NORWEST BANK WORTHINGTON AND FEDERAL LAND BANK OF ST. PAUL,
PETITIONERS V. JAMES R. AHLERS AND MARY M. AHLERS
   No. 86-958
   In the Supreme Court of the United States
4 October Term, 1987
   On Writ of Certiorari to the United States Court of Appeals for the
Eighth Circuit
   Brief for the United States as Amicus Curiae Supporting Petitioners
            TABLE OF CONTENTS
   Question presented
   Interest of the United States
   Statement
   Summary of argument
   Argument:
      A court may not confirm a plan of reorganization under
      Chapter 11 of the Bankruptcy Code without the consent of a
      class of unsecured creditors whose claims are impaired and
      who do not receive property of a value equal to the allowed
      amount of their claims, if the plan allows junior interests
      to participate on the basis of future contributions of
      "labor, experience, and expertise"
      A. Chapter 11 of the Bankruptcy Code gives an impaired,
         dissenting class of unsecured creditors absolute
         priority over equity holders
      B. There is no exception to the absolute priority rule
         that allows equity holders to participate in a plan of
         reorganization under Chapter 11, over the objection of
         a dissenting, impaired class of creditors whose
         claims have not been fully honored, on the basis of a
         contribution of future "labor, experience, and
         expertise"
         1. Chapter 11 of the Bankruptcy Code does not contain
            an exception to the absolute priority rule for
            equity holders who contribute to the reorganized
            enterprise
         2. Even if the Bankruptcy Code should be read to
            contain an exception to the absolute priority rule
            for equity holders who contribute money or money's
            worth to the reorganized enterprise, respondents'
            "labor, experience, and expertise" is not such a
            contribution
   Conclusion
                          QUESTION PRESENTED
   Whether a plan of reorganization under Chapter 11 of the Bankruptcy
Code may be confirmed without the assent of a class of unsecured
creditors whose claims are impaired and who do not receive property of
a value equal to the allowed amount of their claims, if the plan
allows the debtor to participate on the basis of future contributions
of "labor, experience, and expertise."
                     INTEREST OF THE UNITED STATES
   The United States and its agencies are often creditors in
bankruptcy proceedings.  For example, the Internal Revenue Service is
a creditor in a very high percentage of bankruptcy proceedings because
of federal taxes owed by the debtor.  Other agencies, such as the
Farmers Home Administration of the Department of Agriculture and the
Small Business Administration, make loans to private parties, some of
which enter bankruptcy before repaying the loans.  Still other
agencies, such as the Federal Deposit Insurance Corporation, become
creditors in bankruptcy proceedings because of the failure of entities
that they insure.  The question presented by this case affects the
rights of creditors vis-a-vis debtors.  The United States therefore
has an interest in the proper resolution of that question.  The United
States filed a brief at the petition stage of this case at the
invitation of the Court.
                               STATEMENT
   1. This case arises from the bankruptcy petition of respondents
James and Mary Ahlers.  Respondents farm land in Nobles County,
Minnesota.  Between 1965 and 1982, they obtained four loans from
petitioner Federal Land Bank (FLB) and secured each of these loans
with a separate parcel of land they owned (Pet. App. A3).  Between
1982 and 1984, respondents obtained additional loans from petitioner
Norwest Bank Washington (Norwest).  The security for these loans was a
second mortgage on the property already securing FLB's loans and a
first mortgage on respondents' farm machinery, farm equipment, crops,
livestock, and other farm proceeds (id. at A4).
   Respondents defaulted on their loans.  Norwest, exercising its
rights as a secured creditor, filed a replevin action in Minnesota
state court seeking possession of respondents' farm equipment and
machinery (Pet. App. A4).  Two weeks later, respondents filed a
petition for reorganization under Chapter 11 of the Bankruptcy Code,
11 U.S.C. (& Supp. III) 1101 et seq. (Pet. App. A4-A5).  This petition
automatically stayed Norwest's collection efforts in state court (11
U.S.C. (& Supp. III) 362(a)).
   2. a. Petitioners filed motions in the bankruptcy court for relief
from the automatic stay, see 11 U.S.C. (& Supp. III) 362(d), asserting
that respondents could not provide them adequate protection.  The
court, after examining respondents' financial situation, agreed with
petitioners and lifted the stay (Pet. App. A63-A66).  Respondents
appealed this decision to the district court.
   b. The district court denied respondents' motion to stay
petitioners' collection efforts pending its resolution of the appeal,
but it agreed to enjoin petitioners from initiating any foreclosure
proceedings pending appeal of the denial of the stay motion to the
court of appeals.  The court of appeals issued a stay and remanded the
case to the district court for adjudication of respondents' appeal
(Pet. App. A75-A77).  In so doing, the court noted that respondents'
1985 crops were not subject to any liens and that those crops "have a
value sufficient to reasonably insure that neither creditor will be
further harmed if foreclosure and repossession proceedings are stayed"
(id. at A76).  The court gave petitioners a lien on those crops,
ordered respondents to provide Norwest with assurances that all farm
machinery and equipment was fully insured, and requested that the
district court determine the merits of the request for relief from the
automatic stay, including the probability of success of respondents'
proposed plan of reorganization (id. at A76-A77).
   c. The district court affirmed the bankruptcy court's order
granting petitioners relief from the automatic stay (Pet. App.
A84-A86).  The court held that the factual findings of the bankruptcy
court, which were not clearly erroneous, required that petitioners'
interests be given adequate protection, and that respondents were
unable to provide such protection (ibid.).  Pursuant to the
instructions of the court of appeals, the district court then
evaluated the likelihood of success of respondents' proposed plan of
reorganization.  The court found that no such likelihood existed,
concluding that three facts doomed any chance that respondents would
have of successfully reorganizing:  respondents had an
asset-to-liability ratio of .67 to 1;  they had "failed to establish
their ability to operate profitably in the future";  and American
farmers in general face oppressive economic conditions that are
unlikely to improve soon (id. at A87).
   3. a. The court of appeals reversed the bankruptcy court's order
that granted petitioners relief from the automatic stay.  The court
first held that the bankruptcy court and the district court had
analyzed the adequate protection issue improperly and that petitioners
were not entitled to immediate relief from the stay because of a lack
of adequate protection (Pet. App. A7-A12).
   b. The court then addressed petitioners' argument that the
automatic stay must be lifted because of the district court's finding
that the respondents' proposed reorganization plan was infeasible.
Section 362(d)(2) of the Bankruptcy Code, 11 U.S.C. (& Supp. III)
362(d)(2), requires the bankruptcy court to lift the automatic stay if
the debtor has no equity in the property on which the creditor seeks
to foreclose and the property "is not necessary to an effective
reorganization." All agreed that respondents have no equity in their
property, and petitioners argued that, because respondents have no
likelihood of achieving a successful reorganization, it follows that
none of their property would be "necessary to an effective
reorganization." The court of appeals agreed that, if no
reorganization was feasible, the stay should be lifted (Pet. App.
A15).  The court, however, reversed the district court's finding that
there was not a reasonable likelihood of a successful reorganization.
The court concluded that the district court, in determining the extent
to which petitioners' claims were secured, erred in using the
valuations that the bankruptcy court had made in ruling on the
adequate protection issue.  The court held that the extent to which
petitioners were secured creditors had to be determined according to
the value of the property at the time that the plan would be confirmed
(id. at A16).  The court, in dictum, opined that respondents could
indeed propose a feasible reorganization plan (id. at A17-A19,
A37-A49).  /1/
   The court next rejected petitioners' contention that, because they
had legitimate objections to any proposed plan that would allow
respondents to retain an interest in the property, the bankruptcy
court would be precluded from confirming the plan.  Petitioners argued
that, because their claims were substantially undersecured, any plan
of reorganization would have to treat them as unsecured creditors for
this portion of their claims (see 11 U.S.C. 506(a)).  They noted that
no realistic plan proposed by respondents would provide for full
payment of these unsecured claims.  Thus, petitioners concluded that
any plan that included respondents' participation could not satisfy
the absolute priority rule embodied in 11 U.S.C. (& Supp. III) 1129(b)
and could not be confirmed over their objections.  /2/
   The court of appeals rejected petitioners' interpretation of
Section 1129.  It interpreted that section as applying a "modified
version of the traditional absolute priority rule" (Pet. App. A22),
under which a plan proposed by respondents could be confirmed over
petitioners' objections so long as respondents retain an interest that
does not exceed the value of their future "labor, experience, and
expertise" (id. at A26).  The court cited this Court's decision in
Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), which it
read as allowing a debtor to participate in a reorganization so long
as he "contributes to the reorganization enterprise something that is
reasonably compensatory and is measurable" (Pet. App. A24).  The court
then reasoned that respondents' promise to contribute their future
labor and their expertise met this requirement, and thus respondents
could retain an equity interest in the property equal to the value of
those contributions (id. at A24-A25).
   c. Judge Gibson dissented.  He criticized the majority for
misinterpreting Los Angeles Lumber, which he read as allowing debtor
participation in a reorganization only when the debtor contributes
cash or makes contributions "distinctly capital in nature" (Pet. App.
A34).  /3/ Judge Gibson argued that, because respondents' labor
clearly did not fall within this narrow exception to the absolute
priority rule, any proposed plan that allowed them to retain an
interest could not be confirmed (id. at A34-A35).
   4. The court of appeals denied rehearing en banc (Pet. App.
A51-A58).  Four of the five judges who voted for rehearing en banc
joined an opinion that labeled the court's ruling on the absolute
priority issue "directly contrary to * * * Los Angeles Lumber" (id. at
A54).  The other dissenting judge expressed tentative agreement with
the panel dissent (ibid.).
                          SUMMARY OF ARGUMENT
   The absolute priority rule, which was originally a judicial gloss
on the phrase "fair and equitable" as used in the old Bankruptcy Act,
has now been codified in Chapter 11 of the Bankruptcy Code.  Under
this codification, an impaired, dissenting class of unsecured
creditors may block confirmation of a plan of reorganization unless
(i) members of the class receive or retain property of a value equal
to the allowed amount of their claims or (ii) no junior interests
(such as the debtor or equity holders in the debtor) participate in
the plan.  This rule recognizes that the creditors of an insolvent
enterprise are the owners of that enterprise and should receive the
benefit if the enterprise succeeds in reorganization.  The Code allows
unsecured creditors to consent to the participation of more junior
interests, even though the claims of unsecured creditors have not been
fully honored, in recognition of the fact that participation of the
more junior interests will sometimes be advantageous to the creditors.
   Before passage of the Code, equity holders could in some
circumstances participate in a plan of reorganization even without the
consent of unsecured creditors whose claims were not fully honored.
See, e.g., Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 117,
121-122 (1939) (dictum).  In other words, before the Code the
determination whether junior participation would be advantageous to
creditors whose claims were not fully honored was not left entirely to
the judgment of those creditors.  But the Code does leave that
determination to the creditors (voting as a class) and thus has
abolished the Los Angeles Lumber exception to the absolute priority
rule.  The Code, for the first time, gives a statutory definition of
"fair and equitable" rather than leaving the matter to judicial
development, and the express terms of the Code leave no room for an
exception to the absolute priority rule.  Rather, any accommodation of
equity holders in a plan of reorganization that does not leave each
unsecured creditor with property of a value equal to the allowed
amount of its claim must come through agreement among the interested
parties.
   In any event, the exception discussed in Los Angeles Lumber is far
too narrow to permit equity holders to participate in a plan of
reorganization on the basis of a contribution of future "labor,
experience, and expertise," over the objection of a class of unsecured
creditors whose claims have not been fully honored.  The Court in that
very case rejected the argument that such "intangibles" as "'financial
standing and influence in the community' (which) can provide a
'continuity of management'" (308 U.S. at 122 (citation omitted)) may
constitute the kind of contribution that might permit unconsented-to
participation by equity holders when creditor claims have not been
fully honored.  The Court in Los Angeles Lumber likewise rejected the
argument, accepted by the court of appeals in this case, that a court
may force dissenting creditors who are not receiving "fair and
equitable" treatment to accept a plan of reorganization merely
because, in the court's view, the plan will preserve the going-concern
value of an enterprise.  The final argument of the court of appeals --
that the absolute priority rule must be abrogated in order to allow
farmers to reorganize -- is a policy argument that Congress has
accepted in recent amendments adding Chapter 12 to the Bankruptcy
Code, but it does not justify the result reached in this Chapter 11
case.
                               ARGUMENT
 A COURT MAY NOT CONFIRM A PLAN OF REORGANIZATION UNDER CHAPTER 11 OF
THE BANKRUPTCY CODE WITHOUT THE CONSENT OF A CLASS OF UNSECURED
CREDITORS WHOSE CLAIMS ARE IMPAIRED AND WHO DO NOT RECEIVE PROPERTY OF
A VALUE EQUAL TO THE ALLOWED AMOUNT OF THEIR CLAIMS, IF THE PLAN
ALLOWS JUNIOR INTERESTS TO PARTICIPATE ON THE BASIS OF FUTURE
CONTRIBUTIONS OF "LABOR, EXPERIENCE, AND EXPERTISE"
   Section 362(d)(2) of the Bankruptcy Code provides for lifting the
automatic stay when (1) the debtor has no equity in the property
sought to be removed from the stay's protection and (2) that property
is not necessary for a successful reorganization.  In this case it is
undisputed that the first requirement is met.  The second requirement
is satisfied whenever the debtor fails to show that, with the property
the creditor seeks, it is "realistically possible" that the debtor
could successfully reorganize.  See, e.g., Pet. App. A15;  In re
Albany Partners, Ltd., 749 F.2d 670, 673 n.7 (11th Cir. 1984);  In re
Craghead, 57 Bankr. 366, 370 (W.D. Mo. 1985).  The stay in this case
should therefore be lifted if there is no realistic possibility that
respondents could successfully reorganize.
   A plan of reorganization may be confirmed only if it meets either
the terms of 11 U.S.C. (& Supp. III) 1129(a)(8), which permits
confirmation when every creditor class either is "not impaired" /4/ or
accepts the plan, or the terms of 11 U.S.C. (& Supp. III) 1129(b),
which in essence allows a plan to be imposed on an impaired,
dissenting class if it is "fair and equitable." /5/ It is undisputed
that respondents could not propose a plan that meets the terms of
Section 1129(a)(8), because petitioners will clearly be impaired, and
they have, and have said they will assert, legitimate objections to
any proposed plan of reorganization (Pet. App. A19).  Because of the
size of their unsecured claims, their objection would prevent the
class of unsecured creditors from assenting to any reorganization plan
(see id. at A46).  /6/
   Accordingly, respondents could successfully reorganize only if they
could propose a plan that meets the terms of Section 1129(b), which
requires that the plan be "fair and equitable." The court of appeals
recognized that, in light of respondents' financial condition, "any
realistic reorganization plan proposed by (respondents) could not
provide the unsecured creditors with property equal to the amount of
their allowed claims" (Pet. App. A22).  It is also undisputed that
respondents have nothing to contribute to a plan of reorganization
other than their "labor, experience, and expertise" (id. at A26).  But
a plan of reorganization that allows debtor participation in these
circumstances cannot be "fair and equitable" within the meaning of the
Bankruptcy Code.  Petitioners are therefore entitled to the lifting of
the automatic stay.
 A. Chapter 11 of the Bankruptcy Code Gives an Impaired, Dissenting
Class of Unsecured Creditors Absolute Priority over Equity Holders
   The Bankruptcy Code delineates the criteria that must be satisfied
for a plan to be "fair and equitable." /7/ If the impaired, dissenting
class is unsecured, /8/ a plan is "fair and equitable" as to members
of that class only if each member "receive(s) or retain(s) on account
of (its) claim property of a value, as of the effective date of the
plan, equal to the allowed amount of such claim" (11 U.S.C.
1129(b)(2)(B)(i)) or if no junior interests participate in the
reorganization (11 U.S.C. (& Supp. III) 1129(b)(2)(B)(ii)).  This
requirement is the statutory embodiment of what has come to be known
as the "absolute priority" rule.
   The absolute priority rule plays an important role in bankruptcy
proceedings under Chapter 11.  When an enterprise files for
bankruptcy, it can either be reorganized under Chapter 11 or
liquidated under Chapter 7, 11 U.S.C. (& Supp. III) 701 et seq.  /9/
Whether a company should be reorganized or liquidated depends on
whether it is worth more as a going concern than if it were liquidated
piecemeal.  See 11 U.S.C. (& Supp. III) 1129(a)(7) (allowing
confirmation of reorganization plan only when each creditor is assured
of receiving at least what it would receive in a liquidation, or
consents to less favorable treatment).  When the company is worth more
as a going concern than it would be if it were liquidated, there is a
going-concern surplus.  The absolute priority rule requires that any
such surplus be distributed to the creditors according to the priority
of their claims and that the debtor share in the enterprise only after
creditors' claims have been fully honored.  /10/
   The rationale for that rule is that when an enterprise /11/ is
solvent, i.e., when its debts exceed the present value of its assets,
all of its assets are properly treated as owned by the creditors.
Therefore, when the assets remain in the enterprise and it is
reorganized, the reorganized enterprise properly belongs to the
creditors.  Equity interests, whose claims against the old enterprise
had no value because it was insolvent, contribute nothing to the
reorganized enterprise.  See Jackson, Bankruptcy, Non-Bankruptcy
Entitlements, and the Creditors' Bargain, 91 Yale L.J. 857, 894 (1982)
("Reorganization proceedings provide nothing more than a method by
which the sale of an enterprise as a going concern may be made to the
creditors themselves.").  By leaving their assets in a reorganized
enterprise, creditors gamble that there will indeed be a going-concern
surplus and that they will ultimately fare better than if the
enterprise were liquidated.  As Judge Friendly recognized, in this
situation "it is hard to see why (the unsecured creditors) should not
reap the entire gain if the gamble succeeds, rather than allow the
stockholders to have what essentially is a free ride." SEC v.
Canandaigua Enterprises Corp., 339 F.2d 14, 21 (2d Cir. 1964).  /12/
   This is not to say that equity holders can never participate in a
reorganized enterprise.  At times, it may be advantageous to the
creditors to allow equity holders to participate in a plan of
reorganization even though creditors' claims have not been fully
honored.  The participation of current equity holders may sometimes
appear necessary to capture the going-concern surplus that is the
raison d'etre of reorganization.  This Court has suggested that this
may be the case, for example, when the enterprise lacks the necessary
cash to operate and equity holders are the only willing sources of
such cash.  Kansas City Terminal Ry. v. Central Union Trust Co., 271
U.S. 445, 455 (1926).  But see p. 22, infra.  Or the equity holders
may also be the managers and may have experience, expertise, and
management skills that make the enterprise more valuable than it would
be without them.  In those situations, both creditors and equity
holders have an incentive to negotiate an agreement that allows
continuing participation by the equity holders.  The creditors realize
that, if they do not allow the equity holders to participate, they
will lose the value that the equity holders would otherwise contribute
to the reorganized firm.  The equity holders, on the other hand,
realize that, if they do not engage in good-faith bargaining, they
will walk away with nothing.
   Chapter 11 permits the creditor classes to agree to equity-holder
participation, even though creditors' claims are not fully honored,
when the creditors, voting as classes, believe that their best
interests would be served.  Rather than require every plan of
reorganization to be fair and equitable (as old Chapter X did),
Chapter 11 provides that a class of creditors may consent to a plan
under which its members' claims are not fully honored and junior
claimants nevertheless participate (11 U.S.C. 1128(a)(8)(A)).  /13/
The express purpose of this is to provide a mechanism whereby the
parties in interest can reach a mutually beneficial agreement as
determined by the requisite vote of each class.  See H.R. Rep. 95-595,
95th Cong., 1st Sess. 224 (1977) ("(N)egotiation among the parties
after full disclosure will govern how the value of the reorganizing
company will be distributed among creditors and stockholders.  * * *
Only when the parties are unable to agree on a proper distribution of
the value of the company does the (Bankruptcy Code) establish a
financiaL standard.");  Blum & Kaplan, The Absolute Priority Doctrine
in Corporate Reorganizations, 41 U. Chi. L. Rev. 651, 653 (1974) ("The
absolute priority doctrine can be characterized as a way of
structuring negotiations so that they are sufficiently disciplined to
be held within permissible areas and to permit judicial review.").
   It is against this background and statutory structure that
respondents' attempt to include themselves in a plan of
reorganization, despite a conceded inability to honor fully the claims
of an impaired, dissenting class of unsecured creditors, must be
tested.  Although the secured debt substantially exceeded the value of
petitioners' collateral, the court of appeals concluded that a plan
would be feasible if it provided for a scaling down of the secured
claims to the present value of the collateral, with new secured notes
to be awarded against the scaled-down secured claims, and long-term
unsecured notes (bearing no interest) to be awarded against the
balance.  /14/ The court of appeals then ruled that such a plan could
be imposed on a nonassenting class of unsecured creditors because it
would be "fair and equitable":  it would not violate the requirement
of Section 1129(b)(2)(B) that, unless unsecured creditors receive
property of a value equal to their claims, junior interests may
receive nothing.  The court of appeals reached that conclusion
because, it said, there is an uncodified exception to that rule when
the junior interests make a contribution in "money or money's worth,"
and contributions of "labor, experience, and expertise" satisfy that
requirement.  We submit that both conclusions are wrong:  no such
exception to the creditors' entitlement to "absolute priority" is
permitted by the Bankruptcy Code, and the contribution suggested by
the court of appeals would not have satisfied the requirements of
pre-Code cases.
 B. There Is No Exception to the Absolute Priority Rule That Allows
Equity Holders to Participate in a Plan of Reorganization Under
Chapter 11, over the Objection of a Dissenting, Impaired Class of
Creditors Whose Claims Have Not Been Fully Honored, on the Basis of a
Contribution of Future "Labor, Experience, and Expertise"
 1. Chapter 11 of the Bankruptcy Code does not contain an exception to
the absolute priority rule for equity holders who contribute to the
reorganized enterprise
   Before the passage in 1978 of the Bankruptcy Code, 11 U.S.C. (&
Supp. III) 101 et seq., there were circumstances in which an equity
holder could participate in a reorganized enterprise even though the
claims of the creditors of the enterprise were not fully honored and
those creditors did not consent to such participation.  See, e.g.,
Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 117, 121-122
(1939) (dictum).  The court of appeals assumed, without ever
explaining where its rule of law could be found in the Bankruptcy
Code, that such participation is still possible.  It then went on to
hold -- erroneously (see pp. 23-30, infra) -- that the necessary
conditions for shareholder participation were met in this case.  We
submit, however, that the court's first error was its failure to
recognize thagt the Code has changed prior law and that, under Chapter
11 of the Code, equity owners can never participate in a reorganized
enterprise over the dissent of a class of creditors whose claims are
impaired and who do not receive or retain property of a value equal to
the allowed amount of their claims.  /15/
   a. The opinion of Justice Douglas for a unanimous Court in Case v.
Los Angeles Lumber Products Co., supra, strongly reaffirmed the
principle that "'creditors are entitled to priority over stockholders
against all the property of an insolvent corporation.'" 308 U.S. at
116 (quoting Kansas City Terminal Ry. v. Central Union Trust Co., 271
U.S. 445, 455 (1926)).  The Court in Los Angeles Lumber reviewed a
plan of reorganization, which had been approved by the lower courts,
that allowed stockholders to participate in the reorganized company,
although the claims of bondholders were not to be fully honored.  The
bankruptcy court had found, and the court of appeals had affirmed,
that participation would "be an asset of value" to the new corporation
"because of the familiarity of these stockholders with the business *
* * and because of their financial standing and influence in the
community." In re Los Angeles Lumber Products Co., 100 F.2d 963, 965
(9th Cir. 1939).  The lower courts concluded that these findings
allowed the plan to be confirmed despite the objection of certain
bondholders.  /16/ This Court, while not disagreeing with the factual
findings of the lower courts, held that the old stockholders did not
contribute anything to the plan that would allow the old stockholders
to retain an interest in the company.
   The Court noted that the reorganization statute required a plan to
be "fair and equitable." /17/ This term had been interpreted to mean
that "'any arrangement of the parties by which the subordinate rights
and interests of stockholders are attempted to be secured at the
expense of the prior rights of either class of creditors comes within
judicial denunciation.'" 308 U.S. at 116 (quoting Louisville Trust Co.
v. Louisville, N.A. & C. Ry., 174 U.S. 674, 684 (1899)).  Under this
test, the Court held that the plan offered by the shareholders should
not have been confirmed (308 U.S. at 122-132).
   Despite its holding that the plan could not be confirmed, the Court
suggested that there were limited circumstances in which a plan should
be confirmed even though shareholders participated and creditors'
claims were not fully honored.  The Court "stress(ed) the necessity,
at times, of seeking new money 'essential to the success of the
undertaking' from the old stockholders" (308 U.S. at 121 (footnote
omitted) (quoting Kansas City Terminal Ry. v. Central Union Trust Co.,
271 U.S. at 455)).  "Where that necessity exists and the old
stockholders make a fresh contribution and receive in return a
participation reasonably equivalent to their contribution, no
objection can be made" (308 U.S. at 121).  The Court thus stated that
there was an exception to the judicially developed absolute priority
rule -- specifically, that it might confirm a plan over the objection
of a creditor whose claim was not fully honored if "the stockholder's
participation (was) based on a contribution in money or in money's
worth, reasonably equivalent in view of all the circumstances to the
participation of the stockholder" (id. at 122).  It is the exception
to the absolute priority role, as stated in this last passage, on
which the court of appeals in this case relied (Pet. App. A23-A24).
Although that reliance was misplaced in light of the holding of Los
Angeles Lumber (see pp. 23-28, infra), we also submit that these dicta
from Los Angeles Lumber do not accurately state the law under the
Bankruptcy Code.
   b. The Bankruptcy Code modified the law governing confirmation of
plans of reorganization in two relevant respects.  First, whereas
Chapter X of the old Bankruptcy Act provided that a plan had to be
"fair and equitable" (11 U.S.C. (1976 ed.) 621(2)) but did not define
that term, the Bankruptcy Code provides an elaborate definition.
Second, as previously noted, the Bankruptcy Code permits a creditor
class, by a class vote that overrides the objections of minority
members, to assent to a plan that is not "fair and equitable."
Together, these two changes leave no room to allow an equity holder to
buy his way into the reorganized company over the objections of an
impaired class of creditors who do not receive or retain property of a
value equal to the allowed amount of their claims.
   The Bankruptcy Code has replaced the judicially developed "fair and
equitable" test of the old Bankruptcy Act with a statutorily
prescribed one.  The Code provides that a plan is fair and equitable,
with respect to an impaired, dissenting class of unsecured creditors,
in two -- and only two -- circumstances (11 U.S.C. (& Supp. III)
1129(b)(2)(B)):
         (i) the plan provides that each holder of a claim of such
      class receive or retain on account of such claim property of a
      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 under the
      plan on account of such junior claim or interest any property.
   Even when equity holders make new capital contributions as part of
the plan, the interest that they "receive or retain under the plan" is
received or retained on account of their pre-petition claim or
interest in property of the estate.  /18/ It is therefore forbidden by
the express terms of Section 1129(b)(2)(B) unless all unsecured
creditors in the dissenting class receive "property of a value, as of
the effective date of the plan, equal to the allowed amount of (their)
claim(s)." The language of the Code admits of no other conclusion.
   Nothing in the legislative history suggests a congressional
intention to maintain the exception discussed in Los Angeles Lumber.
The House report, in describing proposed Section 1129(b), states:
"The general principle of the subsection permits confirmation
notwithstanding non-acceptance by an impaired class if that class and
all below it in priority are treated according to the absolute
priority rule.  The dissenting class must be paid in full before any
junior class may share under the plan." H.R. Rep. 95-595, supra, at
413.  /19/ No exceptions to this rule seem to be contemplated.  /20/
   It is not surprising that the Code has dropped the
infusion-of-new-capital exception to the absolute priority rule.  The
exception reflected two conditions that have since changed.  First,
the Court believed in 1939 (and earlier) that new capital to fund a
reorganization beneficial to creditors might be available only from
old equity holders.  See Los Angeles Lumber, 308 U.S. at 117;  Kansas
City Terminal Ry., 271 U.S. at 455.  In today's capital markets, which
make it far easier for worthwhile ventures to obtain financing, that
is a much less realistic concern.  See Blum & Kaplan, The Absolute
Priority Doctrine in Corporate Reorganizations, 41 U. Chi. L. Rev.
651, 672 (1974).  Indeed, the ability of a reorganized company to
convince anyone other than a pre-petition equity holder to lend it
money today suggests not a failure of the capital markets as much as a
realistic assessment that the reorganization is not likely to succeed.
   Second, the underlying philosophy of the Code is to allow classes
of creditors to determine what is in their own best interest.  See pp.
14-15, supra.  When a class of creditors dissents from a proposed plan
that provides for equity-holder participation, that indicates that the
necessary percentages of the class do not believe that the equity
holders' participation in a reorganization would increase the value of
their claims.  The Bankruptcy Code leaves that decision to the
creditors, /21/ and there is no longer any need for a court to decide
whether, in a particular case, continuing participation by equity
holders might be in their best interests.  The creditors own the
assets, it is their money that is at stake, and they are in the best
position to ascertain whether a reorganization including the former
equity owners would be to their advantage.  Were such owners allowed
to participate in a reorganization over creditors' objections, the
negotiations envisioned by the absolute priority rule would be
altered.  Creditors, instead of deciding whether a reorganized company
would be worth more with equity holders participating, would instead
have to consider whether they should reach a compromise with the
equity holders to avoid having a bankruptcy judge decide whether the
equity holders should participate.  /22/
   Thus, although we will show in the next section that the judgment
of the court of appeals conflicts with pre-Code law, there is a more
fundamental reason to reverse that judgment.  The exception to the
absolute priority rule on which the court of appeals relied does not
exist under the Bankruptcy Code.
 2. Even if the Bankruptcy Code should be read to contain an exception
to the absolute priority rule for equity holders who contribute money
or money's worth to the reorganized enterprise, respondents' "labor,
experience, and expertise" is not such a contribution
   Whatever basis there may be for assuming that the Bankruptcy Code
carried forward the exception to the absolute priority rule enunciated
in dicta in Los Angeles Lumber -- and we see none -- there is no basis
whatever for any contention that the Bankruptcy Code expands that
exception beyond the bounds contemplated in Los Angeles Lumber.
Because respondents' proposed contribution of "labor, experience, and
expertise" (Pet. App. A26) is exactly the kind of contribution that
the Los Angeles Lumber court held would not suffice to overcome the
absolute priority rule, the judgment of the court of appeals should be
reversed.
   When it noted the existence of an exception to the absolute
priority rule, the Court in Los Angeles Lumber made it clear that
equity-holder participation is permissible only when it is necessary
to preserve going-concern value and the interests of the creditors are
protected.  The Court said that such participation is permissible only
if the old stockholders are the only available source of capital to
keep the reorganized corporation operating (308 U.S. at 117, 121).
Even then, the Court was concerned that "the creditor's rights (not)
be easily diluted by inadequate contributions by stockholders" (id. at
122).  /23/ Thus, the Court stated (ibid.):
         In view of these considerations we believe that to accord
      "the creditor his full right of priority against the corporate
      assets" where the debtor is insolvent, the stockholder's
      participation must be based on a contribution in money or in
      money's worth, reasonably equivalent in view of all the
      circumstances to the participation of the stockholder.  /24/
   The Court illustrated the narrowness of this exception by refusing
to apply it to the facts of Los Angeles Lumber.  The former
shareholders argued that their participation in the new corporation
was appropriate even though not all of the creditors' claims were
fully honored, on the ground, among others, that they were
contributing their financial standing in the business community.  The
Court held that such "intangibles" simply could not be used to
overcome the dictates of the absolute priority rule.  "They have no
place in the asset column of the balance sheet of the new company.
They reflect merely vague hopes or possibilities." 308 U.S. at
122-123.
   The Court in Los Angeles Lumber was clear:  either the shareholders
contribute new capital that is necessary to the reorganization of the
insolvent enterprise, or they do not participate in the
reorganization.  No court of appeals other than the court below has
suggested that an equity holder can participate in the reorganization
of an insolvent debtor even though he does not contribute necedssary
capital to the reorganization.  See, e.g., In re U.S. Truck Co., 800
F.2d 581, 588 (6th Cir. 1986) ("If (the debtor) were retaining an
interest without contributing any capital, the plan would clearly
violate the Code.");  In re Potter Material Serv., Inc., 781 F.2d 99,
101 (7th Cir. 1986) ("An equity-interest owner may retain an interest
in the debtor corporation so long as the owner invests new capital
into the corporation");  In re Muskegon Motor Specialties, 366 F.2d
522, 525 (6th Cir. 1966);  Highland Towers Co. v. Bondholders'
Protective Comm., 115 F.2d 58, 60 (6th Cir. 1940);  Metropolitan
Holding Co. v. Weadock, 113 F.2d 207, 209 (6th Cir. 1940);  see also
Price v. Spokane Silver & Lead Co., 97 F.2d 237, 245 (8th Cir. 1938).
The decision of the court of appeals constitutes a marked departure
from this accepted teaching.  /25/
   The court of appeals sanctioned participation of junior interests
so long as they contribute "something that is reasonable compensatory
and is measurable" (Pet. App. A24).  Thus, the court expanded
permissible contributions to embrace any promise that has a
determinate value.  /26/ The court found such value in respondents'
promise to contribute their future labor and their expertise to the
reorganized company.  The first contribution certainly is not a
capital contribution as envisioned by Los Angeles Lumber.  Similarly,
respondents' farming expertise is not a contribution of capital.
Indeed, the Court in Los Angeles Lumber expressly disapproved allowing
an equity holder to participate in a reorganized company based on such
a contribution.  See 308 U.S. at 112-113 (citation omitted)
(disapproving treatment of "'(equity holders') familiarity with the
operation' of the business and their 'financial standing and influence
in the community' (and) * * * 'continuity of management'" as
"consideration" for equity-holder participation in the plan of
reorganization);  id. at 123 n.16 (approving court of appeals decision
not allowing participation based on supposed management skills).
   The court of appeals opined that respondents should be allowed to
participate in a reorganization because their participation would
preserve the farm's going-concern value (Pet. App. A24-A25).  That
justification, however, was rejected by the Court in Los Angeles
Lumber.  See 308 U.S. at 123 (citation omitted) ("fact that
(creditors) might fare worse as a result of a foreclosure and
liquidation than they would be taking a debtor's plan (has) no
relevant bearing on whether a proposed plan is 'fair and equitable'").
 /27/ It is also thoroughly inconsistent with the principle that the
creditors themselves, rather than a court, are in the best position to
determine whether they will fare better under a plan of reorganization
than they would through exercise of their state-law foreclosure rights
or through liquidation.  See pp. 14-15, supra.
   The reason for requiring any Los Angeles Lumber contribution to be
in money or marketable property is, of course, that without that
limitation the "reorganization" becomes simply a forced scaling down
of the creditors' rights, after which creditors and debtor continue as
before -- which is transparently what the court of appeals sanctioned
here.  The equity-holder contributions contemplated by Los Angeles
Lumber place immediate additional value in the enterprise, where it is
subject to the superior claims of creditors, immediately improving
their chances of ultimately being paid.  In the present case, apart
from the question just how much assurance can be taken from the
debtors' (unenforceable) promise to work for many years for the
reorganized enterprise, /28/ if the debtors go into default on their
new secured debt three months after reorganization, their "yearly
contributions of labor, experience, and expertise" (Pet. App. A26)
will not have contributed any significant value that is available to
meet creditors' claims.  The creditors, having been forced to give up
substantial rights against the promise that the debtors will farm
their land more successfully in the future than in the immediate past,
will be back in bankruptcy court with substantially reduced legal
claims.  Nothing in old Chapter X, present Chapter 11, or Los Angeles
Lumber permits a court to force them to take that risk.
   The court of appeals attempted to justify its result on the ground
that "(a)ny other view would deny to most farmers the opportunity to
take advantage of the reorganization provisions of the Bankruptcy Act"
(Pet. App. A25).  That is simply to assert (whether or not correctly)
that "most farmers" in straitened circumstances need a partial
forgiveness of debt, abrogating the absolute priority rule;  and
indeed abrogation of the absolute priority rule is the means Congress
has chosen in Chapter 12 to respond to farmers' plight.  See 100 Stat.
3111 (to be codified at 11 U.S.C. 1225(b));  132 Cong. Rec. S5556
(daily ed. May 7 1986) (statement of Sen. Grassley).  But this is a
Chapter 11 case.  /29/ Congress in enacting Chapter 11 rejected a
suggestion that it do away with the absolute priority rule (see note
19, supra).  The manifest sympathy that the court of appeals had for
farmers may be understandable (although the wisdom of making it harder
for farmers to enter into enforceable contracts of indebtedness may be
questionable), but the court did not have the power to rewrite Chapter
11.  /30/
   The holding of the court of appeals is in irreconcilable conflict
with both the Bankruptcy Code and this Court's decision in Los Angeles
Lumber.  It should be reversed.
                              CONCLUSION
   The judgment of the court of appeals should be reversed.
   Respectfully submitted.
   CHARLES FRIED
      Solicitor General
   RICHARD K. WILLARD
      Assistant Attorney General
   LOUIS R. COHEN
      Deputy Solicitor General
   ROY T. ENGLERT, JR.
      Assistant to the Solicitor General
   ROBERT S. GREENSPAN
   ROBERT K. RASMUSSEN
      Attorneys
   AUGUST 1987
   /1/ The court said (Pet. App. A17-A18), "it appears probable that
once their secured debt is restructured to reflect present values of
land and equipment as Section 506(a) requires, (petitioners) can repay
that debt over a reasonable period of time with interest and make
substantial payments (but without interest) to unsecured creditors."
The "feasible reorganization plan," as more fully spelled out in an
appendix to the court's opinion (see id. at A47), consists in essence
of scaling down the secured debt to the value of the collateral,
issuing various new secured notes against that portion of the debt,
issuing non-interest-bearing unsecured notes for the remainder,
payable over a 30-year period, and allowing the debtors to retain the
equity.
   /2/ Section 1129(b) in relevant part provides:
         (1) * * * the court * * * shall confirm the plan * * * if the
      plan does not discriminate unfairly, and is fair and equitable
      (to impaired, dissenting creditor classes).
         (2) * * * (T)he condition that a plan be fair and equitable *
      * * includes the following requirements --
                      *   *   *   *   *
         (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 of a
      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 under the
      plan on account of such junior claim or interest any property.
   /3/ Judge Gibson also dissented on the ground that he, unlike the
majority, agreed with both the bankruptcy court and the district court
that, because respondents could not provide petitioners with adequate
protection, the automatic stay should be lifted (Pet. App. A28-A30).
   /4/ The term "impaired" is defined, for purposes of the Code, in 11
U.S.C. (& Supp. III) 1124.  A claim is "impaired" unless (1) the
legal, equitable, and contractual rights to which the claim entitles
its holder are unaltered;  (2) the plan cures a prior default by
specified means and leaves the holder of the claim with the legal,
equitable, and contractual rights to which the claim entitled the
holder before the event of default;  or (3) the holder of the claim
receives cash equal to the allowed amount of the claim.
   /5/ Section 1129(b), which allows confirmation of a plan that meets
all of the requirements of Section 1129(a) except paragraph (8), is
quoted in note 2, supra.  In addition to meeting the terms of either
Section 1129(a)(8) or Section 1129(b), every plan of reorganization
must meet the terms of 11 U.S.C. (& Supp. III) 1129(a)(7), which
requires that each creditor (regardless of the class to which that
creditor belongs) either assent to the plan or receive or retain under
the plan property at least equal in value to what it would receive or
retain if the debtor were liquidated.
   /6/ A class of creditors is deemed to have accepted a plan of
reorganization when two-thirds of the total dollar amount of the
claims within that class and one-half of the actual number of
creditors within that class have agreed to the plan.  11 U.S.C.
1126(c).
   /7/ Under Chapter X of the old Bankruptcy Act of 1898, 11 U.S.C.
(1976 ed.) 501 et seq., and its predecessor, Section 77B (added by Act
of June 7, 1934, ch. 424, Section 1, 48 Stat. 911-922) (repealed
1938), a plan could be confirmed only if it was "fair and equitable."
Unlike the present Bankruptcy Code, the old Act did not define "fair
and equitable." This Court held that those words were a term of art
that required creditors' claims to be fully honored before equity
holders could participate in the reorganized enterprise.  Marine
Harbor Properties, Inc. v. Manufacturers Trust Co., 317 U.S. 78, 85
(1942) (construing Chapter X);  see also Case v. Los Angeles Lumber
Products Co., 308 U.S. 106 (1939) (construing Section 77B).  On the
other hand, Chapter XI of the old Act, 11 U.S.C. (1976 ed.) 701 et
seq., did not require a plan to be "fair and equitable." Instead, it
had only to be in the best interests of the creditors.  Under this
test, a plan could be confirmed so long as the creditors received the
liquidation value of their claims.  See H.R. Rep. 95-595, 95th Cong.,
1st Sess. 223 (1977).
   /8/ To the extent that FLB's and Norwest's claims exceeded the
value of their collateral, they were entitled to be treated as
unsecured creditors.  11 U.S.C. 506(a).
   /9/ Some individual debtors also have the option of proceeding
under Chapter 13, 11 U.S.C. (& Supp. III) 1301 et seq.  Since November
26, 1986, family farmers have had the option of proceeding under a new
Chapter 12.  See Bankruptcy Judges, United States Trustees, and Family
Farmer Bankruptcy Act of 1986 (1986 Act), Pub. L. No. 99-554, Section
255, 100 Stat. 3105-3114 (to be codified at 11 U.S.C. 1201 et seq.);
see also note 29, infra.
   /10/ We use "fully honored" as a shorthand phrase for the statutory
requirement that the holder of an unsecured claim "receive or retain
on account of such claim property of a value, as of the effective date
of the plan, equal to the allowed amount of such claim" (11 U.S.C.
1129(b)(2)(B)(i)).  The Code, unlike prior law, does not "require the
impossible and make it necessary to pay an unsecured creditor in cash
as a condition of stockholders retaining an interest in the
reorganized company.  His interest can be preserved by the issuance,
on equitable terms, of (for example) income bonds or preferred stock."
Northern Pacific Ry. v. Boyd, 228 U.S. 482, 508 (1913).
   /11/ Respondents owned the assets of their farm in their individual
capacities rather than as shareholders in a corporation.  Chapter 11,
however, does not make any relevant distinction between corporate and
individual debtors.  Although the analogy does not apply in all
respects (see note 28, infra), it is convenient to think of
respondents as the equity owners of a farming enterprise of which
petitioners are creditors.
   /12/ Before he went on the bench, Judge Friendly put the matter
more pointedly:  "A plan which gives to creditors securities with a
market value of less than one hundred cents on the dollar of the
creditors' claims and permits stockholders without assessment to
retain a substantial share in the enterprise is, in the language of
the Supreme Court in (First National Bank v. Flershem, 290 U.S. 504,
519 (1934)), an attempt to invoke the power of the court 'not to
enforce rights of creditors, but to defeat them.' Such a transaction,
as pointed out in the opinion of Mr. Justice Brandeis, is simply a
fraudulent conveyance." Friendly, Some Comments on the Corporate
Reorganizations Act, 48 Harv. L. Rev. 39, 77-78 (1934) (footnote
omitted).
   /13/ Under Chapter X and its predecessor, Section 77B, a plan that
was not fair and equitable could not be confirmed even if it had the
requisite approval of all classes of creditors.  See Coogan,
Confirmation of a Plan Under the Bankruptcy Code, 32 Case W. Res. L.
Rev. 301, 325-326 (1982) (discussing this change between pre- and
post-Code law).  For example, in Case v. Los Angeles Lumber Products
Co., 308 U.S. 106 (1939) (applying Section 77B), the plan of
reorganization was denied confirmation as not fair and equitable,
notwithstanding bondholder consent that would be sufficient under the
Code to confirm the plan under Section 1129(a)(8)(A) without reaching
the question of fairness and equity under Section 1129(b).  See 308
U.S. at 114-115.
   /14/ The court of appeals seems to have believed (see Pet. App.
A47) that giving the secured creditors new secured notes equal in face
amount to the present market value of their collateral, plus an
unsecured (and non-interest-bearing) note for the balance of their
debt, would necessarily leave them as well off or as better off than
liquidation.  That is, of course, exactly the fallacy that the
absolute priority rule was designed to combat.  The present value of
any income-producing property is a weighted average of the range of
possible future values.  Giving the creditor a secured (nonrecourse)
note in an amount equal to the present value of the property gives it
only the bottom portion of the range, which is necessarily worth less
(frequently -- and apparently here -- much less) than the property
itself or the proceeds of a present sale.  An unsecured note of the
kind envisioned here will not make up the difference:  it will not
give the creditor the equivalent of ownership.  That is why Section
1129(b)(2)(A) requires that dissenting secured creditors receive
payments with a present value equal to the value of their collateral
and Section 1129(b)(2)(B) requires that dissenting unsecured creditors
receive property of a value equal to their claims before junior
interests may receive anything.
   /15/ The lower courts appear to be divided on this question.  Two
other courts of appeals and some bankruptcy courts have agreed with
the implicit conclusion of the court below.  See In re U.S. Truck Co.,
800 F.2d 581, 587-588 (6th Cir. 1986) (allowing stockholder to
participate in plan of reorganization based on new payment of
$100,000);  In re Potter Material Serv., Inc., 781 F.2d 99, 101 (7th
Cir. 1986);  In re Sawmill Hydraulics, Inc., 72 Bankr. 454, 456 & n.1
(Bankr. C.D. Ill. 1987);  In re Landau Boat Co., 13 Bankr. 788,
792-793 (Bankr. W.D. Mo. 1981);  In re Marston Enterprises, 13 Bankr.
514, 518 (Bankr. E.D.N.Y. 1981).  Some bankruptcy courts have implied,
if not held, that it is no longer possible for equity holders to
retain ownership over the objection of a class of creditors whose
claims are not fully honored.  See In re Pine Lake Village Apartment
Co., 19 Bankr. 819, 834 (Bankr. S.D.N.Y. 1982) (holding plan that
included retained ownership by partners unconfirmable even though
partners proposed to contribute $700,000 in cash);  In re Pecht, 57
Bankr. 137 (Bankr. E.D. Va. 1986).  Although, as we argue below, the
judgment of the court of appeals is plainly wrong under the Los
Angeles Lumber dictum and other pre-Code cases, we also believe that
the Bankruptcy Code has superseded those cases in this regard.
   /16/ A substantial majority of the bondholders had voted to accept
the plan (308 U.S. at 111-112, 115).  Under the Bankruptcy Code, this
assent would have been sufficient to permit confirmation of the plan
(as far as this class was concerned) notwithstanding the departure
from "fairness and equity." See 11 U.S.C. (& Supp. III) 1125.
   /17/ Unlike the present Bankruptcy Code, neither Section 77B (which
was applied in Los Angeles Lumber) nor Chapter X (which replaced
Section 77B in 1938) defined this term.  See note 7, supra.
   /18/ That is clear because there is no provision of the Bankruptcy
Code that could even conceivably be read to allow, over the objection
of a class of creditors, the participation in a plan of a person or
entity that contributed new capital but had no prior claim or interest
in any property of the estate.  Any rule that allowed equity holders,
over the objection of a class of creditors, to participate in the plan
by contributing new capital would thus necessarily create a special
rule for them on account of their prior claim or interest in property
of the estate.
   /19/ The Bankruptcy Commission, the congressionally appointed
committee charged with evaluating the need for bankruptcy reform, had
suggested to Congress that the absolute priority rule be abandoned.
The Commission had urged that the result in Los Angeles Lumber be
statutorily overturned, and that junior classes be allowed to
participate to the extent that they contribute anything of value to
the reorganization.  This proposal was criticized in the academic
literature.  See, e.g., Brudney, The Bankruptcy Commission's Proposed
"modifications" of the Absolute Priority Rule, 48 Am. Bankr. L.J. 305
(1974);  Note, The Proposed Bankruptcy Act:  Changes in the Absolute
Priority Rule for Corporate Reorganizations, 87 Harv. L. Rev. 1786
(1974).  As is apparent from the Bankruptcy Code, it was flatly
rejected by Csongress.
   /20/ Indeed, even if the legislative history were altogether silent
on the subject, the language of the statute would be a sufficient
indication that prior law had been changed.  "It would be
extraordinary to require legislative history to confirm the plain
meaning of (Section 1129(b)(2)(B))." Bourjaily v. United States, No.
85-6725 (June 23, 1987), slip op. 6.
   /21/ See Blum, The "Fair and Equitable" Standard for Confirming
Reorganizations under the New Bankruptcy Code, 54 Am. Bankr. L.J. 165,
172 (1980) ("The main protection theme in reorganizations under the
new Bankruptcy Code is that adequately informed classes of creditors
and shareholders can look after their own interests in the processes
of negotiating plans.").
   /22/ The idea that creditors, rather than a judge, can best make
the determination whether shareholder participation is beneficial to
the creditors is not new.  See Friendly, Some Comments on the
Corporate Reorganizations Act, 48 Harv. L. Rev. 39, 75 (1934)
(footnote omitted) (quoting In re English, Scottish & Australian
Chartered Bank, (1893) 3 Ch. 385, 409) ("As said by Lord Justice
Lindley in the Australian Chartered Bank case:  'If the creditors are
acting on sufficient information and with time to consider what they
are about, and are acting honestly, they are, I apprehend, much better
judges of what is to their commercial advantage than the Court can
be.'").
   /23/ See also Consolidated Rock Products Co. v. Du Bois, 312 U.S.
510, 530 n.27 (1941) (Douglas, J.).
   /24/ The court of appeals based its interpretation on the phrase
"money's worth" in this passage.  It is clear, however, that the full
import of this passage is to limit equity owner participation to cases
in which the equity owner has infused the debtor with fresh capital,
such as cash or marketable property.  See also 308 U.S. at 117
("necessity at times of permitting the inclusion of stockholders on
payment of contributions");  id. at 121 (emphasis added) ("necessity *
* * of seeking new money");  id. at 121 n.15 (emphasis added) ("This
new money was commonly necessary in equity reorganizations not only to
provide new working capital but also to pay dissenting creditors.");
Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 529 n.27
(1941) (emphasis added) ("it should have been shown that there was a
necessity of seeking new money from (old common stockholders) and that
the participation accorded them was not more than reasonably
equivalent to their contributions").  Indeed, before Los Angeles
Lumber the Court had already made it clear in Kansas City Terminal Ry.
v. Central Union Trust Co., supra, that only contribution of
"additional funds * * * essential to the success of the undertaking"
would allow shareholders to overcome the absolute priority rule.  271
U.S. at 455;  see Friendly, supra, 48 Harv. L. Rev. at 76-77.  Los
Angeles Lumber did not purport to alter that rule.
   /25/ See also In re Baugh, 73 Bankr. 414, 418 (Bankr. E.D. Ark.
1987) ("The Ahlers decision radically expanded the exception to the
absolute priority rule * * *.");  In re Sawmill Hydraulics, Inc., 72
Bankr. 454, 456-457 (Bankr. C.D. Ill. 1987) (declining to follow
decision below);  In re C & P Gray Farms, Inc., 70 Bankr. 704, 710
n.21 (Bankr. W.D. Mo. 1987) (emphasis added) ("(T)he universally
occur(r)ing * * * doctrine of 'sweat equity' * * * is so artificial
and inappropriate that it can exist only where the debtor's operations
are in reality so unpromising that an honest and conscientious court
would be obliged to find the plan infeasible.  The court in the Ahlers
case is to be admired for groping for some device, however unsound,
which will ameliorate the desperate plight of the American farmer.");
In re Big Dry Angus Ranch, Inc., 69 Bankr. 695, 698 n.3, 700 n.6
(Bankr. D. Mont. 1987) (decision below was designed to "circumvent"
the absolute priority rule and to say that the "absolute priority rule
means something different than intended by 1129(b)");  In re Stegall,
64 Bankr. 296, 300 (Bankr. C.D. Ill. 1986) ("the solution proposed by
the Ahlers majority is contrary to the Bankruptcy Code and a long line
of case law");  Koger & Acconcia, In re Ahlers:  Capitalizing on
Sweat, 42 J. Mo. B. 455, 458 (1986) (footnotes omitted) ("Case law has
developed a narrow exception to the absolute priority rule * * *.  As
Judge Gibson pointed out in his dissent, this exception has never been
extended to contributions of labor.  In fact, previous attempts to
qualify non-capital equity in the absolute priority context have been
unanimously rejected.");  C. Fortgang & T. Mayer, 1986 Interest and
Costs for the Secured Creditor in Bankruptcy 2 (1986) (paper presented
to 1986 New York University Workshop on Corporate Reorganization)
("the Eighth Circuit has rejected 45 years of learning on the rights
of a dissenting creditor class by ruling that pre-petition equity
holders may retain their equity merely by continuing to work");  id.
at 110-116;  Note, In re Ahlers:  The Farm Reorganization Exception to
the Absolute Priority Rule, 32 S.D.L. Rev. 167, 179 (1987) ("The
Eighth Circuit's decision in Ahlers diverges significantly from the
statutory absolute priority rule enacted in the Bankruptcy Code and
from the Supreme Court's interpretation of the absolute priority rule
in Los Angeles Lumber.").
   /26/ The court also ignored the requirement of Los Angeles Lumber
that the equity holder's contribution be necessary to a successful
reorganization.  See 308 U.S. at 121.  There is nothing in the record
that suggests, contrary to common sense, that it is necessary to have
respondents, as opposed to someone else, operate the farm properties
in question.
   /27/ Likewise, in SEC v. United States Realty & Improvement Co.,
310 U.S. 434, 454 (1940), the Court noted that a difference between
Chapter X cases, in which the absolute priority rule applied, and
Chapter XI cases, in which it did not, was that in the latter "the
preservation of going-concern value through (subordinate creditors' or
stockholders') continued management of the business may compensate for
reduction of the claims of the prior creditors without alteration of
the management's interests, which would otherwise be required by"
Northern Pacific Ry. v. Boyd, 228 U.S. 482 (1913).
   /28/ Los Angeles Lumber was of course a corporate reorganization,
in which the Court could meaningfully speak of "the old stockholders
mak(ing) a fresh contribution (from their separate assets) and
receiv(ing) in return a participation reasonably equivalent to their
contribution" (308 U.S. at 121).  The very concept is not easy to
apply to the Chapter 11 plan of an individual debtor.  Since he is the
debtor, he cannot have any means of making a "fresh contribution" in
cash or property.  His promise of unsalaried future labor is, as Judge
Gibson noted in dissent (Pet. App. A35), not specifically enforceable.
 And even if permissible indirect means of enforcement would suffice
to satisfy the rights of the creditor, it is fundamental to American
bankruptcy law that an individual debtor may not be compelled to
indenture himself to work off a debt;  at least some of the same
considerations suggest that he should not be permitted to do so
either.
   /29/ This case does not arise under Chapter 12, and it is unlikely
that respondents could convert this proceeding into one under Chapter
12.  That new provision appears on its face not to apply to
proceedings begun before the effective date of the Act.  1986 Act
Section 302(a) and (c), 100 Stat. 3119.  But see In re Big Dry Angus
Ranch, Inc., 69 Bankr. 695 (Bankr. D. Mont. 1987) (allowing conversion
of pending Chapter 11 case to Chapter 12);  In re Erickson
Partnership, 68 Bankr. 819 (Bankr. D.S.D. 1987) (same).
   /30/ Commentators have observed about this case:  "Hopefully the
case can be limited to its facts -- a farmer relief measure which is
no more than premature judicial enactment of the new chapter 12 * * *.
 Unfortunately, Ahlers purports to apply the absolute priority rule.
No principle of jurisprudence prevents corporate debtors from using
precedents in farm Chapter 11s.  In a corporate chapter 11, Ahlers
would entrench management shareholders at the expense of unsecured
creditors." C. Fortgang & T. Mayer, 1986 Interest and Costs for the
Secured Creditor in Bankruptcy 116 (1986) (paper presented to 1986 New
York University Workshop on Corporate Reorganization).