified in section 541” unequivocally refers to pre-petition assets. Thus, interpreting § 1115(a) comes down to the “in addition to” verbiage and whether it is a gateway that allows pre-petition property to become property of an individual debtor’s chapter 11 estate. The verbiage either is or is not a gateway; there is no in between. The broad-view courts say that it is, and the narrow-view courts say that it is not. The broad-view courts’ interpretation of § 1115(a) is the right one, because it does not produce proscribed statutory surplusage.
Narrow View
Some narrow-view courts see “in addition to” to have the limited meaning of “separate from” or the like.[17] They view the phrase as used in its § 1115 context to be adverbial in nature and to modify “includes.”[18] They cite and quote writing guides, such as Marget Shertzer’s The Elements of Grammar, for the proposition that “[p]hrases or clauses introduced by such expressions as together with, as well as, in addition to are not part of the subject and, therefore, do not affect the number of the verb.”[19] These narrow-view courts thus find that “in addition to” expressly excludes pre-petition property from that which is included under § 1115.[20]
Other narrow-view courts deem “in addition to,” as used in § 1115(a), to be ambiguous because it is susceptible to more than one reasonable interpretation.[21] Instead of narrowing the issue to the aforementioned “either is or isn’t” question, they seek an interpretation of overall congressional intent. They favor “the narrow interpretation typically on grounds that any intentional repeal of absolute priority for individual debtors would have been reflected in more straightforward drafting.”[22]
Broad View
The narrow-view courts’ arguments seem strong initially, until one recognizes that those courts are disregarding their mandate to enforce statutes as written, not as they would have them written.[23] The judiciary is required to construe a statute so that effect is given to all of its provisions, if possible, and that no part will be rendered inoperative or superfluous.[24] In particular, it must construe the Bankruptcy Code in a manner that gives effect to all of its provisions.[25] Only if a statute’s plain language does not satisfy these requirements or is otherwise ambiguous may courts resort to congressional intent or legislative history.[26] “A statute is not ambiguous simply because one of its words is susceptible to two meanings.”[27]
Courts interpreting § 1115(a) must determine whether the statute as written has a meaning that gives effect to every clause and word of its provisions and is in harmony with other sections of the Code. Section 541 of the Code specifies that pre-petition property is property of the estate, and § 1115 “includes, in addition to the property specified in section 541 [pre-petition property],” certain post-petition property.[28] As previously discussed, some of the courts employing the narrow view argue that “in addition to” as used in this context only means “separate from” or something similar to “separate from.” Under their narrow-view argument, § 1115(a) becomes superfluous on its face, and gives no effect whatsoever to § 1129(b)(2)(B)(ii). If that argument is correct, Congress could have simply omitted the phrase “in addition to the property specified in section 541” from § 1115(a). After all, if § 541 pre-petition property was already part of a chapter 11 estate wholly independent of § 1115, then there would be no need to mention it in § 1115(a). A version of § 1115 omitting that language would have made § 1129(b)(2)(B)(ii) clear and concise; individual chapter 11 debtors would be spared from the absolute priority rule when they propose to retain the post-petition property “included in the estate under § 1115.” Congress nevertheless did not draft this version of § 1115, which shows the fatal flaw of this narrow-view argument.
Seemingly lost upon all of the narrow-view courts is that § 1115(a) has another meaning that gives effect to every clause and word of its provisions and is in harmony with other sections of the Code.[29] That meaning forecloses consideration of its legislative history and intent, other than to rule out inadvertence and repugnancy under the canon of surplusage. The Merriam-Webster Dictionary defines “in addition to” to mean “combined or associated with.”[30] Using this definition, § 1115 includes the combination of pre-petition property and post-petition property in an individual’s chapter 11 estate. This definition permits § 1115 to fit like a puzzle piece into the § 1129(b)(2)(B)(ii) text, and has the effect of insulating pre-petition and post-petition property from the absolute priority rule. Unlike with the narrow view, this broad view leaves no surplusage, gives effect to every clause and word of § 1115, and is in harmony with § 1129(b)(2)(B)(ii).
Interpreting “in addition to” to mean “combined or associated with” could also not be reasonably deemed to be “inadvertently inserted” into § 1115(a) or repugnant to the rest of the Bankruptcy Code, either.[31] “Absolute priority is not sacrosanct. Chapter 13 has no absolute priority rule, and most of the changes effected by the 2005 legislation to individual chapter 11 debtors were part of an overall design of adapting various chapter 13 provisions to fit in chapter 11.”[32] Even three of the four opining courts recognize this: the Fourth Circuit in Lively,[33] the Sixth Circuit in Ice House[34] and the Tenth Circuit in Stephens.[35]
Conclusion
No matter how one looks at it, § 1115 either is or is not a means by which pre-petition property becomes property of an individual debtor’s chapter 11 estate. Only an interpretation recognizing § 1115 to be such a conduit avoids surplusage and otherwise complies with nondiscretionary principles of statutory interpretation. This is what the circuit and other narrow-view courts are missing, and why individual chapter 11 debtors should not be deprived of their right to retain pre-petition property without the worry of the absolute priority rule.
[1] 11 U.S.C. §§ 101, et seq.
[2] Under the absolute priority rule, chapter 11 plans may not reserve property for debtors and their equity securityholders unless creditors consent or receive property equal in value to the full amount of their allowed claims or the debtor’s reorganization value, whichever is less. Collier on Bankruptcy ¶ 1129.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
[3] Emphasis added.
[4] The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
[5] In re Maharaj, 681 F.3d 558 (4th Cir. 2012); In re Lively, 717 F.3d 406 (5th Cir. 2013); Ice House Am. LLC v. Cardin, 751 F.3d 734 (6th Cir. 2014); Dill Oil Co. v. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir. 2013).
[6] See Woodward, 2014 Bankr. LEXIS 1940, at *8 (discussing the “broad view” and “narrow view”).
[7] Id.
[8] See generally Groetken v. Illinois (In re Groetken), 843 F.2d 1007, 1013 (7th Cir. 1988) (“The Bankruptcy Code is a Federal statute[.]”) (citations, quotations and internal punctuation marks omitted).
[9] Bailey v. United States, 516 U.S. 137, 144-45 (1995) (citation omitted).
[10] Id. at 145 (referencing dictionaries such as Webster’s New International Dictionary of English Language and Black’s Law Dictionary); see also Clark v. Rameker, 134 S. Ct. 2242, 2246 (2014) (stating that words not expressly defined in the Bankruptcy Code are given their ordinary meaning).
[11] Bailey, 516 U.S. at 144-45.
[12] Regions Hosp. v. Shalala, 522 U.S. 448, 467 (1998) (citation and quotation omitted); Bowsher v. Merck & Co., 460 U.S. 824, 832 (1983) (“[W]e must give effect, if possible, to every word of the statute” (emphasis added)) (citation omitted).
[13] See Regions Hospital, 522 U.S. at 467 (defining surplusage “as words of no consequence”).
[14] Marx v. Gen. Revenue Corp., 133 S. Ct. 1166, 1177 (2013) (citation and quotation marks omitted).
[15] Chickasaw Nation v. United States, 534 U.S. 84, 94 (2001) (citation, quotation and internal punctuation marks omitted).
[16] Webster’s Third New International Dictionary 1143 (1976); see also In re HP Distrib., LLP, 2011 Bankr. LEXIS 251, at *15-16 n. 33 (Bankr. D. Kan. Jan. 25, 2011) (citing Black’s Law Dictionary (9th ed. 2009) and defining “include” as ‘to contain as a part of something”).
[17] See, e.g., In re Arnold, 471 B.R. 578, 603 (Bankr. C.D. Cal. 2012).
[18] Id. at 602-03; see generally Resolution Trust. Corp. v. Love, 36 F.3d 972, 976 (10th Cir. 1994) (citation and quotation omitted) (indicating that a statute is construed according to its grammatical structure).
[19] Arnold, 471 B.R. at 603 (emphasis in original).
[20] Cf. Lively, 717 F.3d at 409 (“[T]he ‘narrow’ interpretation is unambiguous and correct, and the exception to the absolute priority rule plainly covers only the individual debtor’s post-petition earnings and post-petition acquired property.”).
[21] See, e.g., Maharaj, 681 F.3d at 568.
[22] Collier on Bankruptcy ¶ 1129.04; see also id. (“Congress did not intend to alter longstanding bankruptcy practice by effecting an implied repeal of the absolute priority rule for individual debtors.”).
[23] See generally Lamie v. United States, 540 U.S. 526, 534 (2004) (“[W]hen the statute’s language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms.”) (citation and internal quotation marks omitted).
[24] Clark, 134 S. Ct. at 2248 (referring to the Bankruptcy Code); Marx v. Gen. Revenue Corp., 133 S. Ct. 1166, 1177 (2013) (citation and quotation marks omitted) (“[T]he canon against surplusage assists only where a competing interpretation gives effect to every clause and word of a statute.”); Bate Refrigerating Co. v. Sulzberger, 157 U.S. 1 (1895) (“It is the duty of the court to give effect, if possible, to every clause and word of a statute.”) (citation and quotation omitted).
[25] In re Fiorilli, 196 B.R. 83, 86 (Bankr. N.D. Ohio 1996) (“A fundamental rule of statutory construction requires a court to read together and give effect to all the provisions of the Bankruptcy Code, as was intended by Congress.”) (citing, in part, Reiter v. Sonotone Corp., 442 U.S. 330 (1979)).
[26] See generally BedRoc Ltd. LLC v. United States, 541 U.S. 176, 187 n.8 (2004) (“[L]ongstanding precedents ... permit resort[ing] to legislative history only when necessary to interpret ambiguous statutory text.”); Dep’t of Hous. v. Rucker, 535 U.S. 125, 132 (2002) (“[R]eference to legislative history is inappropriate when the text of the statute is unambiguous.”) (citation omitted); Mitchell v. Chapman, 343 F.3d 811, 826 (6th Cir. 2003) (indicating that a court “must begin with the statute’s plain language, and may resort to a review of congressional intent or legislative history only when the language of the statute is not clear”) (citing, in part, Consumer Prod. Safety Comm’n v. GTE Sylvania Inc., 447 U.S. 102, 108 (1980)), abrogated on other grounds, 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 256 (2009).
[27] Valero Energy Corp. v. United States, 569 F.3d 626, 632 (7th Cir. 2009).
[28] Section 102(3) of the Code also makes clear that “includes” is a term that is not limiting.
[29] This is apparently lost on the broad-view courts, too, given that none of them appear to make strong surplusage agreements.
[30] Merriam-Webster, at www.merriam-webster.com.
[31] Cf. Chickasaw Nation, 534 U.S. at 94 (setting forth those two surplusage exceptions).
[32] Collier on Bakruptcy ¶ 1129.04 (citation omitted).
[33] 681 F.3d at 574.
[34] 751 F.3d at 739-40.
[35] 704 F.3d at 1286.