This is the next post in Plan Proponent’s series on the confirmation-related recommendations in the ABI Commission Report (and, in particular, its Exiting the Case piece). We wrapped-up “Redemption Option Value” in our last post and then had an unplanned 2 week hiatus. In this post, we’ll cover the Commission’s quick recommendation on the absolute priority rule and “new value.”
In prior posts, we’ve covered the absolute priority rule (“APR“) in two contexts: individual cases and corporate cases. In corporate cases, the APR operates such that, equity security holders cannot retain or receive new equity in the reorganized debtor unless the plan provides for the payment in full of all other creditors, at least not without consent.
As the Commission points out, the question often arises whether equity can purchase equity from the reorganized debtor or effectively retain its existing interest in the reorganized debtor by contributing “new value.” In other words, is there a “new value” exception or corollary to the APR?
The Supreme Court weighed-in in Bank of America National Trust and Savings Assn. v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999). The Court answered “no” to the above question if the opportunity is “given exclusively to the old equity holders under a plan adopted without consideration of alternatives.” That was in 1999. Since then, Courts have adopted different views/approaches to LaSalle‘s apparent “market test.”
Therefore, the parameters and the process for a market test are still unresolved. Does the market test require competitive bidding for equity and/or a competing plan before the APR exception is recognized? Some cases cry out for it; others can’t afford it.
Ultimately, the Commission concluded that prepetition equity holders should have a means of retaining or purchasing equity in the reorganized debtor, especially when that class includes (i) the debtor’s founders, (ii) those whose continued association with the debtor is critical, and/or (iii) a necessary plan funding source.
Specifically, the Commission recommends that the new value exception be added to the Code as requiring (i) new money or money’s worth; (ii) in an amount proportionate to the equity received or retained by prepetition equity security holders; and (iii) that would be subject to a “reasonable” market test.
However, the Commission was not any more specific, and left determination of an appropriate market test to the courts based on the facts, evidence, and particulars of the case.
With or without a codification of the new value exception to the APR, it appears more and more that ownership is going to have to “pay to play,” whether that means paying to retain equity, paying for co-debtor stays, or funding a plan to justify channeling injunctions and other post-confirmation reprieves for owners, etc.
Stay tuned for our next ABI Commission post regarding Section 506(c) charges.