Ice House America, LLC v. Charles Cardin

Filing

OPINION and JUDGMENT filed: The judgment of the bankruptcy court is REVERSED, and the case REMANDED for further proceedings consistent with the opinion of this court. Decision for publication. Richard F. Suhrheinrich, Eugene E. Siler, Jr., and Raymond M. Kethledge (AUTHORING), Circuit Judges.

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 14a0099p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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ICE HOUSE AMERICA, LLC,
Appellant,
v.

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No. 13-5764

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CHARLES CARDIN,
Appellee.

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Appeal from the United States District Court
for the Eastern District of Tennessee at Greeneville.
No. 2:12-cv-00463—J. Ronnie Greer, District Judge.
Argued: January 22, 2014
Decided and Filed: May 13, 2014
Before: SUHRHEINRICH, SILER, and KETHLEDGE, Circuit Judges.
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COUNSEL
ARGUED: Michael S. Kelley, KENNERLY, MONTGOMERY & FINLEY, P.C., Knoxville,
Tennessee, for Appellant. William E. Maddox, Jr., WILLIAM E. MADDOX, JR., LLC,
Knoxville, Tennessee, for Appellee. ON BRIEF: Michael S. Kelley, KENNERLY,
MONTGOMERY & FINLEY, P.C., Knoxville, Tennessee, for Appellant. William E. Maddox,
Jr., WILLIAM E. MADDOX, JR., LLC, Knoxville, Tennessee, for Appellee.

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OPINION
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KETHLEDGE, Circuit Judge. The question presented in this case is whether the 2005
amendments to the Bankruptcy Code abrogated the so-called “absolute-priority rule” as applied
to individual debtors who file for bankruptcy under Chapter 11 of the Code. The bankruptcy
court said yes, and approved a bankruptcy plan that allowed the debtor, Charles Cardin, to retain
most of his pre-petition assets while paying his principal unsecured creditor, Ice House America,
LLC, less than 10 cents on the dollar of its approved claim. We respectfully disagree with the
bankruptcy court’s reading of the 2005 amendments, and reverse.
Ice House manufactures stand-alone machines that make cubed ice and then vend the ice
in bags to consumers. Cardin bought eight of the machines, and operates them at various
locations in Eastern Tennessee. The machines provide substantial income: $264,000 in 2012,
according to Cardin’s own projections. Separately, in 2004, Cardin (through a company he
wholly owns) also signed agreements to be the exclusive distributor of Ice House’s machines in
Tennessee. But four years later Ice House sued for breach, eventually obtaining two judgments
against Cardin totaling $1,301,900, without interest. Cardin then filed for bankruptcy as an
individual debtor.
Individual debtors have two basic options under the Code. First, a debtor can file for
liquidation under Chapter 7, under which all of the debtor’s non-exempt assets are sold off and
the proceeds distributed to creditors. Alternatively, a debtor can file for reorganization under
Chapters 11 or 13, which allow the debtor to retain assets, restructure debts, and pay creditors
under a court-approved plan.
Individual debtors who choose the reorganization option usually file for bankruptcy
under Chapter 13. See 11 U.S.C. § 1301. But some debtors—like Cardin here—are barred from
filing under Chapter 13 because their debts are too large. See 11 U.S.C. § 109(e). These debtors
instead file under Chapter 11, which applies more frequently to corporate reorganizations. Toibb
v. Radloff, 501 U.S. 157, 160-61 (1991).

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Under Chapter 11, a debtor must file a proposed plan of reorganization. A plan must
identify, among other things, any claims it will “impair.” 11 U.S.C. § 1123(a)(3). A creditor’s
claim is impaired if, under the plan, the creditor will not receive full value for the claim.
11 U.S.C § 1124. After the plan is filed, creditors vote to accept or reject it. 11 U.S.C § 1126.
Then the bankruptcy court holds a hearing and decides whether to confirm the plan based upon
16 criteria. 11 U.S.C § 1129. As a general rule, the court cannot confirm a plan if any impaired
creditor votes to reject it. 11 U.S.C § 1129(a)(8). But “[s]ection 1129(b) creates an exception to
that general rule, permitting confirmation of nonconsensual plans—commonly known as
‘cramdown’ plans—if ‘the plan . . . is fair and equitable, with respect to each class of claims or
interests that is impaired under, and has not accepted, the plan.’” RadLAX Gateway Hotel, LLC v.
Amalgamated Bank, 132 S. Ct. 2065, 2069 (2012) (quoting 11 U.S.C. § 1129(b)(2)(A)).
In order for a plan to be “fair and equitable” for purposes of § 1129(b), it must satisfy the
absolute-priority rule. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988). The
rule has been “a cornerstone of equitable distribution for Chapter 11 creditors for over a
century.” In re Lively, 717 F.3d 406, 410 (5th Cir. 2013). Originally a judicial gloss upon the
1898 Bankruptcy Act, the absolute-priority rule was codified in the 1978 version of the Code.
As codified, the rule provides that every unsecured creditor must be paid in full before the debtor
can retain “any property” under a plan. 11 U.S.C. § 1129(b)(2)(B)(ii).
The parties agree that the absolute-priority rule is not satisfied here. According to
Cardin’s bankruptcy filings, his assets include his home, valued at $420,000, his ice machines,
valued in total at $320,000, and a 2011 Ford F150 pickup truck, valued at $30,000. Two of
Cardin’s creditors are more than fully secured: Citizen’s National Bank holds mortgages totaling
approximately $543,000 on the home and ice machines, leaving Cardin with almost $200,000 of
equity in those assets; and Ford Motor credit has a $15,429 claim secured by the F150, leaving
Cardin with about $14,500 of equity in the truck. Cardin’s plan allows him to retain all of these
assets after paying off the loans they secure. Meanwhile, the plan requires Cardin to make a
single payment of $124,000 towards Ice House’s unsecured claim of $1.545 million. The plan
also requires Cardin to “remit” to Ice House the amount of any disposable income that he earns
during the five years following the plan’s confirmation (but not any income thereafter).

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Ice House and the United States Trustee objected to Cardin’s plan on the ground that it
violates the absolute-priority rule. The bankruptcy court overruled the objections, construing the
2005 amendments to the Bankruptcy Code to eliminate the absolute-priority rule as applied to
individual debtors. The bankruptcy court then confirmed Cardin’s plan. Ice House appealed to
the district court, which certified the question presented for direct appeal to our court. 26 U.S.C.
§ 158(d)(2)(B). We granted permission for this appeal. 26 U.S.C. § 158(d)(2)(A).
We review the bankruptcy court’s interpretation of the Code de novo. In re Koenig
Sporting Goods, Inc., 203 F.3d 986, 988 (6th Cir. 2000). Subject to certain exceptions not
relevant here, 11 U.S.C. § 541(a)(1) defines “property of the estate” to include, among other
things, “all legal or equitable interests of the debtor in property as of the commencement of the
case.” Thus, prior to the 2005 amendments to the Code, “property of the estate”—and thus the
property subject to the absolute-priority rule in Chapter 11 cases—was only the property the
debtor owned “as of the commencement of the case.”
But Congress expanded the definition of “property of the estate” in the 2005 amendments
to the Code. Those amendments included the addition of an entirely new section to Chapter 11,
namely § 1115, which provides:
(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 but before 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.
(b) Except as provided in section 1104 or a confirmed plan or order confirming a
plan, the debtor shall remain in possession of all property of the estate.
11 U.S.C. § 1115 (emphasis added). By its plain terms, this section expands the definition of
“property of the estate” in Chapter 11 cases to include, for the first time, property obtained by the
debtor “after the commencement of the case.” And all of that property, absent some other
amendment to the Code, would be subject to the absolute-priority rule.

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But Congress did enact additional relevant amendments in 2005. Specifically, Congress
amended § 1129(b)(2)(B)(ii) to add the italicized language below:
the holder of any claim or interest that is junior to the claims of such class will not
receive or retain under the plan on account of such junior claim or interest any
property, except that in a case in which the debtor is an individual, the debtor
may retain property included in the estate under section 1115, subject to the
requirements of subsection (a)(14) of this section.
(Emphasis added.)
The parties agree that the italicized language creates an exception to the absolute-priority
rule, and moreover that the exception applies only in Chapter 11 cases where the debtor is an
individual. But the parties otherwise disagree upon the exception’s scope. Ice House argues that
the italicized language excepts from the absolute-priority rule only property that is added to the
estate by § 1115, i.e., post-petition property. In contrast, Cardin and the bankruptcy court
believe that the italicized language excepts not only post-petition property added by § 1115, but
also pre-petition property that was already part of the estate under § 541(a). Thus, under
Cardin’s reading, the 2005 amendment to § 1129(b)(2)(B)(ii) excepts all of an individual
debtor’s property from the absolute-priority rule—which is to say that the rule does not apply to
individual debtors at all.
The critical language in § 1129(b)(2)(B)(ii) is that “the debtor may retain property
included in the estate under section 1115[.]”

And the key word within that language is

“included.” “Include” is a transitive verb, which means it “show[s] action, either upon someone
or something.” Shertzer, Elements of Grammar 26 (1986). The action described by “include” is
either “to take in as a part, an element, or a member” (first definition) or “to contain as a
subsidiary or subordinate element” (second definition). The American Heritage Dictionary 913
(3d ed. 1992). The first definition (“to take in”) describes genuine action—grabbing something
and making a part of a larger whole—whereas the second definition (“to contain”) lends itself,
more dryly, to a description of things that are already there—“the duties of a fiduciary
include . . . .” The first definition is plainly the better fit in § 1129(b)(2)(B)(ii): converted into
the active voice, § 1129(b)(2)(B)(ii) refers to property that § 1115 includes in the estate, which
naturally reads as “property that § 1115 takes into the estate,” rather than as “property that
§ 1115 contains in the estate.” Thus—employing this definition and converted into the active

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voice—§ 1129(b)(2)(B)(ii) provides that “the debtor may retain property that § 1115 takes into
the estate.”
Section 1115 cannot take into the estate property that was already there. And long before
Congress enacted the 2005 amendments, § 541 had already brought into the estate “all legal or
equitable interests of the debtor in property as of the commencement of the case.” What § 1115
adds to that pile of legal and equitable interests—and thus what § 1115 takes into the estate—is
property “that the debtor acquires after the commencement of the case[.]” 11 U.S.C. § 1115(a)
(emphasis added). (We recently read parallel language in Chapter 13 precisely the same way.
See In re Seafort, 669 F.3d 662, 667 (6th Cir. 2012) (Ҥ 541 fixes property of the estate as of the
date of filing, while § 1306 adds to the ‘property of the estate’ property interests which arise
post-petition.”)) Thus, it is only that property—property acquired after the commencement of
the case, rather than property acquired before then—that “the debtor may retain” when his
unsecured creditors are not fully paid. 11 U.S.C. § 1129(b)(2)(B)(ii).
Our interpretation is buttressed by the Supreme Court’s directive not to “read the
Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress
intended such a departure.” Hamilton v. Lanning, 560 U.S. 505, 517 (2010). And Cardin’s
interpretation is anything but clear. He essentially reads the clause “property included in the
estate under section 1115[,]” as used in § 1129(b)(2)(B)(ii), to mean any property mentioned in
§ 1115, even if that property was already “included” in the estate by § 541(a)—which prepetition property undisputedly is.

Moreover, even if one conflates “included” and

“mentioned”—two words that do not mean the same thing—to adopt Cardin’s meaning one must
still airbrush away the phrase that follows, namely “in the estate,” and then change “under” to
“in” before “§ 1115.” This is a Rube-Goldberg reading at best; and we think it much more likely
that, if Congress meant to except individual debtors from the absolute-priority rule, it would have
simply amended § 1129(b)(2)(B)(ii) to say something more like the following: “the holder of
any claim or interest that is junior to the claims of such class will not receive or retain under the
plan on account of such junior claim or interest any property, except in a case in which the
debtor is an individual.”

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In summary, what the 2005 amendment to § 1129(b)(2)(B)(ii) accomplishes is
straightforward: the amendment maintains the pre-2005 scope of the absolute-priority rule, thus
limiting the rule’s scope to pre-petition property, even as the definition of “property of the
estate” expands to include post-petition property in § 1115.
All that said, we acknowledge a contrary point that the bankruptcy court made in its
thoughtful decision in this case. By way of background, Chapter 13 does not have an absolutepriority rule, but does require the debtor to dedicate all of his “projected disposable income” for
five years to the payment of unsecured creditors.

11 U.S.C. § 1325(b)(1)(B).

A

2005 amendment to the Code applies this same requirement to individual debtors in Chapter 11.
Thus, as the bankruptcy court observed (and Cardin reiterates on appeal), an 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
absolute-priority rule (and thus cannot retain any pre-petition property) if he does not pay those
creditors in full. We recognize that hardship; and, like the Supreme Court in Ahlers, “we do not
take lightly the concerns” that drove the bankruptcy court to its result. 485 U.S. at 209. But
neither do we presume that Congress was without reasons to limit the exception to the absolutepriority rule the way it did. In any event, our task is to interpret the laws that Congress enacted,
not to determine whether they are fair. See id. (“relief . . . cannot come from a misconstruction
of the applicable bankruptcy laws, but rather, only from action by Congress”).
For the reasons given, we think the best interpretation of the 2005 amendment to
§ 1129(b)(2)(B)(ii) is the one we adopt today. So does every other circuit court to have reached
the issue. See In re Lively, 717 F.3d at 410; In re Stephens, 704 F.3d 1279, 1287 (10th Cir.
2013); In re Maharaj, 681 F.3d 558, 565 (4th Cir. 2012). We therefore hold that the absolutepriority rule continues to apply to pre-petition property of individual debtors in Chapter 11 cases.
The plan confirmed here did not comply with the rule, and thus the plan’s confirmation was
error.
The judgment of the bankruptcy court is reversed, and the case remanded for further
proceedings consistent with this opinion.