The Supreme Court Again Equivocates on New Value

By: Deborah L. Thorne
Fagel & Haber

In Bank of America National Trust and Savings Associate v. 203 North LaSalle Street Partnership (203 North LaSalle), the Supreme Court refused to permit the debtor's partners to control the plan process during the exclusive period to retain their equity position without attempting to market or taking any steps to ascertain the market value of the equity. Unfortunately, the Supreme Court declined to decide whether the new value exception to the absolute priority rule still exists. The Supreme Court also declined to give any clear guidance as to the general application of the new value exception.

The 203 North LaSalle case was filed to stop a foreclosure action filed by Bank of America. The debtor's principal assets included pre-petition rents in a cash account and 15 floors of rental property located in a building on the Chicago Loop. The debtor's principal objective was to ensure that its partners retained title to the property to avoid nearly $20 million in personal tax liability, which would become due if the bank foreclosed.

The bankruptcy court found that the value of the rental property was less than the balance of the debt due the bank. The total debt owed to Bank of America was $98 million, which was divided by the bankruptcy court into secured debt in the amount of $54.5 million and unsecured debt in the amount of $38.5 million. Under the plan, the debtor classified the bank's secured claim, the bank's unsecured deficiency claim and unsecured trade debt in three separate classes.

The confirmed plan proposed that the bank's $54.5 million claim would be paid in full between seven and 10 years after the original 1995 repayment date. The bank's unsecured $38.5 million unsecured deficiency claim would be discharged by a payment of an estimated 16 percent of its present value. The trade creditor claims of $90,000 would be paid in full, without interest, on the effective date of the plan.

Certain partners of the debtor agreed to contribute $6.125 million in new capital over the course of five years after the effective date in exchange for the partnership's entire ownership of the reorganized debtor. The present value of the capital contribution was approximately $4.1 million. The plan was confirmed over the bank's objection by a cramdown. The only non-insider class accepting the plan was the unsecured trade creditor class.

On appeal, the Supreme Court held that the debtor's plan was doomed because it vested equity in the reorganized debtor in its pre-petition partners without extending an opportunity to anyone else to either compete for the equity or to propose a competing reorganization plan. The Court held that the partners took unfair advantage of the exclusive period to propose a plan that primarily benefited their interests at the bank's expense. The Supreme Court further noted that the partners could have auctioned the equity interests or agreed to terminate exclusivity, and that had such actions been taken the plan confirmation may have been affirmed. However, the Court refused to provide clear guidance as to how the debtor could have remedied the problem.

The impact of this case on debtors and the treatment of unsecured creditors in future chapter 11 reorganization cases is uncertain. The Supreme Court implied that a new value exception exists, but refused to provide clear guidance as to when acceptable new value has been contributed. The Court indicates that an appropriate "new value" contribution may be determined by testing it through an open-bidding process.

The case will have the greatest impact on single-asset real estate cases and closely held corporations. It may be a signal that cramdown plans will not withstand an objection by creditors if the equity does not contribute new value as determined by some market test. In some instances, this case may prevent grossly unfair treatment of unsecured creditors. In other cases, it may be used by a secured creditor to stop a reorganization and prevent payments to unsecured creditors. Due to the uncertainty this case may cause in future reorganization cases, the need for unsecured creditors to fully participate in the reorganization process to protect their interests is more important than ever.

CHAIRPERSON'S CORNER

Minutes of the April UTC Committee Meeting at ABI's Annual Spring Meeting

By: Judy Thompson
Poyner & Spruill LLP

The Unsecured Trade Creditor Committee met during ABI's Annual Spring Meeting on April 18, 1999 in Washington. Bruce Nathan (Davidoff & Malito LLP, New York) presented an update on the activities of the Reclamation Task Force. An outline of the proposed Reclamation Manual was anticipated by mid-May 1999; it is hoped that a rough draft will be completed by the late fall.

Lynnette Warman (Jenkens & Gilchrist, Dallas) gave the report of the Publications Committee and distributed copies of the recently mailed newsletter for this committee. There was a general call for articles for the committee newsletter and for the 1,000-word Cracking the Code online newsletter . It was suggested that an article on pre-packaged chapter 11s would be appropriate for the newsletter and that we need to plan a special piece on revised Article 9 and its impact on the unsecured creditors in our publications during the year 2000.

Lynnette presented the report of the Ad Hoc Task Force on Membership and advised that the task force had not met since the report previously given at the legislative conference in March. However, the task force has contacted several NACM affiliates that have agreed to begin posting the newsletter on their web sites. The first posting is on the web site of NACMSW , the Dallas affiliate. The NACM affiliates in the Carolinas and New York have also agreed to post the newsletter. Anyone with contacts at NACM affiliates is encouraged to ask them to add the newsletter as well, and to contact Lynnette to make the arrangements.

Larry Ahern (Gullet, Sanford et al., Nashville, Tenn.) led a discussion regarding UCC issues including a possible project on revised Article 9. It was suggested that new Article 9 be posted on ABI World, or that arrangements be made to access it from ABI. That has now been accomplished. It was also suggested that ABI post a list of states that have adopted revised Article 9. It was also pointed out that Prof. G. Ray Warner (University of Missouri, Kansas City) has developed a list of the top 10 points you need to know about revised Article 9.

There was a discussion about the "Last in Line" column for unsecured trade creditors, which runs regularly in the ABI Journal. It was suggested that a list of topics that have been covered thus far be run in News & Views.

There was serious discussion regarding the NACM Legislative Conference scheduled for March 2000. Joe Bodoff (Schechtman & Halperin, Boston) pointed out that the key is to find out when each of the legislative conference meetings are scheduled, particularly including the Government Affairs Committee meeting, and then schedule our meeting around that one. He also suggested that we present a topic of genuine interest to the credit managers who will be attending the NACM Legislative Conference. The following members of the UTC Committee volunteered to work toward developing and appropriately scheduling a program at next year's legislative conference: Lisa Sommers Gretchko (Pepper Hamilton LLP, Detroit), Steve Berman (Morse, Berman & Gomez PA, Tampa, Fla.), Mike Lastowski (Saul, Ewing, Remick & Saul LLP, Philadelphia), Susan Herr (E. I. DuPont de Nemours and Co., Wilmington, Del.), Howard Cohen (Parente Consulting, Philadelphia), and Deborah Thorne (Fagel & Haber, Chicago).

In the absence of Geoff Berman (Development Specialists Inc., Los Angeles), Rick Meth (Herrick, Feinstein LLP, Princeton, N.J.), ABI Vice President of Publications, reported on the status of the Handbook on Assignments for Benefit of Creditors. A draft of the handbook has been sent out and is currently being reviewed by several ABI members with expertise in this area.

There was a discussion regarding an appropriate new project for the committee and it was suggested that, since we have historically been active in the area of preference law, we undertake a two-part project that would include a survey of state preference laws and allowable defenses in the various states, and a preference handbook that would review the elements of preference law, the various defenses and how to calculate a transferee's exposure. The following people volunteered to work on the project, including drafting the handbook and/or researching preference law in their states: Illinois and Indiana: Deborah Thorne; Louisiana: Rudi Cerone (McGlinchey Stafford Lang, New Orleans); New Jersey: Joel Glucksman (Friedman Siegelbaum LLP, Roseland, N.J.); Florida: Bradley Saxton (Holland & Knight LLP, Orlando, Fla.); Pennsylvania: Raymond Lemisch (Adelman Lavine Gold and Levin PC, Philadelphia); Michigan: Lisa Sommers Gretchko; New York: Edward Flint (Shaw, Licitra et al., Garden City, N.Y.): Washington: Joseph Shickich (Graham & James LLP, Seattle); Dallas: Lynnette Warman; and Kentucky: Bill Cohn.

There was discussion regarding an appropriate topic for our meeting in December, but no decisions were made.

Bradley Saxton presented a program on assignments for the benefit of creditors. Copies of his presentation may be obtained by contacting him at bsaxton@hklaw.com.

Update on Revised Article 9 of the Uniform Commercial Code

By: Lynnette R. Warman
Jenkens & Gilchrist PC

Various states have been contemplating the proposed revised Article 9 of the Uniform Commercial Code (UCC). To date, six states have adopted the revision; those states include Arizona, Montana, Maryland, Nebraska, Nevada and Texas. The effective date for the revised Article 9 in all states that adopt it is July 1, 2001. Copies of the revision with all relevant comments and notes may be obtained by calling 1-800-CLE-NEWS.

Volunteers Needed for New Task Force

UTC Committee Co-chair Sandra Shirmang has agreed to chair a task force to develop a program to be presented at the annual NACM Legislative Conference next March. Several committee members have already volunteered to help. If you would like to be involved, please contact Sandra Shirmang at (847) 646-6719. It is the UTC Committee's goal to improve the program presented at the annual NACM Legislative Conference by providing more advance notice in the hope that a larger number of people will attend the annual meeting.

The "Nuts & Bolts Creditors' Forum" is a feature that contains questions relating to credit issues and their suggested solutions. Questions or comments to be included in future newsletters are welcome.
Question:
Are there any special rules that apply to pre-packaged bankruptcy proceedings?
Answer:
Yes, there are special rules that apply to some cases.
As of February 2, 1999, the Bankruptcy Court for the Southern District of New York adopted guidelines for the filing of pre-packaged chapter 11 cases (the "Pre-pack Guidelines"). Although the Pre-pack Guidelines are advisory only, they will likely become a nationwide model. The Pre-pack Guidelines also set forth an extensive list of permissible first-day orders that will likely have application beyond pre-packaged chapter 11 cases. The Pre-pack Guidelines require electronic filing of all pre-packaged chapter 11 cases on the Internet through the Southern District Electronic Filing System.
The Pre-pack Guidelines define a "pre-packaged chapter 11 case" as one in which the debtor substantially and contemporaneously, with the filing of its chapter 11 petition, files a Pre-pack Scheduling Motion, a plan of reorganization, a disclosure statement (or other solicitation materials) and a voting certification. In the Pre-pack Scheduling Motion, the debtor must: (1) represent that either (a) the solicitation was completed pre-filing and no additional solicitation is contemplated, or (b) after a hearing, where a petition is filed after solicitation has commenced but before the expiration of the voting deadline, the court has deemed the solicitation adequate; (2) represent that requisite acceptances have been obtained from each class of claims or interests as to which solicitation is required and, if applicable, with respect to any class of interests that has not accepted or is deemed not to have accepted the plan, the debtor is requesting confirmation under 11 U.S.C. §1129(b); and (3) request a date for a confirmation hearing, including a hearing to determine whether the solicitation and disclosure requirements of 11 U.S.C. §§1126(b)(1) and (b)(2) have been met. These hearings should be combined whenever possible.
The hearing notice, set forth on an official form, must also include a chart summarizing plan distributions, set a date for a meeting under 11 U.S.C. §341(a), and state that if the plan is confirmed prior to the date for the meeting it will not be confirmed if the confirmation order authorizing the meeting needs to be waived. In the event a debtor commences a pre-filing solicitation and a petition is filed by or against the debtor before the voting deadline expires, the debtor can accept but not solicit further ballots and the court must determine the effect of the votes after notice and a hearing.
The Pre-pack Guidelines state that they may be applicable to cramdown cases under 11 U.S.C. §1129(b) where the debtor seeks confirmation as to a class of (1) claims that are deemed not to have accepted the plan under 11 U.S.C. §1129(b); (2) claims or interests whose rejection was assumed by the debtor and were therefore not solicited; and (3) impaired claims or interests that voted to reject, so long as no junior class receives or retains property under the plan.
The guidelines are quite clear on the timing of the voting period that the court will approve as reasonable under Bankruptcy Rule 3018(b). For all publicly traded securities, a 20-business-day period, measured from the date mailing commenced, will be deemed reasonable and, for non-public securities, a 10-business-day period is the guideline. For all other claims and interests, a 20-business-day waiting period will be approved as reasonable.
The guidelines annex an official ballot form and a master ballot form that may be used to report voting by beneficial owners of claims and interests. In connection with notice to holders of equity securities held in "street name," the guidelines state that such holders generally assume the risk associated with their decision to have the securities held in that name.
An 11 U.S.C. §341(a) meeting is to be set no more than 40 days after filing. If the meeting has not occurred prior to the confirmation date, though, there will be no meeting if the confirmation order contains a waiver provision. If unsecured creditors are unimpaired, there will generally be no committee appointed unless pre-petition creditors demonstrate to the U.S. Trustee compliance with Bankruptcy Rule 2007(b).
Answer provided by Laurence Y. Solarsh Esq., solmar@nais.com.

UTC Committee Meeting Calendar

The UTC Committee will meet at the following upcoming conferences:

December 2-4: ABI Winter Leadership Conference, La Quinta Resort & Club, La Quinta, Calif.
March 2000: NACM Legislative Conference, Washington

The next issue of News & Views will be published in late October. Call Lynnette Warman at (214) 855-4792 or send an e-mail message to lwarman@jenkens.com for more information.