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., dissenting).

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 discussed herein.