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Abstracts of Submissions to the NBRC
Chapter 11: Absolute Priority Rule

Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)

ID Name Group Other Code
Problem Referenced Proposed Solutions
NBRC-0009 Honorable James E. Yacos Judiciary; United States Bankruptcy Court for the District of New Hampshire
The cramdown provisions with regard to secured claims is unclear with respect to how interest rates should be determined to apply to payment of the secured claim over the life of the plan. The conflict in the courts and divergence in approaches should be examined. Provide explicit direction in the Code in order to provide guidance.
NBRC-0130 M.O. Sigal, Jr. Attorney; Simpson, Thacher & Bartlett Invited Participant - July Meeting 1129
In memo on New Value: the argument on New Value is cogently stated. The countervailing policy considerations have not, in my opinion, been given the same thorough treatment. No analysis is offered on the following issues: wisdom of a system that would change the common understanding of enterprise financing under which capital is raised at varying costs comensurate with the absolute priority rule and the impact of this on one of the great strengths of this country which is its publis and private capital raising markets; the wisdom in our economic system of perpetuating failed management without any evidence that the social goals of bankruptcy would be achieved by the proposed reorganization plan; the wisdom of a system that would raise the spectre of creditor losses followed by old equity reaping huge post wipe-out profits. There are probably other relevant issues also. If after analysis some form of new value exception to the absolute priority rule makes policy sense, the particulars of the draft proposal #1 are in my opinion overly broad and illusory. What constitutes new value needs some definiteness to guide courts in applying it to particular factual circumstances. While this would necessarily need to await the antecedent judgment as to what policies were sought to be achieved, and correlatively what policies were not to be encompassed, at a minimum, it would seem that a factual finding would be required that the proposed new value satisfied those policy goals. Furthermore, the concept of exclusivity termination as a safeguard would be illusory if not coupled with a procedure for concurrent consideration by parties in interest of any reorganization plan proposed wihtin a statutorily specified reasonable time after such exclusivity termination.
NBRC-0159 Dean C. Waldt Attorney; Davis, Reberkenny & Abramowitz
1121 1129 Proposal to codify the new value exception to the absolute priority rule is based on a false premises. Proposal fails to achieve any balance by creating an inappropriate penalty against equity holders seeking to maintain their interest in the debtor and also represents poor economic policy in that it encourages liquidation rather than reorganization and invites speculation and hostile acquisition wihtin the context of a chapter 11 case. Automatic removal of exclusivity will only fuel litigation and encourage speculation and hostile takeover attempts wihtin the context of a chapter 11 case. Urges Commission to seriously reconsider the proposed changes to section 1121 of the code. Allow the courts the flexibility in determining the form and substance of new value and maintaining exclusivity for a debtor attempting to reorganize.
NBRC-0178 Gary White, on behalf of the Natl. Assoc. of Credit Management Chair, Government Affairs Comm., Natl. Assoc. of Credit Management

Strongly supports the working group's proposal regarding the Absolute Priority Rule. This proposal would afford a creditor the opportunity to purchase equity in the debtor corporation without regard to the debtor's decision to provide new value. In addition, the purchase of such equity prevents the debtor from forcing automatic cramdowns on creditors. Strongly supports the working group's proposal on the Absolute Priority Rule.
NBRC-0180 Marc S. Young Disputed Secured Creditor
1111(b), 1129(b) Rule 3014 Cramdown provisions make a mockery of the requirement that reorganization plans be rejected in cases where unsecured creditors would not receive what they would have if the debtor had liquidated under Chapter 7. Cramdown provisions should be eliminated unless "new value" is offered to creditors.
NBRC-0223 Frank R. Kennedy Professor, Michigan Law School; former Executive Director, Commission on the Bankruptcy Laws of the United States (1973) Cover letter discussing various areas of concern

Author provides a list of 30 "Topics for Consideration by Commission on Bankruptcy Laws." The recommended topic relating to the Absolute Priority Rule is: Codification of new value exception to absolute priority doctrine and acceleration of cramdown. None.
NBRC-0272 M.O. Sigal, Jr. Attorney
1121, 1129
In the Working Group's proposal on absolute priority, the countervailing policy considerations were not given thorough treatment. Also, the new value exception language is overbroad and illusory. Chapter 11 Working Group should conduct a more thorough exploration of the countervailing policy considerations of the absolute priority proposal, and the new value provisions should be more narrowly tailored to provide "definiteness" to guide courts in particular fact circumstances.
NBRC-0320 Robert M. Zinman, on behalf of the Bankruptcy Institute American Bankruptcy Institute ("ABI") Numerous position papers, memoranda and research material

In single asset cases, new value has been used as a basis for overcoming the absolute priority rule, "which turns everything on its head." If new value is recognized, it should wither be made inapplicable to single asset cases, or in the alternative, consideration should be given to preserving the application of absolute priority in a single asset case by limiting the interest obtained by the contributor of new value to what that contribution bears to existing unpaid unsecured debt.
NBRC-0393 Dean C. Waldt Attorney
Proposal to codify the new value exception to the absolute priority rule creates an inappropriate penalty against equity holders seeking to maintain their interest in the debtor. The proposal also represents poor econimic policy in that it encourages liquidation rather than reorganization and invites speculation and hostile acquisition within the context of a chapter 11 reorganization case. The automatic removal of exclusivity will feul lititgation and encourage speculation and hostile takeover attempts. Opposes amendment to codify the new value exception to the absolute priority rule.
NBRC-0429 Mark Homan England
Partner, Price Waterhouse, UK

The debtor's time is being wasted negotiating a plan, rather than seeking to maximise recovery for the creditors. Strengthen the rule of absolute priority.
NBRC-0780 J. Christopher Kohn Director, Commercial Litigation Branch, U.S. Department of Justice
Author opposes the Commission's proposal to codify a new value exception to chapter 11. "The new value proposal shifts the locus of power in chapter 11 from the parties to the courts by transferring to bankkruptcy judges decisions that belong in the hands of creditors. The Bankruptcy Code already permits equity participation when creditors consent. The new value exception is meaningful only to override creditors' withheld consent. This is unfair to creditors, sepecially since conrimstion orders are, as a practical matter, often unappealable." "The better approach is to require creditor consent for "new value" plans and to require that creditors of the same rank be placed in the same class for voting purposes and paid consideration of the same value. This approach preserves the absolute priority principle while permitting new value plans that benefit the enterprise as a whole."
NBRC-0887 Ismail Ibrahim Deputy General Manager, The Long-Term Credit Bank Of Japan, Limited (LTCB)

"I am writing concerning the 'new-value' exception to the abolute priority rule being considered by the National Bankruptcy Review Commission....I am concerned with the impact the 'new-value' exception will have on borrowers' attitudes and strategies. As you know, real estate is a highly cyclical business and we therfore often accommodate our borrowers dudring a cycle's nadir...The proposed rules provide borrowers with a mechanism to 'sell' at the peak without losing control of the asset in the certainty that they can 'buy' at the trough of the cycle at a favorable rate....Should this proposal become law, it will undoubtedly discourage many banks...from lending in the real estate market." "We urge you to fully consider the ramifications of the new value exception, and its probable impact on the real estate financial markets."
NBRC-0921 Dean S. Cooper and George Kielman Associate General Counsel and Assistant General Counsel, respectively, of The Federal Home Loan Mortgage Corporation ("Freddie Mac")

"Freddie Mac does not oppose in concept the codification of the so-called new value 'exception' to the absolute priority rule provided that the new value proposal contains all of the standards for the new value exception set forth by the Supreme Court in Case v. Los Angeles Lumber Products. The proposal as currently approved by the Commission does not accomplish that result." "Freddie Mac requests that the Commission clarify the new value proposal to require that: (1) the new contribution be necessary, (2) the debtors may only receive an interest which is reasonably equivalent to their contribution, and (3) the contribution must be in money or the equivalent, as required by Los Angeles Lumber. In particular, Freddie Mac believes that there must be some objective legal standard to assess the sufficiency of the new value contribution."
NBRC-0926 Steven L. Schwarcz Professor of Law, Duke University School of Law Article from 47 Duke Law Journal Issue #3 (Dec. 1997) entitled "The Easy Case for the Priority of Secured Claims in Bankruptcy"

Author submits article which agrues that unsecured creditors themselves should wan a debtor to have access to full-priority secured credit and therefore responds to recent scholarly arguments that a protion of a debtor's collateral be set aside for unsecured creditors. N/A
NBRC-0941 Mike Sutherland Attorney, Vinson & Elkins L.L.P.

Author feels that adopting the "new cash infusion exception" to the absolute priority rule "would bring havoc to the very cases which need no more confusion or subterfuge -- namely, single asset real estate cases. Large corporations, publically or privately held, don't need such an exception and shouldn't use it." "If you need a Mom & Pop business exception, make very small corporations and partnerships eligible for Chapter 13 instead of monkeying around with Chapter 11. Thanks"


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