Opinion ID: 741818
Heading Depth: 3
Heading Rank: 2

Heading: Liberty's Unsecured Claim

Text: 20 11 U.S.C. § 1129(b)(2) sets forth specific criteria for the fair and equitable treatment of unsecured claims: 21 (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 22 (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. 23 11 U.S.C. § 1129(b)(2)(B). § 1129(b)(2)(B)'s provision for fair and equitable treatment of unsecured creditors codifies the judicially developed absolute priority rule. With one exception, that general rule prohibits the bankruptcy court from confirming the Plan if any of the debtor's former equity holders retain any equity interest in the estate without also providing to senior objecting creditors cash or other property equal to the present value of their claim. Ambanc's partners do retain equity interests, so Liberty-an unsecured creditor classified senior to Ambanc's partners-must be paid the full present value of its claim. The district court found that because Liberty will receive 100% of both its secured and unsecured claims before the partners receive anything, the Plan satisfied the absolute priority rule. However, in order for Liberty to be paid the full value of its claims, the Plan must provide for payment of interest for the post-confirmation time-value of the amount of Liberty's unsecured claim. See In re Perez, 30 F.3d 1209, 1214-15 (9th Cir.1994). The Plan violates the general absolute priority rule provided in the Code because it does not pay interest on Liberty's unsecured claim. 24 Because the Plan plainly violates the general absolute priority rule, we must consider whether it satisfies the exception or corollary, In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir.1993), mot. to vacate denied and cert. dismissed, 513 U.S. 18, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994). Allowing old equity to retain an interest does not violate the absolute priority rule if the former equity holders provide new value to the reorganized debtor, under the new value corollary to the absolute priority rule. 25 The new value corollary requires that former equity holders offer value under the Plan that is (1) new, (2) substantial, (3) in money or money's worth, (4) necessary for successful reorganization, and (5) reasonably equivalent to the value or interest received. Id. at 908. Under the Plan, Ambanc's partners retain all of their rights, title, and interest in the reorganized debtor conditioned upon each partner contributing $20,000 payable over 10 years in annual increments of $2,000. With 16 contributors, this translates to an initial contribution of $32,000, and a total contribution of $320,000 over a period of ten years. 26 There is no dispute that the partners contribute new value. We reverse, however, on the ground that the bankruptcy court erred in finding the contribution substantial, the analysis of which is intertwined with the money or money's worth component. 27 The bankruptcy court's findings of fact, conclusions of law and order confirming the Plan stated only that [e]ach impaired class has either accepted the Plan or the treatment provided by the Plan for such class is fair and equitable and does not discriminate unfairly. Order p 10(h). We find this conclusion to be clear error. See Bonner, 2 F.3d at 909. 28 The relevant amount for the substantiality analysis is the partners' up-front contribution. Under the money or money's worth requirement, the new capital contribution of the former equity holders (1) must consist of money or property which is freely traded in the economy, and (2) must be a present contribution, taking place on the effective date of the Plan rather than a future contribution. See In re Yasparro, 100 B.R. 91, 96-97 (Bankr.M.D.Fla.1989) (holding that promissory notes from the individual debtor to the unsecured creditors were future rather than present contributions and thus did not satisfy the new value corollary) (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); In re Stegall, 85 B.R. 510 (C.D.Ill.1987), aff'd, 865 F.2d 140 (7th Cir.1989)). Only those contributions from Ambanc's partners that will actually be paid on the effective date of the Plan may be considered as money or money's worth under the new value corollary-the contribution of $32,000. 29 The Bonner case was before this Court on the district court's reversal of the bankruptcy court's grant of relief from the automatic stay. The bankruptcy court had based relief from the stay on its conclusion that the new value corollary to the absolute priority rule was no longer in effect. In affirming the district court's reversal, we first determined that the judicially-created new value corollary survived the enactment of the Bankruptcy Code in 1978. We then held that the specific record before us did not establish as a matter of law that there was no reasonable possibility that the bankruptcy judge could find the plan at issue fair and equitable. In Bonner, there had not yet been a confirmation hearing on the reorganization plan, under which old equity was to contribute $200,000, or 6% of the unsecured debt of $3.4 million. We noted that there are certain conceptual difficulties regarding valuation inherent in the application of the new value exception, id. at 917 n. 40, but deferred addressing valuation methodology until we might be presented with a concrete factual situation at a later date, id. 30 The present case still does not present us with the factual situation appropriate for the resolution of the difficult issues of valuation in the context of the new value corollary. Rather, we reject the contribution proposed here as a threshold matter because it is de minimis as a matter of law. 31 The most conceptually difficult prong of the new value corollary may be the fifth-equivalence, which likely requires the bankruptcy court to determine a value for the reorganized debtor to be compared with the contribution. Wholly de minimis contributions, however, simply fail the threshold analysis under the second prong, substantiality-a requirement separate and independent of equivalence, see In re Snyder, 967 F.2d 1126, 1131 (7th Cir.1992). Commentators have observed that prior to making the time-consuming determination as to whether the new value contribution is reasonably equivalent to the value being received[-the equivalence prong], a significant number of courts have required that the new value contribution be 'substantial' in comparison to such things as (1) the total unsecured claims against the debtor, (2) the claims being discharged, or (3) the dividend being paid on unsecured claims by virtue of the contribution. J. Ronald Trost, Joel G. Samuels, Kevin T. Lantry, Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, CA46 A.L.I.-A.B.A. 479, 552 (1995). 32 There is no dividend being paid as a result of contribution in this case, and we need not now determine whether total unsecured claims or total amount discharged provides the better basis, because the contribution in this case is de minimis under either comparison. First, $32,000 is less than 0.5% of the total unsecured debt of approximately $4 million. This percentage is well below the percentage of unsecured debt that other courts have held to be insubstantial as a matter of law. Compare, e.g., In re Woodbrook Assocs., 19 F.3d 312, 320 (7th Cir.1994) ($100,000 contribution not substantial because it is only 3.8% of $2.6 million unsecured debt); In re Snyder, 967 F.2d 1126, 1132 (7th Cir.1992) (the disparity between the contribution and the unsecured debt, at most $22,000 or 2.2% of approximately $1,000,000 unsecured claims, was so extreme ... there [was] no need to proceed any further ....); and In re Olson, 80 B.R. 935 (Bankr.C.D.Ill.1987) ($5,000, or only 1.56% on the $320,000 due all unsecured creditors, held insubstantial), aff'd, No. 88-4052, 1989 WL 330439 (C.D.Ill. Feb.8, 1989), with In re Elmwood, Inc., 182 B.R. 845 (D.Nev.1995) ($150,000, less than 4% of unsecured debt, approved where a higher contribution would not correct the undesirable location and crime problems associated with the primary asset, an apartment complex). Second, the contribution percentage is likely even smaller when compared to amount of debt discharged-the interest on the unsecured claims. At, for instance, the rate of interest the Plan applies to Liberty's secured claim-10.5%-potentially over ten years, this lost interest could exceed $4 million. 33 Rejection of de minimis contributions is consistent with longstanding precedent. The absolute priority rule arose in the early part of this century from litigation attacking collusion between shareholders and bondholders who sought to squeeze-out unsecured creditors in reorganizations of failed railroads. Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 Stan.L.Rev. 69 (Nov.1991). The courts initially employed fraudulent transfer principles to assist unsecured creditors. Id. at 76-77. In one early such case, Northern Pacific Ry. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913), the Supreme Court recognized two general principles: First, continued shareholder participation in the reorganized debtor creates a presumption of collusion. Id. at 507, 33 S.Ct. at 561. Second, reorganization managers could dispel this presumption by promulgating a fair offer to all creditors. Id. at 508, 33 S.Ct. at 561-62. Our holding in Bonner recognizes that such precedential heritage survived the later codification of the absolute priority rule. The Boyd presumption against former equity's participation has endured as a primary component of absolute priority jurisprudence. A de minimis contribution is insufficient to overcome that presumption. 34 We decline to define a bright-line rule, but merely hold that a proposed contribution of one-half of one percent of each of the various quantities judicially recognized as relevant to the substantiality comparison falls within the de minimis range. 35 Based upon the above holding, we need not reach the fourth and fifth prongs of the new value corollary, necessity and reasonable equivalence. However, if a new Plan is proposed in the future and confirmed, the bankruptcy court's confirmation order will likely need to exhibit a more comprehensive factual determination as to necessity than is present in the order under review. The court must also take care that the equivalence analysis only compares what the partners put in to what they get out.