Opinion ID: 472220
Heading Depth: 3
Heading Rank: 2

Heading: Unsecured claims.

Text: 71 With respect to a class of dissenting unsecured creditors, a plan will be fair and equitable if one of two tests is satisfied. First, the plan may provide that each unsecured creditor in the class receive or retain property having a value, as of the effective date of the plan, equal to the allowed amount of its claim. 11 U.S.C. § 1129(b)(2)(B)(i). Norwest and the Federal Land Bank contend, and we agree, that any realistic reorganization plan proposed by the Ahlers could not provide the unsecured creditors with property equal to the amount of their allowed claims. Thus, any feasible plan would not meet the fair and equitable standard of section 1129(b)(2)(B)(i). 72 Alternatively, the plan may provide any treatment for the class of unsecured creditors, including no participation at all, 16 as long as no junior claims or interests participate in the plan or retain an interest in the debtor's property. 11 U.S.C. § 1129(b)(2)(B)(ii). Norwest and the Federal Land Bank contend that because the Ahlers could not provide the unsecured creditors with property equal to the allowed amount of their claims, any non-liquidation plan would not satisfy the fair and equitable standard of section 1129(b)(2)(B)(ii). They argue that under any reorganization plan, the Ahlers would retain an equitable ownership interest, which is junior to the unsecured creditors' claims, without providing for the unsecured creditors in full. We do not agree that retention of this equitable ownership interest is fatal to the Ahlers' plan being fair and equitable under section 1129(b)(2)(B)(ii). 73 Section 1129(b)(2)(B) essentially applies a modified version of the traditional absolute priority rule, which was initially established in Northern Pacific Railway v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913). See 3 Norton, Bankruptcy Law & Practice § 63.21 (1985). Simply stated, the absolute priority rule provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under the plan. However, in cases decided after Boyd, the Supreme Court specifically recognized that there may be circumstances in which the absolute priority rule could be modified to allow a junior ownership interest to participate in the reorganization plan even though dissenting senior creditors may receive less than their allowed claims. 74 In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), the Court stated: 75 It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. This Court, as we have seen, indicated as much in Northern Pacific Railway Co. v. Boyd, supra [228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931] and Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra [271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028]. Especially in the latter case did this Court stress the necessity, at times, of seeking new money essential to the success of the undertaking from the old stockholders. 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. 76 Id. at 121, 60 S.Ct. at 10 (footnote omitted). 77 The Court continued by stating that if these conditions were satisfied, 78 the creditor cannot complain that he is not accorded his full right of priority against the corporate assets. 79 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. 80 Id. at 122, 60 S.Ct. at 10 (footnotes omitted) (emphasis added). 81 In the Kansas City Terminal Railway case cited by the Court in Case, the Supreme Court stated: 82 Generally, additional funds will be essential to the success of the undertaking, and it may be impossible to obtain them unless stockholders are permitted to contribute and retain an interest sufficiently valuable to move them. In such or similar cases the chancellor may exercise an informed discretion concerning the practical adjustment of the several rights. 83 Kansas City Terminal Railway, 271 U.S. at 455, 46 S.Ct. at 551-52. 84 See also Sophian v. Congress Realty Co., 98 F.2d 499, 502 (8th Cir.1938) (to justify retention of stock interests by stockholders of debtor it must appear that they have furnished some compensatory additional consideration or have an equity interest in the estate of the debtor after the rights of creditors are fully provided for); In re U.S. Truck Co., 47 B.R. 932, 940-41 (E.D.Mich.1985): In re Marston Enterprises, Inc., 13 B.R. 514, 517-18 (Bankr.E.D.N.Y.1981) (contribution of new capital necessary to fund reorganization plan in return for participation in reorganization plan did not violate fair and equitable rule, even though intervening classes of creditors received nothing under the plan). 85 Thus, a more accurate summation of the absolute priority rule would be that a dissenting class of unsecured creditors must be provided for in full before any junior class may receive or retain any property under the plan, unless the junior class contributes to the reorganization enterprise something that is reasonably compensatory and is measurable. 86 Certainly, a farmer's efforts in operating and managing his farm is essential to any successful farm reorganization, and this yearly contribution is measurable in money or money's worth. Moreover, the reorganization value of the Ahlers' farm exceeds its liquidation value--if the plan is rejected, the unsecured creditors will get nothing, whereas they will receive annual payments if the plan is approved and is successful. The Ahlers' farm operation and management skills are something of a value which would disappear if their farm was liquidated. Because that value cannot be captured for creditors in the event of liquidation, fairness is not violated if their Chapter 11 plan leaves that value in their hands. This view also recognizes the broad rehabilitative purposes of the Bankruptcy Act--to give a debtor with a reasonable chance of success an opportunity for a fresh start. Any other view would deny to most farmers the opportunity to take advantage of the reorganization provisions of the Bankruptcy Act. Accordingly, the farmer should be entitled to participate in the plan to the extent of this contribution, even though more senior claims are not provided for in full under the plan. The only remaining question, therefore, is whether the farmer's new contribution is reasonably equivalent to the equitable ownership interest the farmer would retain under the plan. 87 We recognize that there is no mathematical formula which the bankruptcy court can apply to make this determination, and that this determination must necessarily depend on the facts in each case. However, the value of the farmer's labor, including the value of his experience and expertise in farming the land, should not be overly difficult to determine. Valuing the retained equitable ownership interest, however, is a more difficult problem. 88 In In re U.S. Truck the court stated that in determining the general worth of the retained interest, a court must necessarily make determinations regarding the future of the debtor as reorganized, and its possible profits. 47 B.R. at 941-42 (citing In re Landau Boat Co., 13 B.R. 788 (Bankr.W.D.Mo.1981) ). In Landau Boat the creditors argued that the shareholders were retaining equity value without consideration because the debtor corporation, as an ongoing business, was worth more than the shareholders' new contribution. The court in Landau Boat stated: 89 The commercial value of property consists in the expectation of income from it   . Such criterion is the appropriate one here, since we are dealing with the issue of solvency arising in connection with reorganization plans involving productive properties   . The criterion of earning capacity is the essential one    if the allocation of securities among the various claimants is to be fair and equitable   . Since its application requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made. But that estimate must be based on an informed judgment which embraces all facts relevant to future earnings capacity and hence to present worth, including, of course, the nature and condition of the properties, the past earnings record, and all circumstances which indicate whether or not that record is a reliable criterion of future performance. 90 13 B.R. at 792-93 (quoting Consolidated Rock Products v. DuBois, 312 U.S. 510, 526, 61 S.Ct. 675, 685, 85 L.Ed. 982 (1941) ). 91 The court found that the debtors' corporation had the potential to be profitable. Landau Boat, 13 B.R. at 793. However, after considering the debtor's financial needs, including debt service, the state of the economy, and the fact that the debtor was in a highly competitive business, the court concluded that the probability of the debtor making a real profit in the next few years was unlikely. Id. Thus, the court found that the new investors were making a substantial investment which exceeded any value that could be realized from the business in the near future. Id. 92 Applying these principles to the present case, the Ahlers would not realize any real profit or benefit from their retained equitable ownership interest until the reorganization plan was completed and the secured creditors had been paid the full amount of their allowed secured claims. At this time, the equitable ownership interest would mature. Thus, if the bankruptcy court determines that the value of the Ahlers' yearly contributions of labor, experience, and expertise over the life of the plan will equal or exceed the value of the retained ownership interest at maturity, the dissenting unsecured creditors cannot complain that they have not been accorded their full right of priority against the debtors' assets. 17 93 We recognize, of course, that because the profitability of any reorganization plan cannot be determined with mathematical certitude, the possibility exists that the plan may be more profitable than anticipated. If so, and if the equitable ownership interest receives this excess profit, the equitable ownership interest may receive more than the value of its contribution. To avoid this result, the bankruptcy court should require that any cash flow from the operation of the farm in excess of that anticipated in the plan should be paid to the unsecured creditors on a pro rata basis until such time as the unsecured creditors are paid in full without interest. Similarly, if any secured property is sold during the life of the plan, and if the unsecured creditors have not been paid in full, excluding interest, before that date, the bankruptcy court should require that any amount received in excess of that necessary to pay the secured creditors be shared equitably among the unsecured creditors and the ownership interest, based on its contribution at the time the property is sold. 18 94 This matter is remanded to the district court with directions that the bankruptcy court take prompt action to comply with this opinion. 19 Each party to this appeal is to bear its own costs. 95