Lead Opinion
This case involves Bank of America Illinois’ (“Bank America”) appeal of the confirmation of a bankruptcy reorganization plan. 203 N. LaSalle Street Limited Partnership (“LaSalle”), which owns fifteen floors of office space m a Chicago building, failed to pay a secured note held by Bank America, and Bank America attempted to foreclose on the property. LaSalle filed for .bankruptcy under Chapter 11, 11 U.S.C. § 1101 et seq. LaSalle eventually filed a reorganization plan that the bankruptcy court approved, as modified, despite Bank America’s opposition to the plan. The district court upheld the bankruptcy court’s order confirming the plan. For the reasons set forth in the following opinion, we affirm the judgment of the district court.
I
BACKGROUND
A. Facts
The debtor in this case, LaSalle, is an' Illinois limited partnership that owns fifteen floors of office space in a building in the central business district of Chicago. The property was encumbered by a lien in favor of Bank America; LaSalle owed Bank America more than $93 million. LaSalle’s loan was secured by a first non-recourse mortgage on the property that came due on January 3,1995. LaSalle was unable to repay the loan, so Bank America started a foreclosure action in state court on January 20,1995. In response, LaSalle filed for bankruptcy under Chapter 11. Bank-America elected to have its secured claim, which was significantly greater than the value of the security, treated as a secured claim and an unsecured claim under 11 U.S.C. § 1111(b).
Before the bankruptcy court, the debtor filed a plan for reorganization on April 13, 1995, which it amended on May 12. Bank America objected to the amended plan, and
Under the confirmed plan, the debtor’s partners would contribute new capital: $3 million the day after the effective date of the plan and five annual installments of $625,000 thereafter. LaSalle would pay the non-insider trade creditors in full without interest. Upon confirmation, the insiders would waive their general unsecured claims. The priority and state tax claims under the plan would be paid within 30 days of approval.
B. District Court Proceeding
Bank America appealed the bankruptcy court’s confirmation of LaSalle’s reorganization plan to the district court and raised 14 objections. The district court reviewed Bank America’s objections and upheld the decision of the bankruptcy court in its entirety. The district court rejected Bank America’s objection that the plan was not proposed in good faith, as required by § 1129(a)(3), because that provision focuses on the content and effect of the plan, not the subjective motivation of the plan’s proponent. The court further reasoned that, even if § 1129(a)(3) were concerned with the filer’s motivation, here the avoidance of tax consequences, LaSalle’s proposal was not filed in bad faith. The district court also found that the bankruptcy court’s factual findings that the plan was accepted by an actual impaired class, as required by § 1129(a)(10), was not clearly erroneous. The district court agreed with the bankruptcy court that the plan met § 1129(a)(7)(A)’s “best interest” test because, under the proposed plan, Bank America receives property of a value not less than the amount Bank America would receive if the debtor had proceeded under Chapter 7: The present value of the plan for the secured claim is the same under the plan as Bank America would receive in a Chapter 7 liquidation. In addition, Bank America’s deficiency claim, its unsecured claim, is treated more favorably under the proposed plan than under Chapter 7 because, under Chapter 7, Bank America would have received nothing for its unsecured deficiency claim. Further, according to the court, because the best interest test is met and the plan is carefully tailored to fulfill the requirements of that test, the plan does not unfairly discriminate against Bank America. Indeed, said the court, the discrimination from which Bank America claimed to suffer — other unsecured claims are paid off 100%, but Bank America gets only 16% of its unsecured claim — is not unfair. The district court agreed with the bankruptcy court that the Bankruptcy Code did not abolish the Bankruptcy Act’s “new
II
DISCUSSION
For a reorganization plan to be confirmed, the plan must meet the requirements of 11 U.S.C. § 1129.
However, before we turn to the specifics of the case, a quick overview of the process for the confirmation of a reorganization plan may prove useful. For a bankruptcy court to approve a proposed reorganization plan, the plan’s proponent must show that the plan satisfies the 13 requirements of § 1129(a), if they are applicable. With one exception, to be discussed, a plan must meet all 13 requirements. They are: (1) the plan’s compliance with Title 11, (2) the proponent’s compliance with Title 11, (3) the good faith proposal of the plan, (4) the disclosure of payments, (5) the identification of management, (6) the regulatory approval of rate changes, if applicable, (7) the “best interest” test, (8) the unanimous acceptance by impaired classes, (9) the treatment of administrative and priority claims, (10) the acceptance by at least one impaired class of claims, (11) the feasibility of the plan, (12) the bankruptcy fees, and (13) retiree benefits. See 11 U.S.C. § 1129(a)(l)-(13). If, however, a plan is not approved by all of the impaired classes, as generally required by 11 U.S.C. § 1129(a)(8), it is still possible for a plan to be confirmed. If at least one of the non-insider, impaired classes of claims approves the plan, then a plan may be confirmed if two additional requirements are
In our review of the district court and bankruptcy court decisions, we review both courts’ conclusions of law de novo. In re Chappell,
A. Mootness
As a preliminary matter, we must respond to LaSalle’s contention that the appeal should be dismissed as moot. LaSalle submits that, because the reorganization plan has been confirmed and LaSalle has implemented the plan, it would be very difficult now to reverse all the necessary transactions without harming a number of innocent third parties. Specifically, LaSalle contends: Investors have already put their capital into the reorganized debtor (thus foregoing other investment opportunities); LaSalle has renegotiated a lease with one of its two largest tenants; that tenant has spent a significant amount of money to redecorate its leased space; and numerous other payments have been made. In short, LaSalle concludes, under the circumstances, it would be very difficult for the bankruptcy court to “unscramble the eggs” now.
The mere fact that Bank America was unable to obtain a stay from either the district court or this court does not necessarily lead to the conclusion that, once the plan has been confirmed and implemented, all issues related to the confirmation of the plan are moot. See In re Envirodyne Indus.,
Many of the transactions that have occurred to date easily can be reversed without significant harm to third parties. Bank America seeks to foreclose on the property; doing so would not affect the monies that the trade creditors and state taxing authority have received. Bank America also does not seek to reverse the lease agreement reached between LaSalle and its tenant. Moreover, Bank America has agreed to return any payments and documents to LaSalle necessary to reverse the transaction. Finally, Bank America has consented to repay to the investors their investments plus reasonable interest. We believe that, if we were to reverse the decisions of the district and bankruptcy courts, the bankruptcy court could fashion some form of relief that would not unduly burden innocent third parties. Therefore we, like the district court, do not agree with LaSalle that the appeal is moot.
B. Feasibility
Bank America insists that the plan fails to meet the feasibility requirement of § 1129(a)(ll), which requires that, in order for a plan to be confirmed, the “[e]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization of the debtor....” 11 U.S.C. § 1129(a)(ll). In determining that
The bankruptcy court scrutinized the plan very carefully and, despite these shortfalls, determined that the plan was feasible. It reasoned that the cashflow under the plan would be sufficient to pay all the debtor’s expenses and the debt service to the bank for the first six years of the plan. By that time, the bankruptcy court concluded, LaSalle will have paid down the principal on the note by $7.5 million. In years 7 and 8 of the plan, however, there will be some cashflow shortages because of likely costs expended to renew the lease of one of the major tenants in the property. In years 9 and 10, the court predicted, projected cashflow will again exceed expenses and debt service. This cash-flow shortfall would not, make the plan unfeasible, stated .the court, because it was likely that, after six years of successful implementation of the plan, Bank America voluntarily would lend the needed capital to LaSalle. If, on the other hand, the bank at that time decided not to lend LaSalle the money, LaSalle could sell its interest in the property and prepay the balance of the loan. The bankruptcy court, after hearing expert testimony on the improving market for office space in Chicago’s central business district, determined that, at the time of the cashflow shortfall, the value of LaSalle’s property would significantly exceed the remaining principal on the secured debt. Alternatively, the court found that, even if LaSalle did not make up the shortfall, there would not be a liquidation. Under the plan, if Bank America refuses to lend LaSalle the necessary capital and LaSalle does not sell its property, LaSalle will automatically and voluntarily transfer the property to Bank America.
Bank America forwards three points that, it insists, undermine the bankruptcy court’s conclusion that the plan is feasible. First, Bank America argues that the success of the plan depends upon the bank’s willingness to re-lend money to LaSalle. Second, Bank America contends that, although there was expert testimony on which the court relied about the improving real estate market in the central business market in general, there was no testimony of an improving market for this specific property. Finally, Bank America asserts that the automatic reconveyance of the property to the bank in the event of LaSalle’s default does not sufficiently protect Bank America’s interest because a potential future bankruptcy proceeding could invalidate the conveyance.
We agree with the district court, which, when considering the same arguments on appeal, concluded that these concerns are “primarily hypothetical, and constitute merely disagreements with the inferences drawn by the bankruptcy court.” Bank of America, Illinois v. 203 N. LaSalle Street Partnership,
C. New Value Corollary
1.
The general rule for a reorganization plan that has not been approved unanimously
Prior to the passage of the Bankruptcy Code, there was a corollary to this rule, the “new value” corollary. See In re Wabash Valley Power Ass’n,
In enacting the Code, Congress codified ■the absolute priority rule, § 1129(b)(2)(B)(ii), by providing that a plan’s treatment of the creditors would be fair and equitable if
the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added). At the same time, the Code altered the scheme of plan confirmation to provide that a plan could be confirmed if at least one of the impaired non-insider classes of creditors votes to approve the plan. The court then must confirm the plan if it finds that the plan does not discriminate unfairly and is “fair and equitable” to each dissenting class. See 11 U.S.C. § 1129(b)(2).
At the time it codified the absolute priority rule, Congress did not explicitly codify the new value corollary. In re Woodbrook,
We begin, as we must with every statutory interpretation question, with the wording of the statute. Bank America reads § 1129(b)(2)(B)(ii) to require, by the very force of the language itself, the repeal of the new value corollary. As we have noted earlier, this statutory provision provides that a junior interest may not receive any property in a reorganization “on account of’ its previous interest before an objecting impaired senior creditor is paid in full. Under this reading of the statute, Bank America contends that, even assuming that LaSalle’s reorganization plan meets the requirements of the new value exception, confirmation of the plan violates the statutory language. La-Salle’s old equity interest holders, whose claims are junior to those of Bank America, are receiving or retaining property, the ability to • continue to run their business, “on account of’ their old equity intérest.
This interpretation requires, of course, that the phrase “on account of’ bear a great deal of weight. As a matter of abstract logic, and certainly of semantics, one can argue that such a meaning can be attributed to these three words. At some level of abstraction, the new investors in the plan can be said to have the opportunity to invest and to control the company “on account of’ their previous relationship with the debtor. However, the phrase is also susceptible of another construction. Congress, in using the “on account of’ language, might well have intended a more direct causation between the property received- by the debtor and the old equity interest. It can be cogently reasoned that, when an old equity holder retains an equity interest in the reorganized debtor by meeting the requirements of the new value corollary, he is not receiving or retaining that interest “on account of’ his prior equitable ownership of the debtor. Rather, he is allowed to participate in the reorganized entity “on account of’ a new, substantial, necessary and fair infusion of capital.
The mere recitation of the possible interpretations of the statutory absolute priority rule, interpretations argued and reargued in both the cases and the academic literature,
The Supreme Court has made it clear that, in interpreting the Bankruptcy Code, we must keep in mind that “[w]hen Congress amends the bankruptcy laws, it does not write ‘on a clean slate.’ ” Dewsnup,
In this ease, there can be no question that “Congress must have enacted the Code with a full understanding” of the absolute priority rule and its new value corollary. Dewsnup,
Of the two textual interpretations, we think that the far more plausible is the one that interprets the “on account of’ language to permit the continued existence of the new value corollary. We think that it is more reasonable to believe that Congress legislated on the understanding that, in new value transactions, old equity owners receive stock
The new value corollary has been a major source of new funding in reorganizations for the past fifty years. To assume that Congress abolished this device implicitly by the three words “on account of’ is to assume that Congress made a major economic decision affecting the economic health, and indeed the continued existence, of many corporate entities without ever addressing squarely the issue in the statute or its legislative history. The Code does provide some flexibility in plan confirmation in the face of dissenting creditors by denying minority dissenting creditors the right to prevent confirmation as long as the requisite majority of the creditors in each class accepts the plan. To the extent' that the new value corollary was, in pre-Code days, a device that gave the plan proponent some leverage in dealing with minority creditors, its necessity may not be as great today as it was in an -earlier period.
To declare the abolition of the new value corollary would require us to take one of several paths, all of which would be inconsistent with the directions of the Supreme Court of the United States. We could hold that the statutory version of the absolute priority rule is unambiguous in its rejection of the new value corollary and disregard the great body of judicial opinions and serious scholarship that has contended for a variety of interpretations. Alternatively, we could acknowledge the provision’s ambiguity but disregard the clear direction of the Supreme Court that we are not lightly to infer that Congress has altered by implication established bankruptcy practice. Rather than embark on either of these precarious routes, we shall join the other circuits
2.
Bank America further submits that, even if a new value exception were to exist under the Code, the debtor’s plan here did not meet its requirements because the amount of capital infused was not substantial. The bankruptcy court found that the plan proposed infusing new capital into the reorganized debtor. The new capital, the court determined, amounted to a present-value money equivalent of $4.1 million. The bankruptcy court also concluded that this capital was necessary for the success of the plan, was in money or money’s worth, was reasonably equivalent to the interest retained, and was substantial. Thus, according to the bankruptcy court, the plan met the requirements of the new value corollary and did not violate the absolute priority rule.
We review these findings by the bankruptcy court for clear error. In re Andreuccetti,
In this case, under the proposed plan, the investors would infuse $6,125 million into the reorganized debtor to make the reorganization plan work. This capital, the bankruptcy court determined, had a present value of over $4 million. The bankruptcy court, in finding that the amount to be infused was substantial, stated:
Here, the new value being contributed by the partners is substantial both in absolute terms and in its impact in this case. The $4.1 million minimum value of the contribution in this case dwarfs the $30,000 involved in Snyder and the $100,000 in Woodbrook---- The new value contributions proposed by the September 11 plan are not mere tokens, but genuine contributions to the proposed plan.
In re 203 N. LaSalle St. Ltd. Partnership,
D. Impaired Class
Bank America maintains that the acceptance by the impaired class in this case does not meet the Bankruptcy Code’s requirement that, when not all of the impaired classes agree to a proposed plan, at least one impaired class that is not an insider class vote to accept the plan. Bank America submits that the impaired class which approved the reorganization plan, here the trade claims, is an artificially impaired class of claims. Bank America, relying on In re Windsor on the River Associates,
Although we have never before adopted the Eighth Circuit’s “artificial impairment” test, we believe that, even assuming that the Eighth Circuit’s interpretation of § 1129(a)(10) is the appropriate standard, the bankruptcy court did not err in its application here. We have noted, -in discussing In re Windsor, that “[a] finding of ‘artificial impairment’ requires an inquiry into the purposes of the debtor.” In re Wabash,
E. Other Issues
Bank America presses several other claims on appeal, but they need not detain us long. First, Bank America claims that the bankruptcy court clearly erred when it found that the plan subjected its unsecured claim to unfair discrimination. The bankruptcy court
Section 1129(b)(1), which applies to the cramdown confirmation of reorganization plans, provides that a plan may be confirmed only if “the plan does not discriminate unfairly ... with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). No one contends that the confirmed plan does not discriminate between classes. Under the plan, the unsecured trade creditors would receive 100% of their claims, except for the interest thereon, and Bank America, according to the eourt, would receive only 16% of its unsecured deficiency under the plan. However, the bankruptcy court found that this discrimination was not unfair because there was a legally acceptable rationale to support this disparity. Under § 1129(a)(7), the “best interest” test, for a cramdown proposal to be confirmed, each of the creditors in the Chapter 11 reorganization must receive at least as much as they would under a Chapter 7 liquidation. Under such a liquidation, the trade creditors would have been paid in full; whereas, because the unsecured deficiency claim is a statutory creation of Chapter 11, Bank America would not have received anything for the deficiency amount. Consequently, the bankruptcy court reasoned, the disparity between these claims, with the trade creditors receiving 100% and Bank America receiving 16%, is not unfair. Bank America does better than it would have under Chapter 7, and the trade creditors do no worse. Additionally, the plan called for the payment of the bank’s unsecured deficiency claim before any insider creditor would be paid. Finally, the bankruptcy court concluded that this discrimination is narrowly tailored to meet the requirements of the “best interest” test. We believe that this explanation adequately explains the difference in treatment between the two classes of unsecured claims, and the bankruptcy court did not clearly err in refusing to find this discrimination unfair.
Second, Bank America contends that, because the primary subjective purpose of the investors in the reorganized debtor is to stave off the tax liability they would incur if the bank were to foreclose, the plan was not proposed in good faith. To be confirmed, a plan must be “proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). “Though the term ‘good faith,’ as used in section 1129(a)(3), is not defined in the Bankruptcy Code, ... the term is generally interpreted to mean that there exists ‘a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code.’ ” In re Madison Hotel Assocs.,
Finally, Bank America asks that, if we reverse the district and bankruptcy courts’ holdings on any issue, we also reverse the bankruptcy court’s orders denying (1) relief from the automatic stay and (2) Bank America’s request to convert or dismiss the case. Because we uphold the district court’s judgment in its entirety, we deny Bank America’s request.
Conclusion
For the foregoing reasons, we affirm the judgment of the district court.
Affirmed.
Notes
. See In re Woodbrook Assocs.,
. LaSalle originally owed $160,000 in unsecured trade debt, but after filing for bankruptcy, the general partners purchased some of the trade claims.
. The plan originally called for paying the trade claims 180 days after confirmation of the plan; the bankruptcy court confirmed the plan on the condition that LaSalle also agree to pay interest to the trade creditors on the principal amounts for the 180 days following confirmation.
. The bankruptcy reduced the value of the property at the time of confirmation, $55.8 million, by the amount that it would have cost Bank America to dispose of the property, $1.3 million, and arrived at a value of Bank America’s secured loan in the amount of $54.5 million. Bank America also has an unsecured claim for the amount of the deficiency, the difference between its secured claim and the total amount that La-Salle owed the bank. Bank America’s deficiency claim is for approximately $38.5 million.
. Section 1129 provides in relevant part:
(a) The court shall confirm a plan only if all of the following requirements are met:
(I) The plan complies with the applicable provisions of this title.
(3) The plan has been proposed in good faith and not by any means forbidden by law.
(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.
(10) If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by an insider.
(II) Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.
(b)(1) ... [I]f all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan ... if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(B) With respect to a class of unsecured claims—
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. § 1129.
. The absolute priority rule derives from § 1129's “fair and equitable” requirement. See In re Snyder,
. Although the question of whether the new value corollary survived Congress’ passage of the Bankruptcy Code has not been determined definitively in this circuit, we have considered it on several occasions without deciding the issue. See, e.g., In re Wabash; In re Woodbrook; In re Snyder,
. The district and bankruptcy courts are quite divided over this issue, but a majority of such courts have concluded that the new value corollary survived the passage of the Bankruptcy Code. See J. Ronald Trost, Joel G. Samuels & Kevin T. Lantry, "Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification,” CA46 ALI-ABA 479, 540-43 (1995) (surveying 88 published district courL and bankruptcy court decisions, issued after the Supreme. Court’s decision in Norwest Bank Worthington v. Ahlers,
. See, e.g., Mason v. Paradise Irrigation Dist.,
. See In re Snyder,
. There are differing views about the effectiveness of the Code's attempt to give the proponents of the plan some flexibility in this regard. The confirmation standard contained in section 1129 still allows slightly more than one third of a class of creditors to veto a plan accepted by every other party to the reorganization and permits a large investor who owns an entire class of securities to thwart any confirmation plan involving shareholder participation.
. During times of financial instability, banks often restrict the number of outstanding loans. The resulting “credit crunch” affects the ability of businesses to obtain the capital that they need. During such a period, shareholders might represent the only source of financing for the reorganization of an entity in reorganization.
. The Ninth Circuit has concluded that the new value exception is alive and well. In re Bonner Mall Partnership,
. In In re Windsor, the Eighth Circuit held that, “for purposes of 11 U.S.C. § 1129(a)(10), a claim is not impaired if the alteration of rights in question arises solely from the debtor’s exercise of discretion.... Whether Debtor manipulated the terms of its plan for purposes of securing confirmation is a question of fact.”
. Because the plan was confirmed over Bank America’s objections, in addition to meeting the other requirements of § 1129, the plan had to meet the. "cramdown” requirements as well.. " ‘Cramdown’ is the procedure for approving a reorganization plan in the face of creditor resistance. It requires that at least one class of impaired creditors approve the plan....” In re Wabash Valley Power Ass’n,
. Bank America also asserts that the only purpose of the reorganization plan is to "stave off the evil day when the creditors take control of [the debtor’s] property.” In re James Wilson Assocs.,
Dissenting Opinion
dissenting.
Although I agree with the way the majority opinion handles many of the issues in this case, I must dissent because the plain language of the absolute priority rule, see 11 U.S.C. § 1129(b)(2)(B)(ii), does not include a new value exception. Moreover, even if one strains and finds ambiguity in the language of the statute, thus necessitating a look at pre-Code practice, see Dewsnup v. Timm,
I. Plain Language
A reorganization plan must be “fair and equitable” to be implemented over the objection of an impaired class of creditors. The absolute priority rule helps define what is “fair and equitable” under a reorganization plan. See 11 U.S.C. § 1129(b)(2). A “fair and equitable” plan meets one of two requirements: (1) a class of unsecured creditors must receive property equal to the value of its claim on the effective date of the plan, see § 1129(b)(2)(B)(i), or (2) a dissenting class of unsecured creditors must be fully provided for before any junior class can receive or retain property under the plan, see § 1129(b)(2)(B)(ii) (“the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property”). In this case, the reorganization plan (the “Plan”) does not satisfy the first prong because Bank America will not receive property equal to the value of its $38.5 million deficiency claim on the effective date of the Plan. The Plan also does not satisfy the second requirement — the absolute priority rule — because it permits LaSalle’s partners, whose interests are junior to those of Bank America, to “receive or retain” prop'erty- — ie., the exclusive right to retain their equity interests
The majority maintains that LaSalle’s partners do not retain a property interest “on account of’ their prior equity interest, but rather “ ‘on account of a new, substan
The Plan permits LaSalle’s partners to retain their equity interests “on account of’ two separate factors. LaSalle and the majority opinion correctly assert that LaSalle’s partners retain their ownership interests “on account of’ their new capital contributions. One cannot contest the fact that the partners’ new capital contributions áre one reason why they are able to maintain their ownership of the indebted property. LaSalle’s partners, however, receive this exclusive ownership right only “on account of’ their unique status as prior equity holders. The Plan’s grant of this exclusive right to LaSalle’s partners thus provides a necessary element that causes the prior equity holders to retain their junior interests before the satisfaction of Bank America’s deficiency claim. “Abstract logic” and “semantics” do not suggest this conclusion — the requirements of the Plan and the language of the statute mandate it.
The motivations of LaSalle’s partners magnify this point. They put new capital into the indebted property only so they could postpone the tax losses that they would incur in a foreclosure. In other words, regardless of the new capital contributions provided by LaSalle’s partners, the presence of (and the potential tax liability inherent in) the partners’ prior equity interests motivated the Plan’s inclusion of the partners’ exclusive right to retain their equity interests. The most natural and literal reading of this statute, when applied to the facts of this case, leads one to the inescapable conclusion that LaSalle’s partners are retaining their equity interests “on account of’ their junior interests in the property.
The Fourth Circuit, in In re Bryson Properties, XVIII,
Moreover, the majority opinion fails to consider how its interpretation of the words “on account of’ in § 1129(b)(2)(B)(n) compares to the use of those same words in other parts of the same section. Section 1129(b)(2)(B)(i), for example, provides that a plan is fair and equitable with respect to a class of unsecured claims if “the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value ... equal to the allowed amount of such claim.” 11 U.S.C. § 1129(b)(2)(B)© (emphasis added). In this subsection, “on account of such claim” takes a simple, ordinary “but for” or “because of’ meaning. In other words, § 1129(b)(2)(B)© provides that a plan is fair and equitable with regard to an impaired, unsecured claim if the holder of an unsecured claim receives a value equal to that particular unsecured claim. It would unduly complicate the statute, and indeed make no sense, to insert “primarily or solely” before “on account of such claim” in subsection § 1129(b)(2)(B)®. Congress surely could not have intended such a meaning for that subsection. Nonetheless, the majority seems to think that Congress intended such a meaning for the very same words in the very next subsection. Such a reading of § 1129(b)(2)(B)(ii) ignores the well-established cannon of statutory interpretation that “identical words used in different parts of the same act are intended to have the same meaning.” Sullivan v. Stroop,
Furthermore, I cannot subscribe to the notion that the language of § 1129(b)(2)(B)(ii) must be deemed ambiguous merely because the case law and the academic literature have interpreted it in different ways. The majority relies upon Dewsnup in stating that the “mere recitation of the possible interpretations” of the absolute priority rule renders § 1129’s language ambiguous. Ante, at 964. But Dewsnup and other Supreme Court precedent also command courts to apply a statute’s unambiguous language without looking beyond it. See Dewsnup,
A natural reading of § 1129(b)(2)(B)(ii) prohibits a junior interest holder from retaining property in the debtor “on account of’ or' “because of’ its status as a prior interest holder. The Plan in this case gives LaSalle’s partners the exclusive right to retain then-ownership interest in the indebted property because of their status as a prior interest holder. Because the straightforward text of the statutory absolute priority rule prohibits such a Plan where there are dissenting, unsecured creditors, I see no need to look beyond the words of the statute.
II. Pre-Code PractiCE
Assuming, arguendo, that the language of § 1129(b)(2)(B)(ii) is ambiguous, a review of the pre-Code bankruptcy practice does not dictate the adoption of the new value exception. In Dewsnup, the Supreme Court noted that Congress did “not write ‘on a clean slate’ ” when amending the bankruptcy laws and that the “Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.” Dewsnup,
While pre-Code practices have long helped courts interpret ambiguous Bankruptcy Code provisions, they cannot require courts to read unestablished, disputed, or outdated pre-Code principles into the Code. Dewsnup understated its point that Congress does not write on a clean slate when amending the bankruptcy laws because “Congress in fact writes bankruptcy laws on a very messy slate.” In re A.V.B.I., Inc.,
In Dewsnup, for example, once the Court found the language of 11 U.S.C. § 506 to be ambiguous, its look at the pre-Code practice regarding the involuntary reduction of a creditor’s lien arguably proved to be a fruitful venture. See Dewsnup,
In the situation of the absolute priority rule, however, a critical look at the pre-Code practice does not reveal Congress’s intent to include a new value exception in § 1129(b)(2)(B)(ii). Rather, the Bankruptcy Code so fundamentally altered the pre-Code reorganization and confirmation procedures that strict adherence to the pre-Code new value exception might contravene Congress’s intent in codifying the absolute priority rule.
The reasonableness of reading the pre-Code new value exception into the codified absolute priority rule is initially harmed by the questionable foundation upon which that exception rests. The Supreme Court’s “creation” of the new value exception in Case v. Los Angeles Lumber Prods., Co.,
Moreover, the bankruptcy law principles underlying the “creation” and “development” of the new value exception differ greatly from those under the present Bankruptcy Code. Prior to the enactment of the Code in 1978, bankruptcy law consisted of a number of provisions differing from each other regarding the confirmation of reorganization plans and the existence of “fair and equitable” standards in those situations. In Case, for example, Section 77B of the Bankruptcy Act of 1898 required that creditors unanimously consent to a debtor’s reorganization plan and that the plan meet a “fair and equitable” standard developed under the common law. See Case,
' The enactment of the Bankruptcy Code in 1978, however, fundamentally changed this bankruptcy backdrop. Chapter 11 of the Code “reflects a melding of concepts derived from several [of these and other] distinct bodies of pre-Code law” combined with the “conscious purpose ... to create a new chapter that represented the best of all these approaches to reorganization.” A.V.B.I.,
Current bankruptcy practice also differs from pre-Code practice because most Chapter 11 cases are now operated by debtors-in-possession rather than court-appointed trustees. See A.V.B.I.,
The enactment of the Code further altered prior bankruptcy practice by removing bankruptcy judges’ “equitable powers to modify contracts to achieve ‘fair’ distributions.” Kham & Nate’s,
In light of the elimination of the unanimous consent requirement, the current trend of operation by debtors-in-possession, and the decrease of bankruptcy courts’ equitable powers, retaining the “new value exception” arguably gives debtors a “broad new remedy” — exactly the sort of balance-upsetting interpretation that Dewsnwp rejected. The present case is therefore more like Wolas than Dewsnwp.
The debtor in Wolas maintained that 11 U.S.C. § 547(c)(2), which makes an exception to the rule authorizing a trustee to avoid certain property transfers made by a debtor within ninety days before bankruptcy, did not apply to payments on long-term debt. Although the text of § 547(c)(2) did not distinguish between long-term debt and short-term debt, the debtor argued, among other things, that Congress intended to codify the
Keeping in mind the significant differences in the pre-Code bankruptcy environment, strict adherence to a tenuous pre-Code practice makes little sense. Even if Dewsnup repudiated prior bankruptcy statutory interpretation cases like Wolas and Ron Pair and effectively mandated a review of pre-Code practice in any case where the parties disagree on the . meaning of the statute’s language, see Dewsnup,
. A debtor’s exclusive right to receive or retain an equity interest is property for purposes of the new value exception and the absolute priority rule. See Norwest Bank Worthington v. Ahlers,
. Contrary to the majority’s suggestion that the courts of appeals that have addressed this issue have all ruled that the new value exception did survive the enactment of the Bankruptcy Code, see ante, at 966 & n. 13, Bryson s outcome and analysis reveal that the circuits are not in agreement on the issue. The Ninth Circuit has conducted perhaps the most exhaustive discussion of the issue to date, and it determined that the new value exception remains viable. See Bonner Mall,
. In this circuit, we have speculated inconclusively on the meaning of the sparse legislative history. Some cases have suggested that Congress’s rejection of a proposal by the Bankruptcy Commission to modify the absolute priority rule and its exceptions reveals that Congress did not intend to include such an exception when enacting the Code. See, e.g., Kham & Nate’s,
. Justice Scalia's dissent in Dewsnup contends, however, that the language of § 506(a) & (d) unambiguously granted such a remedy. See Dewsnup,
. Under Chapter X, no shareholder ever convinced a court that it contributed sufficient value to retain an interest under the new value concept, and no reported case expressly adopted Case's new value dicta as its holding until the Code’s enactment in 1978. 7 Collier on Bankruptcy, ¶ 1129.04[4][c], at 1129-107.
. Because the absolute priority rule no longer applied to Chapter XI proceedings after 1952, cases under that chapter d]d not address any new value issues. 7 Collier on Bankruptcy, ¶ 1129.04[4][c], at 1129-106 to 1129-107; see also id. ¶ 1129.04[4][a], at 1129-84 to 1129-85. The number of parties that could potentially seek application of new value principles further declined due to a preference for filing under Chapter XI rather than Chapter X, which is partially explained by Chapter X’s disinterested trustee requirement. Id. ¶ 1129.04[4][c], at 1129-106.
. In furthering its reasoning, the majority lists the significant advantages gained by the existence of a new value exception to the statutory absolute-priority rule. Ante, at 20-21; see also Bonner Mall,
Without question, the ability to infuse new capital from old equity holders provides a valuable tool for reorganizations. The creditors; however, should be able to make the ultimate decision regarding whether to incorporate such new value. See Greystone III,