Source: http://www.law.cornell.edu/supremecourt/text/526/434
Timestamp: 2013-12-07 19:28:21
Document Index: 764321863

Matched Legal Cases: ['§1101', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1101', '§362', '§1121', '§1121', '§1121', '§506', '§1111', '§1122', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§1129', '§77', '§205', '§77', '§621']

Supreme Court aboutsearch liibulletin subscribe previews BANK OF AMERICA NAT. TRUST AND SAV. ASSN. v. 203 NORTH LASALLE STREET PARTNERSHIP
BANK OF AMERICA NAT. TRUST AND SAV. ASSN. v.203 NORTH LASALLE STREET PARTNERSHIP
126 F. 3d 955, reversed and remanded.
[HTML] [PDF] BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION v.
203 NORTH L
SALLE STREET PARTNERSHIP
No. 971418. Argued November 2, 1998Decided May 3, 1999
A loan by petitioner Bank of America National Trust and Savings Association (Bank) to respondent 203 North LaSalle Street Partnership (Debtor) was secured by a mortgage on the Debtors interest in a Chicago office building, the value of which was less than the balance due the Bank. After the Debtor defaulted and the Bank began state-court foreclosure, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U. S. C. §1101
. The Debtor proposed a reorganization plan under which, inter alia,
certain of its former partners would contribute new capital in exchange for the Debtors entire ownership of the reorganized entity. That condition was an exclusive eligibility provision: the old equity holders were the only ones who could contribute new capital. The Bank objected and, as sole member of an impaired class of creditors, thereby blocked confirmation of the plan on a consensual basis. See §1129(a)(8). The Debtor, however, resorted to the alternate, judicial cramdown process for imposing a plan on a dissenting class. §1129(b). Among the conditions for a cramdown is the requirement that the plan be fair and equitable with respect to each class of impaired unsecured claims that has not accepted it. §1129(b)(1). A plan may be found to be fair and equitable if the holder of any claim … junior to the claims of such class will not receive or retain under the plan on account of such junior claim … any property. §1129(b)(2)(B)(ii). Under this absolute priority rule, the Bank argued, the plan could not be confirmed as a cramdown because the Debtors old equity holders would receive property even though the Banks unsecured deficiency claim would not be paid in full. The Bankruptcy Court approved the plan nonetheless, and the District Court and the Court of Appeals affirmed. The Seventh Circuit found ambiguity in the absolute priority rules language, and interpreted the phrase on account of to permit recognition of a new value corollary to the rule, under which the objection of an impaired senior class does not bar junior claim holders from receiving or retaining property interests in the debtor after reorganization, if they contribute new capital in money or moneys worth, reasonably equivalent to the propertys value, and necessary for successful reorganization of the restructured enterprise. The court held that when an old equity holder retains an equity interest in the reorganized debtor by meeting the corollarys requirements, he is not receiving or retaining that interest on account of his prior equitable ownership, but, rather, on account of a new, substantial, necessary, and fair infusion of capital.
: A debtors prebankruptcy equity holders may not, over the objection of a senior class of impaired creditors, contribute new capital and receive ownership interests in the reorganized entity, when that opportunity is given exclusively to the old equity holders under a plan adopted without consideration of alternatives. The old equity holders are disqualified from participating in such a new value transaction by §1129(b)(2)(B)(ii), which in these circumstances bars a junior interest holders receipt of any property on account of his prior interest. Pp. 822. (a) The Court does not decide whether the statute includes a new value corollary or exception. The drafting history is equivocal, but does nothing to disparage the possibility apparent in the statutory text, that §1129(b)(2)(B)(ii) may carry such a corollary. Although there is no literal reference to new value in the phrase on account of such junior claim, the phrase could arguably carry such an implication in modifying the prohibition against receipt by junior claimants of any interest under a plan while a senior class of unconsenting creditors goes less than fully paid. Pp. 813.
(b) The Court adopts as the better reading of the on account of modifier the more common understanding that the phrase means because of, since this is the usage meant for the phrase at other places in the statute, see Cohen
v. de la Cruz, 523 U. S. 213. Thus, a causal relationship between holding the prior claim or interest and receiving or retaining property is what activates the absolute priority rule. As to the degree of causation that will disqualify a plan, the Government argues not only that any degree of causation between earlier interests and retained property will activate the bar to a plan providing for later property, but also that whenever the holders of equity in the Debtor end up with some property there will be some causation. A less absolute statutory prohibition would follow from reading the on account of language as intended to reconcile the two recognized policies underlying Chapter 11, of preserving going concerns and maximizing property available to satisfy creditors, see Toibb
501 U. S. 157. Causation between the old equitys holdings and subsequent property substantial enough to disqualify a plan would presumably occur on this view whenever old equitys later property would come at a price that failed to provide the greatest possible addition to the bankruptcy estate, i.e.,
whenever the equity holders obtained or preserved an ownership interest for less than someone else would have paid. Pp. 1318.
(c) Assuming a new value corollary, plans providing junior interest holders with exclusive opportunities free from competition and without benefit of market valuation fall within §1129(b)(2)(B)(ii)s prohibition. In this case, the proposed plan is doomed by its provision for vesting equity in the reorganized business in the Debtors partners without extending an opportunity to anyone else either to compete for that equity or to propose a competing reorganization plan. The exclusiveness of the opportunity, with its protection against the markets scrutiny of the stated purchase price, renders the partners right a property interest extended on account of the old equity position and therefore subject to an unpaid senior creditor classs objection. Under a plan granting old equity on exclusive right, any determination that the purchase price was top dollar would necessarily be made by the bankruptcy judge, whereas the best way to determine value is exposure to a market. In the interest of statutory coherence, the Bankruptcy Codes disfavor for decisions untested by competitive choice ought to extend to valuations in administering §1129(b)(2)(B)(ii) when some form of market valuation may be available to test the adequacy of an old equity holders proposed contribution. Pp. 1823.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, PETITIONER v.
203 NORTH
LASALLE STREET PARTNERSHIP
The issue in this Chapter 11 reorganization case is whether a debtors prebankruptcy equity holders may, over the objection of a senior class of impaired creditors, contribute new capital and receive ownership interests in the reorganized entity, when that opportunity is given exclusively to the old equity holders under a plan adopted without consideration of alternatives. We hold that old equity holders are disqualified from participating in such a new value transaction by the terms of 11 U. S. C. §1129(b)(2)(B)(ii), which in such circumstances bars a junior interest holders receipt of any property on account of his prior interest.
Petitioner, Bank of America National Trust and Savings Association (Bank),
is the major creditor of respondent, 203 North LaSalle Street Partnership (Debtor or Partnership), an Illinois real estate limited partnership.
The Bank lent the Debtor some $93 million, secured by a nonrecourse first mortgage 3
on the Debtors principal asset, 15 floors of an office building in downtown Chicago. In January 1995, the Debtor defaulted, and the Bank began foreclosure in a state court.
In March, the Debtor responded with a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U. S. C. §1101
., which automatically stayed the foreclosure proceedings, see §362(a). In re 203 N. LaSalle Street Partnership,
126 F. 3d 955, 958 (CA7 1997); Bank of America, Illinois
v. 203 N. LaSalle Street Partnership,
195 B. R. 692, 696 (ND Ill. 1996). The Debtors principal objective was to ensure that its partners retained title to the property so as to avoid roughly $20 million in personal tax liabilities, which would fall due if the Bank foreclosed. 126 F. 3d, at 958; 195 B. R., at 698. The Debtor proceeded to propose a reorganization plan during the 120-day period when it alone had the right to do so, see 11 U. S. C. §1121(b); see also §1121(c) (exclusivity period extends to 180 days if the debtor files plan within the initial 120 days).
The Bankruptcy Court rejected the Banks motion to terminate the period of exclusivity to make way for a plan of its own to liquidate the property, and instead extended the exclusivity period for cause shown, under §1121(d).
The value of the mortgaged property was less than the balance due the Bank, which elected to divide its undersecured claim into secured and unsecured deficiency claims under §506(a) and §1111(b).
126 F. 3d, at 958. Under the plan, the Debtor separately classified the Banks secured claim, its unsecured deficiency claim, and unsecured trade debt owed to other creditors. See §1122(a).
The Bankruptcy Court found that the Debtors available assets were prepetition rents in a cash account of $3.1 million and the 15 floors of rental property worth $54.5 million. The secured claim was valued at the latter figure, leaving the Bank with an unsecured deficiency of $38.5 million.
So far as we need be concerned here, the Debtors plan had these further features:
(1) The Banks $54.5 million secured claim would be paid in full between 7 and 10 years after the original 1995 repayment date.
(2) The Banks $38.5 million unsecured deficiency claim would be discharged for an estimated 16% of its present value.
(3) The remaining unsecured claims of $90,000, held by the outside trade creditors, would be paid in full, without interest, on the effective date of the plan.
(4) Certain former partners of the Debtor would contribute $6.125 million in new capital over the course of five years (the contribution being worth some $4.1 million in present value), in exchange for the Partnerships entire ownership of the reorganized debtor.
The last condition was an exclusive eligibility provision: the old equity holders were the only ones who could contribute new capital.
The Bank objected and, being the sole member of an impaired class of creditors, thereby blocked confirmation of the plan on a consensual basis. See §1129(a)(8).
The Debtor, however, took the alternate route to confirmation of a reorganization plan, forthrightly known as the judicial cramdown process for imposing a plan on a dissenting class. §1129(b). See generally Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L. J. 133 (1979).
There are two conditions for a cramdown. First, all requirements of §1129(a) must be met (save for the plans acceptance by each impaired class of claims or interests, see §1129(a)(8)). Critical among them are the conditions that the plan be accepted by at least one class of impaired creditors, see §1129(a)(10), and satisfy the best-interest-of-creditors test, see §1129(a)(7).
Here, the class of trade creditors with impaired unsecured claims voted for the plan,
126 F. 3d, at 959, and there was no issue of best interest. Second, the objection of an impaired creditor class may be overridden only if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. §1129(b)(1). As to a dissenting class of impaired unsecured creditors, such a plan may be found to be fair and equitable only if the allowed value of the claim is to be paid in full, §1129(b)(2)(B)(i), or, in the alternative, if the holder of any claim or interest that is junior to the claims of such [impaired unsecured] class will not receive or retain under the plan on account of such junior claim or interest any property, §1129(b)(2)(B)(ii). That latter condition is the core of what is known as the absolute priority rule.
The absolute priority rule was the basis for the Banks position that the plan could not be confirmed as a cramdown. As the Bank read the rule, the plan was open to objection simply because certain old equity holders in the Debtor Partnership would receive property even though the Banks unsecured deficiency claim would not be paid in full. The Bankruptcy Court approved the plan nonetheless, and accordingly denied the Banks pending motion to convert the case to Chapter 7 liquidation, or to dismiss the case. The District Court affirmed, 195 B. R. 692 (ND Ill. 1996), as did the Court of Appeals.
The majority of the Seventh Circuits divided panel found ambiguity in the language of the statutory absolute priority rule, and looked beyond the text to interpret the phrase on account of as permitting recognition of a new value corollary to the rule. 126 F. 3d, at 964965. According to the panel, the corollary, as stated by this Court in Case
v. Los Angeles Lumber Products Co.,
308 U. S. 106, 118 (1939)
, provides that the objection of an impaired senior class does not bar junior claim holders from receiving or retaining property interests in the debtor after reorganization, if they contribute new capital in money or moneys worth, reasonably equivalent to the propertys value, and necessary for successful reorganization of the restructured enterprise. The panel majority held that
when an old equity holder retains an equity interest in the reorganized debtor by meeting the requirements of the new value corollary, he is not receiving or retaining that interest on account of  his prior equitable ownership of the debtor. Rather, he is allowed to participate in the reorganized entity on account of  a new, substantial, necessary and fair infusion of capital. 126 F. 3d, at 964.
In the dissents contrary view, there is nothing ambiguous about the text: the plain language of the absolute priority rule … does not include a new value exception. Id
., at 970 (opinion of Kanne, J.). Since [t]he Plan in this case gives [the Debtors] partners the exclusive right to retain their ownership interest in the indebted property because of
their status as … prior interest holder[s], id
., at 973, the dissent would have reversed confirmation of the plan.
We granted certiorari, 523 U. S. 1106 (1998)
, to resolve a Circuit split on the issue. The Seventh Circuit in this case joined the Ninth in relying on a new value corollary to the absolute priority rule to support confirmation of such plans. See In re Bonner Mall Partnership
, 2 F. 3d 899, 910916 (CA9 1993), cert. granted, 510 U. S. 1039, vacatur denied and appeal dismd as moot, 513 U. S. 18 (1994)
. The Second and Fourth Circuits, by contrast, without explicitly rejecting the corollary, have disapproved plans similar to this one. See In re Coltex Loop Central Three Partners, L. P.
, 138 F. 3d 39, 4445 (CA2 1998); In re Bryson Properties, XVIII
, 961 F. 2d 496, 504 (CA4), cert. denied, 506 U. S. 866 (1992)
We do not decide whether the statute includes a new value corollary or exception, but hold that on any reading respondents proposed plan fails to satisfy the statute, and accordingly reverse.
The terms absolute priority rule and new value corollary (or exception) are creatures of law antedating the current Bankruptcy Code, and to understand both those terms and the related but inexact language of the Code some history is helpful. The Bankruptcy Act preceding the Code contained no such provision as subsection (b)(2)(B)(ii), its subject having been addressed by two interpretive rules. The first was a specific gloss on the requirement of §77B (and its successor, Chapter X) of the old Act, that any reorganization plan be fair and equitable. 11 U. S. C. §205(e) (1934 ed., Supp. I) (repealed 1938) (§77B); 11 U. S. C. §621(2) (1934 ed., Supp. IV) (repealed 1979) (Chapter X). The reason for such a limitation was the danger inherent in any reorganization plan proposed by a debtor, then and now, that the plan will simply turn out to be too good a deal for the debtors owners. See H. R. Doc. No. 93137, pt. I, p. 255 (1973) (discussing concern with the ability of a few insiders, whether representatives of management or major creditors, to use the reorganization process to gain an unfair advantage); ibid
. ([I]t was believed that creditors, because of managements position of dominance, were not able to bargain effectively without a clear standard of fairness and judicial control); Ayer, Rethinking Absolute Priority After Ahlers
, 87 Mich. L. Rev. 963, 969973 (1989). Hence the pre-Code judicial response known as the absolute priority rule, that fairness and equity required that the creditors … be paid before the stockholders could retain [equity interests] for any purpose whatever. Northern Pacific R. Co.
228 U. S. 482, 508 (1913)