Today the Court granted certiorari in one case of interest to
the business community. Amicus briefs in support of the petitioner are due on
June 18, 1998, and amicus briefs in support of the respondent are due on July 20
(because July 18 is a Saturday). Any questions about this case should be
directed to Roy T. Englert, Jr. (202-778-0657) in our Washington office. The
Court will be in recess until May 18, 1998.
Bankruptcy — New Value Exception to Absolute Priority
Rule. The Court granted certiorari today in Bank of America National
Trust & Savings Association v. 203 North LaSalle Street
Partnership, No. 97-1418, to decide whether there is a new value exception
to bankruptcy's absolute priority rule. More specifically, the Court will decide
whether a bankruptcy court may confirm, over creditors' objections, a plan of
reorganization that does not pay creditors the full value of their unsecured
claims yet allows the pre-bankruptcy equity holders an exclusive opportunity to
retain an interest in the reorganized enterprise in exchange for a contribution
of new capital.
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 a reorganization] plan." Norwest Bank
Worthington v. Ahlers, 485 U.S. 197, 202 (1988) (internal quotation
marks omitted). The rule was originally a judicial development but now is
incorporated into the Bankruptcy Code, in 11 U.S.C. 1129(b)(2)(B)(ii).
Ahlers, 485 U.S. at 202.
Justice Douglas's opinion for the Court in Case v.
Los Angeles Lumber Products Co., 308 U.S. 106, 121-122 (1939), contained
dicta that have been read to suggest that there was or is a new value exception
to the absolute priority rule. Ahlers, 485 U.S. at 203. The new value
exception, however, is difficult to reconcile with the language of Section
1129(b)(2)(B)(ii), which forbids pre-petition equity holders to "receive or
retain under the plan on account of such junior claim or interest any property"
unless more senior interests consent or are paid in full. Accordingly, the Court
in Ahlers left open the question whether any new value exception exists.
485 U.S. at 203 n.3. The Court later granted certiorari in U.S. Bancorp
Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994), to
decide the issue the Court left open in Ahlers, but the Court dismissed
the case as moot after the parties settled (see 513 U.S. at 29).
In 203 North LaSalle, a divided panel of the Seventh
Circuit held that the new value exception exists under the Bankruptcy Code, and
that the debtor's pre-petition equity holders did not unlawfully receive or
retain any interest "on account of" their prior interests, even though they were
given the exclusive opportunity to bid for equity interests in the reorganized
entity. 126 F.3d 955 (1997). The court affirmed the lower courts' orders
confirming a plan of reorganization over the objections of Bank of America
National Trust and Savings Association, the debtor's major creditor, which would
not be paid in full under the plan. The court split 5-5 on whether to rehear the
case en banc, with Judges Coffey, Easterbrook, Manion, Kanne, and Diane P. Wood
voting for rehearing en banc. Subsequently, in In re Coltex Loop Central
Three Partners, L.P., 1998 WL 90844 (Feb. 19, 1998), a unanimous panel of
the Second Circuit reached a conflicting result and expressly agreed with Judge
Kanne's dissent in LaSalle. The Seventh Circuit's position is in accord
with that of the Ninth Circuit (see In re Bonner Mall Partnership, 2 F.3d
899 (1993) (Reinhardt, J.), cert. dismissed, 513 U.S. 18 (1994)), while the
Second Circuit's position is in accord with that of the Fourth Circuit (see
In re Bryson Properties, 961 F.2d 496 (1992)). See also In re
Greystone III Joint Venture, 995 F.2d 1274, 1285 (5th Cir. 1991) (Jones, J.,
Because the existence vel non of a new value exception
can affect the negotiations as well as litigation over a plan in almost every
reorganization case, 203 North LaSalle is potentially the most important
Supreme Court bankruptcy case in many years. Amicus briefs supporting the
certiorari petition were filed by the American Council of Life Insurance, the
American Bankers Association, the California Bankers Association, and the
American College of Real Estate Lawyers. The Solicitor General of the United
States also urged the Court, in both Ahlers and Bonner Mall, to
reject the new value exception, and it is possible that the Solicitor General
will again take a position in 203 North LaSalle.
Mayer, Brown & Platt is counsel of record for Bank of
America National Trust and Savings Association in this case.
Copyright 1998 Mayer, Brown & Platt. This Mayer, Brown
& Platt publication provides information and comments on legal issues and
developments of interest to our clients and friends. The foregoing is not a
comprehensive treatment of the subject matter covered and is not intended to
provide legal advice. Readers should seek specific legal advice before taking
any action with respect to the matters discussed herein.
This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and
comments on legal issues and developments of interest to our clients and
friends. The foregoing is not a comprehensive treatment of the subject matter
covered and is not intended to provide legal advice. Readers should seek
specific legal advice before taking any action with respect to the matters