Daily Development for
Thursday, October 23, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for today's DD is Jim Stillman of Murphy, Weir & Butler, Los Angeles.

BANKRUPTCY; REORGANIZATION; CRAMDOWN; "NEW VALUE" EXCEPTION: "New value exception" to priority claims in cramdown plan should not take into account future stream of payments to be contributed by insiders.

In re Ambanc La Mesa Limited Partnership, ___ F.3d _____ (9th Cir. 1997).

The Chapter 11 debtor owed amounts far in excess of the value of its sole asset, real property which was encumbered by a deed of trust. The creditor therefore held a secured claim to the extent of the value of the property and an unsecured claim for the balance. Because the creditor was impaired and did not accept the plan, the Court examined whether the Bankruptcy Code "cramdown" provision, Section 1129(b), was satisfied. The cramdown provision, which requires that the plan treat each objecting impaired class fairly and equitably, was not satisfied here because the equity holders retained an equity interest in the estate and did not provide to the senior objecting creditor cash or other property equal to the full present value of their estate. Because the unsecured claim was not earning interest, the creditor was not receiving full present value.

Finally, the judicially-created exception to this rule, known as the "new value corollary," allowing equity holders to retain an interest if they provide "new value" to the reorganized debtor, was not satisfied because the contribution of less than one-half percent of the total unsecured debt was de minimis and not considered "new value."

The Court of Appeals held that only money contributed as of the effective date may be considered as "new value," and not a promised stream of future payments. Consequently, where the current contribution was less than half of one percent of the amount of unsecured claims or the amount of debt discharged, the value was not substantial under any of the current approaches used by courts, and thus the Court did not have to consider the additional question whether the contribution was "equivalent" to the value of the interest retained.

The court further ruled upon separate classification of the deficiency claim of secured creditors. To be acceptable, separate treatment of the deficiency claim would require specific findings that the discrimination was reasonable and "directly related to the basis or rationale for the discrimination."

Reporter's Comment: The Ninth Circuit preserved the "new value" exception, in In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir. 1993), and has, since then, labored to put the Genie back in the bottle. It was probably a bit of overkill for the Ninth Circuit to say that the Supreme Court's requirement that new value be "money or money's worth" (see Norwest Bank of Worthington v. Ahlers, 485 U.S. 197 (1988)) can only be met by a contribution completed on the effective date: other credit-supporting instruments contingent on future events plainly have "money's worth" (e.g., a Letter of Credit). The Court's very tentative concession that separate classification of the deficiency claim might, on remand, be permissible on more thorough findings is interesting, given In re Barakat, 99 F.3d 1520 (9th Cir. 1996), in which the Ninth Circuit rejected separate classification.

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