Daily Development for Monday, April 24, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

We've heard something about this case before, from Jack Murray's postings, but it is a decision from the Supremes, and the DIRT reporter, Jim Stillman of Murphy Sheneman, Julian and Roberts in Los Angeles, has a lot to say about the case in the comments, so I thought we had a good DD. Maybe we'll get still more good stuff from Jack Murray.

BANKRUPTCY; CONFIRMATION; ABSOLUTE PRIORITY RULE; NEW VALUE COROLLARY: A plan will not be confirmed if provide for a debtor to maintain ownership of the property under a plan that impairs an objecting secured creditor, even though the debtor contributes money having a present value of $4.1 million under the plan, where the value of the opportunity to control the reorganized debtor will not be exposed to market bidding.

Bank of America National Trust and Savings Association v. North LaSalle Street Partnership, 119 S.Ct. 1411, 1999 U.S.LEXIS 3003 (1999).

Section 1129(b)(2)(B)(ii) of the Bankruptcy Code, the socalled absolute priority rule, provides that a more junior interest holder, such as equity, may not retain or receive property under the plan "on account of" his prior position, if senior creditors withhold consent and are not fully paid. Many courts, including the Seventh Circuit Court of Appeals below in this case, have taken the view that a "new value corollary" to the absolute priority rule exists. It is employed where junior parties, including the debtor, seek confirmation of a plan in which they contribute significant new money to the estate in exchange for retaining their interest, or in the rubric of the corollary, purchasing a new interest in the reorganized debtor.

The Supreme Court, by Justice Souter, here declined to decide in the abstract whether or not there is a "new value corollary;" the opinion notes merely that the legislative history "does nothing to disparage the possibility apparent in the statutory text that the absolute priority rule...may carry a new value corollary." (1999 LEXIS 3003, **2728.)

The problem in this case, the Opinion continues, is that the Bankruptcy Judge, and not the market, decided that the contribution of $4.1 million by the existing equity was a sufficient price to pay for the opportunity to control the new debtor. Courts should not be left to "measure it by the Lord Chancellor's foot" (at **30) when the market itself, i.e., some kind of competitive bidding, is the best way to determine what new value the reorganized equity position should command. The Supreme Court leaves it for the courts to work out whether "a market test would require an opportunity to offer competing plans or would be satisfied by a right to bid for the same interest sought by old equity." (at **41.) The judgment is reversed on the grounds that neither approach was allowed below.

Reporter's Comment: The most common question about LaSalle posed by commentators and practitioners so far is, why is the Supreme Court so coy about the existence of the corollary? Is there such an exception (corollary) to the absolute value rule or not? Some say, the practical effect of rulings such as LaSalle is to moot the question by rendering the corollary unuseable. That view depends largely on the question of creditbidding. Consider that if all the "new value" contributed under the plan would be paid to a particular nonconsenting, undersecured creditor, then that creditor should be allowed to credit bid the undersecured portion of the claim in competition against the contribution. (Analyzing that view leads one into quite technical questions regarding the effect of a Section 1111(b) election, the issue of plan exclusivity and other points beyond the scope of this review.) But for the impact of credit bidding, one could say that LaSalle allows a secured creditor's claim to be "cramdowned" (impaired without consent) in a newvalue plan, so long as there is an impaired assenting class without regard to the votes of affiliates and, LaSalle teaches, so long as the secured creditor is unwilling or unable to outbid the newvalue provider. This situation may arise.

LaSalle poses other questions. For example, how broad must the "market" be? Is the "market" to be the only test for the sufficiency of the contribution? Does the new value have to be objectively significant at all, or is the fairness of the contribution to be decided as at a foreclosure auction where so long as third parties have an opportunity to counterbid, the highest price is irrebuttably deemed to be the fair price. That approach certainly avoids having to consider the Lord Chancellor's foot, etc.

And speaking of the aforesaid Foot, why is the LaSalle court *so suspicious or intolerant of the Bankruptcy Court's valuation skills here,* when at many other procedural points in a case the Bankruptcy Court decides questions of value as a trier of fact, determining practically every day that suchandsuch a dollar figure is fair value, or is market, or significant, adequate, or whatever the Code may require, and does so without throwing the determination out to the auction pit. Or is LaSalle a "big case" rule only or maybe a rich creditor rule?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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