U.S. Supreme Court Update
December 27, 1999
Just prior to this newsletter going to print, the United States Supreme Court
rendered its decision on May 3, 1999, in the case of Bank of America National
Trust and Savings Association v. 203 North LaSalle Street Partnership,
- S. Ct.-, 1999 WL 257631 (1999). In an 8-1 decision written by Justice Souter
(joined by Chief Justice Rehnquist and Justices O’Connor, Kennedy, Ginsberg
and Breyer), the Court reversed the Seventh Circuit Court of Appeal’s
affirmance of the lower courts’ confirmation of the debtor’s plan of
reorganization.
On May 3, 1999, the U.S. Supreme Court determined that pre-petition equity
holders may not, over the objection of a senior class of impaired creditors,
contribute new capital and receive new equity interests in the reorganized
debtor when the investment opportunity is provided exclusively to the old equity
holders. The Court’s decision was based on its interpretation of the
confirmation requirements contained in the Bankruptcy Code which prohibit
holders of a junior claim or interest from receiving or retaining any interest
in property "on account of" such junior claim or interest. This
prohibition is commonly referred to as the "absolute priority rule."
The Court did not decide whether a new value exception or corollary to the
absolute priority rule survived the enactment of the Bankruptcy Code in 1978.
Instead, the Court decided that, assuming the new value exception or corollary
was viable, the exclusive right of the old equity holders to contribute new
capital and to receive ownership interests in the reorganized debtor was
"because of", the meaning attributed by the Court to the term "on
account of", the old equity holders’ ownership interest. Consequently,
the Court determined that the debtor’s plan was doomed because the plan fell
within the prohibition of 11 U.S.C. §1129(b)(2)(B)(ii).
A more complete discussion and an analysis of this long-awaited, and
potentially significant decision, will be included in the next issue of this
newsletter.
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