Opposition Brief — Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership

Supreme Court brief1999

Ask Donna

What actually matters in this document.

Text

Supreme Court, US.

+ FILED

No. 97-1418 | MAR $1 1998

GFFICE OF THE CLERK

IN THE =

——

a J

Supreme Court of the United States

OCTOBER TERM, 1997

BANK OF AMERICA NATIONAL TRUST AND

SAVINGS ASSOCIATION,

Successor by merger to Bank of America Illinois,

> Petitioner,

203 NORTH LASALLE STREET PARTNERSHIP,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Seventh Circuit

RESPONSE IN OPPOSITION TO THE

PETITION FOR WRIT OF CERTIORARI

RICHARD M. BENDIX, JR.

Counsel of Record

MALCOLM M. GAYNOR

PAUL J. GAYNOR

SCHWARTZ, COOPER, GREENBERGER

& KRAUSS, CHARTERED

180 North LaSalle Street

Suite 2700

Chicago, Illinois 60601 -

(312) 346-1300

Attorneys for Respondent

Midwest Law Printing Co., Chicago 60610, (312) 321-0220

RULE 14.1(b) AND 29.6 STATEMENT

The Respondent, 203 North LaSalle Street Partner-

ship, is an Illinois Limited Partnership. The Respondent

has no parent corporation, subsidiaries or affiliates, and

no stock in the Respondent is publicly traded.

TABLE OF CONTENTS

PAGE

RULE 14.1(b) AND 29.6 STATEMENT .......... i

TABLE OF CONTENTS ........ccccccscccecs ii

TABLE OF AUTHORITIES ............:.... iv

STATEMENT OF THE CASE ................ 1

REASONS FOR DENYING THE WRIT ......... 7

1. THIS CASE IS NOT AN APPROPRIATE

VEHICLE FOR CONSIDERING SURVIV-

AL OF THE NEW VALUE COROLLARY .... 9

A. Reversing the lower courts would

make this the first case in which an

unstayed order confirming a substan-

tially consummated plan of reorgani-

zation was overturned .............. 9

B. By failing to appeal the bankruptcy

court’s order denying the Bank’s

motion to terminate the Debtor’s

exclusive right to file a plan, the

Bank waived its right to raise exclu-

Pe ae 15

C. The Plan does not violate the abso-

bute priestiy TUES . «oso o'ssecuenueen 17

D. Even if the absolute priority rule

applies, this case does not present

any of the hypothetical dangers upon

which critics rely to question the

survival of the new value corollary ... 20

Il. THERE IS NO SPLIT IN THE CIRCUITS

REGARDING THE EXISTENCE OF THE

NEW VALUE COROLLARY ............ 25

Ill. THE STATUS OF THE NEW VALUE

COROLLARY IS NO LONGER SUFFI-

CIENTLY IMPORTANT TO REQUIRE

DECISION BY THIS COURT ........... 27

DE (CabGUGRSGoseeseecoeesooces 30

TABLE OF AUTHORITIES

CASES PAGE(S)

Alsberg v. Robinson,

GSB F.36 SIS (the Cie. 1606)... ccc cc cece: 25

In re Bonner Mall Partnership,

2 F.3d 899 (9th Cir. 1993) .. 8, 12, 13, 25, 29, 30

In re Bryson Properties XVIII,

961 F.2d 496 (4th Cir. 1991) . 8, 19, 22, 25, 26, 27

In re Burton Securities, S.A..,

202 B.R. 411 (S.D. Tex. 1996) ............. 13

In re Cambridge Biotech Corp..,

214 B.R. 429 (D. Mass. 1997) ............. 13

Case v. Los Angeles Lumber Products Co.,

Bee Ge OGRE acter wnacscteces 18, 19

Central States, Southeast and Southwest Areas

Pension Funds v. Central Transport, Inc.,

841 F.2d 92 (4th Cir. 1988) ............ 13, 14

Church of Scientology v. United States,

i ee ase s at i)

Coltex Loop Central Three Partners,

L.P. v. BT/SAP Pool C Associates,

No. 96-5140, slip op. (2d Cir. Feb. 19,

PS ree 8, 19, 22, 23, 24, 25, 26, 27

In re Continental Airlines,

91 F.3d 553 (3d Cir. 1996) (en banc)

cert. denied 117 S. Ct. 686, 136 L.Ed.

Sees iksccacaba ce eueeweniuawds 12, 13

Dewsnup v. Timm, 502 U.S. 410 (1992) ........ 25

In re Freeman, 956 F.2d 252 (11th Cir. 1992) .... 16

In re Greystone III Joint Venture,

995 F.2d 1274 (5th Cir. 1991) ............. 25

Group of Institutional Investors v. Chicago,

M.StP.&Pac.R.R. 318 U.S. 523 (1943) ....... 18

Kansas City Terminal R. Co. v. Central Union

Trust Co., 271 U.S. 445 (1926) ......... 18, 22

Kham & Nate’s Shoes No. 2, Inc. v. First

Bank of Whiting, 908 F.2d 1351

Ss ED os FE RbCs Pe hed Geb b% ows ce 24

Matter of Manges, 29 F.3d 1034 (5th Cir.

1994), cert. denied 513 U.S. 1152 (1995) ..... 13

Mills v. Green, 159 U.S. 651 (1895) ............ y

NLRB v. Bildisco and Bildisco,

RL ES. ee ee oe 15

Northern P. Ry. Co. v. Boyd,

Es bs kG des obudebe s 19, 20

Norwest Bank Worthington v. Ahlers,

SR 28, 29

In re Pine Mountain Ltd.,

80 B.R. 171 (9th Cir. BAP 1987) ........ 16, 17

In re Public Service Company of New Hampshire,

963 F.2d 469 (ist Cir. 1992), cert. denied

ED dks wi haar bueds aeee x 13

Randall v. Loftsgaarden, 478 U.S. 647 (1986) .... 19

Matter of Snyder, 967 F.2d 1126

dad co wae kkk ek > om 17, 24

In re Texaco, 92 B.R. 38 (S.D.N.Y. 1988) ....... 13

Matter of 203 North LaSalle Street Partnership,

190 B.R. 595 (N.D. Ill. 1995) .............. 14

In re UNR Industries, Inc., 20 F.3d 766

(7th Cir. 1994), cert. denied 513 U.S.

Se 4 a6kanbdekcétsetikbeuwesbans 9, 11, 12

U.S. Bancorp Mortgage Co. v. Bonner Mall

Partnership, 513 U.S. 18 (1994) ........... 12

In re Wabash Valley Power Association,

72 F.3d 1305 (7th Cir. 1995), cert. denied

Se es ED ob heh oda be) 60-08 60s 08 18

Matter of Woodbrook Associates,

19 F.3d 312 (7th Cir. 1994)............. 3, 24

STATUTES

11 U.S.C. § 221 (1938) (repealed 1978) ......... 19

BS We ED 8 ody vacebst onsvcuen beds 12

ER Ge ND. 6 hd 6 n4sdcovesarsdaccanes 2

GD We PE oo O44 cb ic ke cckwdeneeee 11

BE Dae | ERSSND ccc rctncecceceess 2, 23

RD WS ee SED pcaveevciuveces oeetess 2

ihe 0 Pee 5, 16

DG We EE 6 6 6.0.6.0684 6 ekncerentaou 16

Be ee OE: on 5 2 ce ews 66635000 406 eae 25

OD We SE face t's oa ta deb ctheseved cease 26

BE Dae ERED wesc cevivedrecoseere whe 16

OR Wee ee 3G % oc sc ovvccusvcsetes 18, 19

11 U.S.C. § 1129(DM2KAMI) .. 2. ee ee ee eee 2,3

11 U.S.C. § 1129(bX2KBXMGi) .......-.... 2, 15, 16

vii

Ee CU PEED Cdeetereceuddscedecen

SR UE hevicécrbeteensentvobeste

PEPE condudcohecisccenesctbece

26 U.S.C. §§ 1001, 7701(g) ...............

Section 77B of the Bankruptcy Act of

1898 June 7, 1934, 48 Stat. at L. 912,

Chap. 424 (repealed).................

OTHER AUTHORITIES

8 Collier on Bankruptcy, 41200.01[b]

i CD 66babihbenwcndese

Baird, The Elements of Bankruptcy

Se Er ere

National Bankruptcy Review Commission

Final Report, October 20, 1997 ..........

Warren, A Theory of Absolute Priority,

1991 Annual Survey of American Law ...

STATEMENT OF THE CASE

The plan of reorganization (the “Plan”), which has

been in effect since December 6, 1995, gives the Bank

all cash flow and all future appreciation from the re-

organized debtor’s (“Reorganized LaSalle”) Class A office

building (the “Property”) until the Bank has received

payment in full of its secured and unsecured claims,

aggregating $93 million.’ The Bank’s opportunity to

benefit from that future appreciation, which the Bank

agrees will occur, is facilitated by a $6.125 million new

capital contribution from certain of the former Debtor's

partners (“Investors”). The Plan provides that the In-

vestors can receive no return whatsoever on or of their

investment until the Bank has been paid in full. The

Investors made that new capital contribution to defer

the tax liability they would have incurred if the Bank

had foreclosed on its mortgage.’ App. at 112a-113a.

The Bank’s note was nonrecourse requiring the Bank,

under nonbankruptcy law, to look only to the Property

for payment. Therefore, in a foreclosure, the Bank would

have received only the depressed value of the Property

at the time of the foreclosure sale.’ In a Chapter 7 liqui-

dation, the Bank’s deficiency claim would have been

disallowed as unenforceable under applicable nonbank-

' The Plan es the Bank’s deficiency claim in its en-

tirety until that claim has been paid in full.

* The Plan eliminated the interests of non-contributing part-

ners. Partners who did contribute new capital received equity

interests in Reorganized LaSalle proportionate to their con-

tributions.

* Federal banking law requires banks to dispose of saleable

foreclosed properties within five years. 12 U.S.C. § 29

ruptcy law. App. at 128a. However, in this Chapter 11

case, pursuant to 11 U.S.C. § 1111(b)(1)(A), the Bank

was entitled to be treated as if it had recourse against

the Debtor. The Bank had a right, under 11 U.S.C.

§ 1111(b)(2), to retain a lien upon the Property for its

full $93 million claim. But the Bank did not exercise

that right. Accordingly, under 11 U.S.C. § 506(a), the

Bank’s claim was split into two claims: (a) a secured

claim equal in amount to the value of the Property and

(b) an artificially created unsecured claim for the bal-

ance of the Bank’s debt. In order to determine the

amount of the Bank’s secured claim, the bankruptcy

court was required to value the Property.

The Bank’s $54.5 million secured claim was based on

the bankruptcy court’s valuation of the Property at

$55.8 million, less the disposition costs which the Bank

would have incurred if it had sold the Property after

foreclosing on its mortgage. App. at 115a. There was no

material difference between the Bank’s and the bank-

ruptcy court’s valuation of the Property. The bankruptcy

court’s value for the Property was a mere 2.8% less than

the value proposed by the Bank’s appraiser. App. 108a,

llla.

General Electric Capital Corporation (“GE Capital”), in

a letter of intent for refinancing the Property, offered to

lend Reorganized LaSalle $54.5 million to pay the Bank’s

secured claim in cash, in full. App. at 125a-126a. The

Bank refused to accept that cash payment, or any plan

which would have permitted the Debtor to retain owner-

ship of the Property. App. at 126a. Therefore, in order to

confirm its Plan, the Debtor was required to “cram down”

the Bank’s claims by satisfying the requirements of 11

U.S.C. §§ 1129(b)2AXi) and 1129(b)(2)(B)(ai).

The Plan treated the Bank’s secured claim more favor-

ably than the treatment required by the marketplace as

evidenced by GE Capital’s letter of intent. Thus, al-

though the Bank voted its secured claim to reject the

Plan, the bankruptcy court found that the Plan’s treat-

ment of that claim satisfied the requirements of Section

1129(b 2) Ai). App. at 172a.

As required by the Seventh Circuit’s decision in Jn the

Matter of Woodbrook Associates, 19 F.3d 312, 319 (7th

Cir. 1994), the Plan placed the Bank’s artificial defi-

ciency claim in a class by itself, separate and apart from

creditors holding recourse unsecured claims. Under the

Plan, this artificial deficiency claim receives all proceeds

from a sale or refinancing of the Property remaining

after payment of the Bank’s secured claim until that de-

ficiency claim is paid in full. App. at 132a-133a. The

bankruptcy court projected that a sale or refinancing of

the Property on the tenth anniversary of plan confirma-

tion would produce a $19 million distribution to the

Bank on account of its deficiency claim, representing a

16% dividend on a present value basis. App. at 133a. If

the Property is refinanced rather than sold on or before

the tenth anniversary of confirmation of the Plan, the

potential exists for the Bank to receive an even greater

dividend when the Property is refinanced again or sold

after the tenth anniversary of Plan confirmation.‘

The Bank was not the only creditor in this case. The

general partner of the Debtor and an affiliate held al-

* The Plan does not discharge the Bank’s deficiency claim.

Thus, if the first mortgage is paid through successive refi-

nancings, the deficiency will continue to exist and the poten-

tial exists for the Bank to benefit from those refinancings until

its deficiency claim is paid in full.

lowed unsecured claims totaling $7.7 million; the gen-

eral partner held another claim based upon a $11.3

million second mortgage. App. 103a, 129a. Under the

Plan, insiders waived all of these claims, even though

the $7.7 million of unsecured claims held by the general

partner and its affiliate would have received a distribu-

tion of approximately $3 million in a Chapter 7. App. at

129a-130a. Under the Plan, that money was reinvested

in the Property. In addition, general unsecured trade

debt of about $160,000 was paid in full pursuant to the

Plan. App. at 103a, 132a.

Of the $6.125 million new capital contribution, $3 mil-

lion was paid in cash on the day after confirmation; the

balance was payable in installments of $625,000 on the

first five anniversaries of plan confirmation. Jd. The first

two deferred payments totaling $1,250,000 have already

been made. The remaining payments are partially se-

cured by a letter of credit which, in turn, has been

guaranteed by an affiliate of the general partner. App.

at 123a. The amount and terms of the new capital con-

tribution were more favorable to the Bank than the

amount and terms required by the marketplace in the

form of the GE Capital letter of intent. App. at 125a-

126a, 127a n4. Unlike that letter of intent, which

permitted a 9% annual return on (and a return of) new

capital before any payment to the deficiency claim, the

Plan fully subordinated the new capital contribution to

the Bank’s artificial deficiency claim. Jd., 135a. Indeed,

the bankruptcy court found that the equity interests in

Reorganized LaSalle have no value “on the market”.

App. 139a.

The Bank filed a motion in the bankruptcy court seek-

ing to terminate the Debtor’s exclusive right to file a

plan, a right conferred by 11 U.S.C. § 1121(b). The Bank

also sought leave to file its own plan that called for

liquidation of the Property, and made no provision

either for contribution of new capital or for any payment

to the $7.7 million of allowed unsecured claims held by

insiders. The bankruptcy court denied the Bank’s mo-

tion. The Bank did not appeal that denial or raise

that denial as an issue on appeal when the Debt-

or’s Plan was confirmed.

Following confirmation of the Plan, the Bank moved

both in the bankruptcy court and in the district court for

a stay pending appeal. The Bank refused to post a

supersedeas bond. As a result, its motions for stay pend-

ing appeal were denied. Thereafter, Reorganized LaSalle

implemented the Plan.

Specifically, as set forth in Debtor's Supplemental

Status Report on Plan of Reorganization filed on De-

cember 27, 1995 (the “SSR”), see Appellee’s Memo-

randum In Support Of Motion To Dismiss, filed in the

Seventh Circuit February 5, 1996 at Ex. F, (a) certain

partners in the Debtor contributed $3 million of cash

and $3,125,000 of notes payable in five annual install-

ments of $625,000 to Reorganized LaSalle as new equity

capital Ud. at Ex. D at Wilkow Aff. 4 3) (two of the five

annual installment payments have already been made);

(b) the cash component of Reorganized LaSalle’s new

equity capital, together with $3.1 million of cash which

the Debtor held before the Chapter 11 filing, was used

to pay (i) $2,277,257.39 of delinquent real estate taxes,

(ii) $1,149,500 to the Bank on account of its restructured

first mortgage loan, (iii) a $266,975 commitment fee to

the Bank, (iv) a $1,850,000 payment to Rudnick &

Wolfe, a major tenant of the Property, in connection

with the seven-year extension of Rudnick & Wolfe’s

lease with Reorganized LaSalle, which lease extension

was effective only if and when the Plan was confirmed,

(v) a $400,000 commission to Equis, Rudnick & Wolfe’s

leasing broker, (vi) a $181,000 commtftssion to M & J

Wilkow Brokerage Services Corporation, the landlord’s

leasing broker, and (vii) $88,377.87, representing pay-

ment in full, to all 41 of the Debtor’s non-insider unse-

cured trade creditors.

Pursuant to the Plan, Reorganized LaSalle has also:

(a) delivered to the Bank all of the documents reflecting

the restructuring of the Bank’s first mortgage loan ef-

fected by the Plan, (b) rejected all of the Debtor’s pre-

petition contracts with providers of goods and services

to Reorganized LaSalle; (c) hired new on-site property

management personnel; and (d) entered into new service

agreements. Jd. at Ex. F SSR; Jd. at Ex. D Wilkow Aff.

at 94. The partnership interests of those partners who

did not contribute new equity capital to the Reorganized

Debtor have been eliminated (Jd. at Ex. A Plan §5.2 at

17) and resulting income tax consequences have been

realized.

Relying upon the Confirmation Order and the result-

ing deferral of tax liability, several Investors chose not

to structure the sale of other real estate owned by them

as a tax free exchange.

REASONS FOR DENYING THE WRIT

The Bank’s petition for a writ of certiorari (the “Peti-

tion”) should be denied for the following reasons:

1. This case is not an appropriate vehicle for deciding

whether the new value corollary to the absolute priority

rule survived enactment of the Bankruptcy Code in 1978

because:

a) This case is equitably moot. The Bank

failed to obtain a stay pending appeal following

entry of the confirmation order. As a result, the

Plan has been consummated. In reliance on the

final order confirming the Plan, investors have

contributed millions of dollars to the reorganized

enterprise. Any attempt to unwind transactions

that occurred nearly two and a half years after

confirmation, would seriously jeopardize future

Chapter 11 reorganizations by undermining in-

vestors’ confidence in their ability to invest in

reorganized companies in reliance on final un-

stayed bankruptcy court orders.

b) The Bank’s primary criticism of the Plan is

that it purportedly gave the Debtor’s equity

holders the “exclusive opportunity” to retain in-

terests in the reorganized debtor. However, the

Bank waived the issue of exclusivity by failing to

raise it on appeal below.

c) The Plan does not violate the absolute

priority rule. Investors did not receive any prop-

erty which would have been available to satisfy

creditors’ claims.

d) The Plan does not involve any of the al-

leged dangers which have caused critics of the

new value corollary to question its continued

existence. Not only was the bankruptcy court’s

valuation of the Property consistent with the

value attributed to the Property by the Bank’s

appraiser, but the new capital contribution ex-

ceeded the requirements of an independent lend-

er in the marketplace. Significantly, the Bank

does not claim that the Plan causes any of the

putative harms which the Bank ascribes to the

new value corollary.

2. There is no split in the Circuits regarding the

existence of the new value corollary. The Seventh

Circuit in this case and the Ninth Circuit in Jn re

Bonner Mall Partnership, 2 F.3d 899 (9th Cir. 1993)

have both held that the new value corollary survived

enactment of the Bankruptcy Code in 1978. No circuit

court has held to the contrary. Both the Second Circuit

in Coltex Loop Central Three Partners, L.P. v. BT/SAP

Pool C Associates, No. 96-5140, slip op. (2d Cir. Feb. 19,

1998) and the Fourth Circuit in Jn re Bryson Properties

XVIII, 961 F.2d 496 (4th Cir. 1991) suggest that a

debtor’s equity holders may retain their interest in the

reorganized debtor under certain circumstances. Such

circumstances are present in this case. Neither Coltex

nor Bryson Properties held that the new value corollary

ceased to exist after enactment of the Bankruptcy Code.

3. The question of the new value corollary’s survival

is no longer sufficiently important to justify consider-

ation by this Court. The issue has arisen primarily in

single asset real estate and family farm Chapter 11

cases, which constituted a mere fraction of all Chapter

11 filings.

4. The Seventh Circuit’s decision in this case was

correct both as a matter of law and as a matter of bank-

ruptcy policy.

THIS CASE IS NOT AN APPROPRIATE VEHICLE FOR

CONSIDERING SURVIVAL OF THE NEW VALUE COR-

OLLARY.

A. Reversing the lower courts would make this the

first case in which an unstayed order confirming

a substantially consummated plan of reorganiza-

tion was overturned.

The Petition should be denied as equitably moot, even

if the question presented merits this Court’s attention.*

This case should never have spawned any appellate

decisions on the new value corollary, because the Bank’s

appeals from the unstayed Confirmation Order should

have been dismissed as equitably moot. The district and

circuit courts in this case improperly refused to dismiss

the Bank’s appeals to them as equitably moot. Affirming

the bankruptcy court’s entry of the Confirmation Order

on the merits, the district and circuit courts theorized

that, had they reversed the Confirmation Order, the

bankruptcy court could have fashioned some form of

relief which would not unduly burden innocent third

parties. App. at lla, 60a. Clearly, modification of the

Plan would upset the legitimate expectations of the

Investors, who were not parties to the appeal. Neverthe-

less, the Seventh Circuit brushed that fact aside because

* The doctrine of equitable mootness is separate and distinct

from mootness under Article III of the Constitution. The latter

doctrine requires dismissal of an appeal when circumstances

make it impossible for a court to fashion any form of meaning-

ful relief. Church of Scientology v. United States, 506 U.S. 9

(1992); Mills v. Green, 159 U.S. 651 (1895). When an appellant

invokes equitable mootness, the reviewing court must consider

whether it is “prudent” to upset a plan of reorganization long

after confirmation. In re UNR Industries, Inc., 20 F.3d 766,

769 (7th Cir. 1994), cert. denied 513 U.S. 999.

the Bank had consented to repay the investments plus

reasonable interest. Repayment to the Investors is not

what they legitimately expected when they made their

investments in reliance upon the unstayed Confirmation

Order. They purchased deferral of tax liabilities for an

extended period.

The Seventh Circuit ignored the universal unwilling-

ness of appellate courts to reverse unstayed confirma-

tion orders. This Court should not compound the dam-

age already done to the equitable mootness doctrine by

the lower courts in this case by considering the merits,

and should deny the Petition. If this Court wishes to

examine the new value corollary, it should wait for a

case arising from a confirmation that has been stayed,

a case not burdened with the equitable mootness issue.

In order to protect legitimate reliance interests of

participants in the Chapter 11 process, it is important

that the Court deny this Petition seeking review of an

unstayed confirmation order. The very consideration of

this case on its merits will cast doubt on the finality of

confirmation orders, even if this Court should ultimately

affirm. No appellate court has ever found a reason in

the facts of any reported case powerful enough to re-

verse an unstayed confirmation order. In this case, the

Bank offered no reason whatsoever, and omitted any

reference to the absence of a stay in its Statement of the

Case. Any benefit to be obtained from considering this

case on its merits, would be far outweighed by the harm

which would flow from disregarding equitable mootness.

The Bank did not obtain a stay pending appeal, be-

cause it was unwilling to furnish a supersedeas bond

and assume the attendant liability on such a bond in

the event the bankruptcy court’s confirmation order was

affirmed. Nevertheless, the Bank seeks to dismantle the

plan of reorganization confirmed and consummated

more than two years ago.° Reversal of the Confirmation

Order at this late stage would completely repudiate the

well-settled doctrine of equitable mootness and would

undermine the confidence of investors, lenders and pur-

chasers in the finality and reliability of confirmed reor-

ganization plans.

iene tie tks chia dt ccnainieih tes on

appeal, but the mere pendency of an appeal itself, dis-

courages business people from making substantial in-

vestments in reorganized debtors. The appellate process

itself is expensive and sophisticated entrepreneurs will

deduct the cost of appeals from the amount they are

willing to pay for interests in reorganized debtors. Po-

tential investors in a reorganized debtor will hold back

their best offer unless they are certain that, absent a

stay, the reorganized enterprise will operate free of ju-

dicial interference following confirmation of a reorga-

nization plan.

Only if investors can confidently rely upon the finality

of such orders will the substantial social and private

value of reorganizations, referred to by the Seventh

Circuit In the Matter of UNR Industries, Inc., 20 F.3d

* 11 U.S.C. § 1101(2) defines substantial consummation as:

(A) transfer of all or substantially all of the property pro-

posed by the plan to be transferred;

(B) assumption by the debtor or by the successor to the

debtor under the Avon of the business or of the manage-

ment of all or substantially all of the property dealt with

by the plan; and

766, 771 (7th Cir. 1994), cert. denied 513 U.S. 999 be

fully realized.

In support of his conclusion that an appeal from an

unstayed confirmation order in that case should be dis-

missed, Judge Easterbrook trenchantly’ observed that:

Every incremental risk of revision on appeal

puts a cloud over the plan of reorganization and

derivatively over the assets of the reorganized

firm. People pay less for assets that may be

snatched back or otherwise affected by subse-

quent events.

By protecting the interest of persons who ac-

quire assets in reliance on a plan of reorganiza-

tion, a court increases the price the estate can

realize ex ante and thus produces benefits for

creditors in the aggregate.

Id. at 770.

The Bank notes that this Court granted certiorari to

consider the existence of the new value corollary to the

absolute priority rule in U.S. Bancorp Mortgage Co. v.

Bonner Mall Partnership, 513 U.S. 18 (1994). However,

that case did not involve an appeal from an unstayed

order confirming a substantially consi mmated reorgani-

zation plan. Rather, that case involved an appeal from

an order reversing a lower court order granting a se-

cured creditor’s motion for relief from the automatic stay

under 11 U.S.C. § 362(d)(2). In re Bonner Mall Partner-

ship, 2 F.3d 899 (9th Cir. 1993). Consequently, the equi-

" In re Continental Airlines, 91 F.3d 553, 559 (3d Cir. 1996)

(en banc) cert. denied 117 S. Ct. 686, 136 L.Ed. 2d 610 (1997)

where the Third Circuit characterized Judge Easterbrook’s

opinion as “trenchant.”

table mootness doctrine was not implicated by this

Court’s grant of certiorari in Bonner Mall.

Under the equitable mootness doctrine, courts decline

to consider the merits of appeals from confirmation

orders when, as a result of substantial consummation of

a reorganization plan, it is no longer prudent to grant

relief. Matter of Manges, 29 F.3d 1034, 1039 (5th Cir.

1994), cert. denied 513 U.S. 1152 (1995). The equitable

mootness doctrine promotes the “important public policy

favoring orderly reorganization and settlement of the

debtor’s estate by ‘affording finality to the judgments of

the bankruptcy courts’.”; In re Public Service Company

of New Hampshire, 963 F.2d 469, 471-472 (1st Cir.

1992), cert. denied 506 U.S. 908 (1992), quoting In re

Texaco, 92 B.R. 38, 45 (S.D.N.Y. 1988). See also In re

Continental Airlines, supra at 560; Central States,

Southeast and Southwest Areas Pension Funds v. Cen-

tral Transport, Inc., 841 F.2d 92, 95 (4th Cir. 1988); In

re Cambridge Biotech Corp., 214 B.R. 429, 431-432 (D.

Mass. 1997) (under Section 1127(b) of the Code, court’s

power to modify a plan of reorganization extends only

from confirmation to substantial consummation); Jn re

Burton Securities, S.A., 202 B.R. 411, 417 (S.D. Tex.

1996).

In Central States, supra, a dissident creditor who

failed to post a st ssedeas bond sought complete re-

versal of a confir ed reorganization plan after new

equity had been invested and used to pay claims. In dis-

missing the appeal as moot, the court stated as follows:

We can understand a reluctance to put up a

supersedeas bond of $7 million but if the [appel-

lant] Pension Fund seriously sought an outright

reversal of the order of confirmation, as it con-

tends, it should have posted the bond or sought

a substantial reduction in its amount; it should

not have sat idly by while this case drifted along

a routine, unexpedited course.

841 F.2d at 95. Just like the appellant in Central

States, the Bank refused to post a supersedeas bond

that would have stayed implementation of the Plan, and

would have prevented investors from relying on the

Confirmation Order to make their substantial infusion

of new equity nearly two and one-half years ago.* Such

a bond would also have preserved the status quo for

appellate courts and prevented the comprehensive

change in circumstances that has now occurred as a

result of substantial consummation of the Plan. See

Matter of 203 North LaSalle Street Partnership, 190

B.R. 595 (N.D. Ill. 1995). Having failed to preserve the

status quo and having permitted a comprehensive

change in circumstances to occur, the Bank must bear

the consequences of its refusal to post a bond—denial of

its Petition.

Granting certiorari and reversing the unstayed Con-

firmation Order years after substantial consummation

would eliminate the compelling and well-settled doctrine

of equitable mootness from bankruptcy jurisprudence,

thereby causing the significant economic harm described

* In making these capital contributions, many of the Investors

have foregone significant alternative investment opportunities.

See Appellee’s Memorandum In Support Of Motion To Dis-

miss, February 5, 1996 at Ex. B. These opportunities cannot

be recreated if the Confirmation Order is reversed. For ex-

ample, some Investors have irretrievably lost the opportunity

to engage in a tax free exchange regarding a completed sale of

other property Those Investors will suffer irreparable harm

if the Confirmation Order is now reversed, because they have

used up losses which could have been used to offset the gain

resulting from foreclosure on the Property.

by Judge Easterbrook in UNR, and drastically curtailing

rehabilitation under Chapter 11. See NLRB v. Bildisco

and Bildisco, 465 U.S. 513, 527-529 (1984) (policy of

Chapter 11 is to permit successful rehabilitation of

debtors and to avoid liquidation with attendant loss of

jobs and possible misuse of economic resources). If this

Court wishes to consider the continued survival of the

new value corollary, it should await a case where the

petitioner has preserved the status quo. This is not such

a case. Certiorari should, therefore, be denied.

B. By failing to appeal the bankruptcy court’s order

denying the Bank’s motion to terminate the

Debtor’s exclusive right to file a plan, the Bank

waived its right to raise exclusivity.

An essential element of the Petition is the contention

that the Debtor’s statutory exclusive right to file a plan

during the first 120 days of the Chapter 11 case consti-

tuted “property” which the Debtor’s limited partners

retained “on account of” their prior equity interests

within the meaning of 11 U.S.C. § 1129(b)(2)(B\ii). For

example, in the “Question Presented” Section of the

Petition, the Bank asks,

[w]hether the Bankruptcy Code authorizes a

judge to conf"m a Chapter 11 plan of reorgani-

zation that gr .nts pre-bankruptcy equity owners

of a debtor an exclusive opportunity to retain or

purchase an ownership interest in the reorga-

nized debtor...

Petition at i (emphasis added). Thereafter, the Bank

argues that, “the exclusive right to retain an equity

interest in a business enterprise is ‘property’ within the

meaning of 11 U.S.C. § 1129(b)(2BXii) . . .” Petition at

9. The Bank has waived its right to complain of exclu-

sivity. Consequently, this is not an appropriate case for

considering the issue posed by the Bank’s Petition.

A Chapter 11 debtor’s exclusive right to file a plan is

conferred by 11 U.S.C. § 1121(b) of the Code. That right

is not perpetual; it exists only for the first 120 days of

a Chapter 11 case and, even during that period, is

subject to reduction upon request by a creditor such as

the Bank. 11 U.S.C. §§ 1121(b), 1121(d). The obvious

remedy for the wrong perceived by the Bank—inability

to solicit bids for Reorganized LaSalle’s equity through

a competing plan of reorganization—was to request ter-

mination of the Debtor’s exclusive period.

The Bank did move in the bankruptcy court for an

order terminating the Debtor’s exclusivity period. Simul-

taneously, the Bank sought authority to file its own

plan. The Bank’s plan was a plan of liquidation, which

(a) was less favorable to unsecured creditors than the

Debtor’s Plan, (b) violated 11 U.S.C. §1129(a)(7) by fail-

ing to pay $7.7 million of allowed unsecured claims held

by the Debtor’s general partner and an affiliate, and (c)

provided no infusion of new capital. The bankruptcy

court entered an order denying the Bank’s motion. BAI

R. 104. The Bank did not (a) appeal the bankruptcy

court’s order, (b) raise the denial of its motion as

an issue on appeal or (c) designate its motion to

terminate the Debtor’s exclusive period as part of

the record on appeal below. By failing to do so, the

Bank waived any right to now argue that the Debtor’s

exclusive right to file a plan permitting its partners to

contribute new capital constitutes “property” retained

“on account of” their prior equity interests within the

meaning of 11 U.S.C. § 1129(b)(2)(B\ii). In re Freeman,

956 F.2d 252, 255 (11th Cir. 1992); In re Pine Mountain

Ne te Le

te me

Ltd., 80 B.R. 171, 173 (9th Cir. BAP 1987). As a result

of that waiver, the question presented by the Bank’s

Petition is not properly before this Court.

C. The Plan does not violate the absolute priority

rule.

By acquiring worthless “equity” in Reorganized

LaSalle in exchange for contributing new value, Inves-

tors received no “property” which would have been

available to satisfy creditors’ claims. In return for

$6.125 million of new value, Investors received only the

ability to defer a $20 million tax liability that would

have been triggered by the Bank’s foreclosure of its

mortgage on the Property. That ability is not “property”

to which creditors could look for payment under the

absolute priority rule, which rule requires that creditors

be paid in full from a debtor’s property before any

interest in that property may be received or retained by

equity holders. On the contrary by contributing new

value, the Investors conferred a substantial windfall on

the Bank, because of their desire to defer tax liability.

The Plan simply does not cause the harm to the Bank’s

deficiency claim which the absolute priority rule was

intended to prevent.

The absolute priority rule was a judicial creation

which had its origins in the law of fraudulent transfers

and equity receiverships, and was designed to ensure

that reorganizations were “fair and equitable”. Jn the

Matter of Snyder, 967 F.2d 1126, 1128 n.1 (7th Cir.

1992). As the Seventh Circuit recently observed:

the absolute priority rule was a judicial inven-

tion designed to preclude the practice in railroad

reorganizations of ‘squeezing out’ intermediate

unsecured creditors through collusion between

secured creditors and stockholders (who were

often the same people). Northern P. Ry. Co. v.

Boyd, 228 U.S. 482, 57 L.Ed. 931, 33 S.Ct. 554

(1913). See also e.g. John D. Ayer, Rethinking

Absolute Priority After Ahlers, 87 Mich.L.Rev.

963, 969-73 (1989) discussing the history of the

absolute priority rule. This rule was thus de-

vised primarily to deal with the situation of

overlapping ownership and creditor interests.

In re Wabash Valley Power Association, 72 F.3d 1305,

1314 (7th Cir. 1995), cert. denied, 117 S.Ct. 389 (1996).

As used in subsection (f) of the first corporate reorga-

nization statute (Section 77B of the Bankruptcy Act of

1898 June 7, 1934, 48 Stat. at L. 912, Chap. 424 (re-

pealed)), the words “fair and equitable” were “words of

art which, prior to the advent of § 77B had acquired a

fixed meaning through judicial interpretation in the

field of equity receivership reorganizations.” Case v. Los

Angeles Lumber Products Co., 308 U.S. 108, 115 (1939).

That meaning was clear and simple: “to the extent of

their debts, creditors are entitled to priority over stock-

holders against all property of an insolvent corporation.”

Id. (quoting Kansas City Terminal R. Co. v. Central

Union Trust Co., 271 U.S. 445, 455 (1926) (emphasis

added); see also, Group of Institutional Investors v.

Chicago, M.StP.&Pac.R.R. 318 U.S. 523, 565 (1943).

(absolute priority rule is satisfied if “each security hold-

er in the order of his priority receives from that which

is available for satisfaction of his claim, the equitable

equivalent of the right surrendered.”) (emphasis added).

The words “fair and equitable” which appear in 11

U.S.C. § 1129(b) are identical to the words which ap-

peared in its predecessors, Section 77B and Chapter X.

ee a a a ee a ee

6 Ow pete eis

oN er et

11 U.S.C. § 221 (1938) (repealed 1978). The meaning of

those words in 11 U.S.C. § 1129(b) is identical to the

meaning ascribed to them by Justice Douglas in Case.

In interpreting the words “fair and equitable”, in Section

77B, Justice Douglas employed the same well-settled

rule of statutory construction that this Court should

employ in interpreting those same words in Section

1129(b): “where words are employed in an act which at

the time had a well known meaning in the law, they are

used in that sense unless the context requires the con-

trary.” Case at 115.

The Investors retain their valueless partnership in-

terests in Reorganized LaSalle in exchange for contrib-

uting new value. Clearly, therefore, the Plan does not

involve the type of harm to creditors which the absolute

priority rule was designed to prevent. Unlike parties in

Northern P. Ry. Co. v. Boyd, 228 U.S. 482 (1913), the

Bank and the Investors are adversaries. The Plan is not

the product of collusion between them. Unlike the plans

in Coltex and Bryson, the Plan preserves the Bank’s

artificial deficiency in its entirety until that claim has

been paid in full. Therefore, the Plan does not divert to

the Investors any property of the Debtor in which the

Bank had a legal or equitable claim as an unsecured

creditor. Indeed, it is undisputed that the equity inter-

ests in Reorganized LaSalle are worthless in a balance

sheet sense, even after Reorganized LaSalle has received

all of the Investors’ new capital. The “benefit” which the

Investors receive is continued deferral of a tax liability

which only they will suffer in the event of a foreclosure.

The Bank has no legal or equitable claim to that benefit.

See Randall v. Loftsgaarden, 478 U.S. 647, 665-66

(1986) (tax losses have no value apart from investors’

status as partners and are not freely transferable).

Given the facts of this case, the Court in Boyd would

have found no violation of the absolute priority rule.

D. Even if the absolute priority rule applies, this

case does not present any of the hypothetical

dangers upon which critics rely to question the

survival of the new value corollary.

Assuming that the absolute priority rule applies to

this case, and relying exclusively on secondary material,

dissents and dicta, the Bank’s Petition proffers two

reasons why the question of the new value corollary’s

continued existence purportedly has sufficient practical

import to warrant consideration by this Court: (1)

absence of the corollary will make debtors more willing

to negotiate consensual plans with creditors [Petition at

16-17]; and (2) in applying the corollary, bankruptcy

judges might undervalue estate assets, thereby decreas-

ing “the amount paid to creditors, while at the same

time permitting the debtor’s pre-bankruptcy equity

holders to retain an ownership interest in the post-

bankruptcy business at a bargain price.” Petition at 16-

18. Those concerns are chimerical. Neither of the fore-

going circumstances exist in this case. Consequently,

this case is not an appropriate one for considering the

new value corollary’s continued existence. Certiorari

should, therefore, be denied.

The Bank does not claim that the bankruptcy court’s

recognition of the new value corollary made the Debtor

unwilling to negotiate with the Bank over the terms of

a reorganization plan. Nor does the Bank claim that the

Debtor refused a request by the Bank either for a

greater dividend or for more capital. In fact, the Bank’s

attempts to (a) lift the automatic stay, (b) have the case

dismissed or converted to a Chapter 7 liquidation and

Property and providing no new capital, demonstrate

that the Bank’s sole object throughout this case has

been to foreclose its mortgage on the Property. As a

result, it was the Bank, not the Debtor, which refused

to negotiate on the terms of any consensual reorganiza-

tion plan. The Bank does not even suggest that the

Debtor used the new value corollary to impose on any of

the creditors a worse deal than creditors would have

received without that corollary. On the contrary, in con-

junction with equity holders’ desire to defer a substan-

tial tax liability, the new value corollary produced a

windfall for the Bank by forcing equity holders to make

a substantial new capital contribution in exchange for

an equity interest which had no value to creditors.”

Similarly, the record in this case provides no basis for

the Bank’s fear that bankruptcy judges will undervalue

a debtor’s property, thereby enabling equity holders to

obtain a bargain at creditors’ expense. On the contrary,

the $55.8 million value which the bankruptcy court

placed on the Property is within 2.8% of the $57.4 mil-

lion value proposed by the Bank’s appraiser. In addition,

since the Plan preserves the Bank’s unsecured claim in

® Unlike the academic critics cited in the Bank’s Petition,

Harvard Law School’s Professor Elizabeth R. Warren pre-

sciently anticipated that factors extraneous to a debtor’s as-

sets, such as limited partners’ desire to defer a potential tax

liability that would accrue through a secured creditor’s fore-

closure of its mortgage, could force those limited partners to

confer a windfall on creditors by overpaying for equity in a

reorganize.i debtor. Warren, A Theory of Absolute Priority,

1991 Annual Survey of American Law at 21. This is precisely

what happened in this case.

its entirety, and since the Investors (unlike the equity

holders in Coltex and Bryson) can receive nothing until

the Bank’s unsecured claim is paid in full, the bank-

ruptcy court’s valuation of the Property has no impact

on the Bank’s ability to recover the full amount of its

unsecured claim.

The Bank does not even suggest that the Investors

received their equity in Reorganized LaSalle at a bar-

gain price. On the contrary, the amount of new capital

contributed by the Investors met and surpassed the re-

quirements of the marketplace as evidenced by the GE

Capital letter of intent. This independent corroboration

from the market regarding the sufficiency and fairness

of the Investor’s new capital contribution satisfies the

desire for market validation of new capital contributions

expressed by Judge Restani in the Coltex and Bryson

Properties cases. Furthermore, because the Plan permits

no return whatsoever to Investors on account of their

$6.125 million capital contribution until the Bank’s se-

cured claim and unsecured artificial deficiency claims

have been paid in full, the equity in Reorganized

LaSalle has no value vis a vis the proceeds that will be

realized from a future sale or refinancing of the Prop-

erty. App. at 135a, 139a. By retaining worthless inter-

ests in Reorganized LaSalle in exchange for their sub-

stantial contribution of new value, the Investors re-

ceived no property of Reorganized LaSalle. Instead,

Investors received only the ability to defer a $20 million

tax liability that would have been triggered by a fore-

closure. That deferral is not “property” vf the Debtor to

which the Bank could look to satisfy its artificial de-

ficiency claim. Kansas City Terminal R. Co. v. Central

Union Trust Co., 271 U.S. 445, 453-454 (1926) (under

absolute priority rule unsecured creditors are preferred

over stockholders against property belonging to debtor

corporation). Consequently, it bears repeating that

under the Plan, the Debtor’s equity holders have re-

ceived no benefit at creditors’ expense. Rather, they

have conferred a substantial windfall on the Bank solely

because of their desire to defer a potential tax liability.'®

It is noteworthy that neither the Bank nor any of its

academic supporters has cited a single case involving a

confirmed plan of reorganization, affirmed on appeal,

where the new value corollary was used to inflict on

creditors the harm which the Bank speculates may flow

from that corollary. On the contrary, in cases such as

Coltex, where it appears that equity holders did attempt

to undervalue the bank’s collateral and obtain a bargain

at the expense of a bank’s artificial deficiency claim, the

nomic harm which it suffered under the Plan. Nor has the

Bank articulated a rational economic reason for opposing the

Plan. On the contrary, as the holder of an artificial deficiency

claim created solely by the operation of 11 U.S.C. § 1111(b)

(1A), the Bank’s opposition to the Plan is antithetical to the

Bank’s economic interest as an unsecured creditor. But for the

new value corollary, the Bank’s decision to vote its artificial

deficiency claim against the Debtor’s Plan would lead to con-

version of the Debtor's case to a Chapter 7 liquidation, or to

dismissal of the case. In either event, Bank would foreclose

on its non-recourse mortgage and have no deficiency claim.

Thus, in a foreclosure, the Bank would forfeit the $19 million

dividend which it is projected to receive under the Plan on ac-

count of its artificial $38.5 million unsecured deficiency claim.

No rational unsecured creditor would vote to defeat a plan

paying it a $19 million dividend so that it could receive noth-

ing in a Chapter 7 liquidation. Consequently, the Bank’s argu-

ment against the new value corollary can only be seen as a

transparent back door attack upon the bankruptcy court's

finding that the Plan’s treatment of the Bank’s secured claim

is “fair and equitable.”

confirmation order was reversed.'' Similarly, in the vast

majority of reported decisions discussing the new value

corollary, courts decline to even reach the question of

the corollary’s survival because they find that the plan

in question would not have satisfied the corollary in any

event. See e.g. Matter of Woodbrook Associates, 19 F.3d

312 (7th Cir. 1994); Matter of Snyder, 967 F.2d 1126

(7th Cir. 1992). In other words, all of the empirical

evidence demonstrates that courts have interpreted the

new value corollary strictly, and have been vigilant in

protecting the rights of creditors from the potential

harms hypothesized by the Bank and by the corollary’s

academic critics. The Bank’s fears that bankruptcy

courts will fail to do so are fanciful, and there is no need

for this Court’s involvement.

In short, the Plan in this case simply does not present

the hypothetical problem which caused critics of the new

value corollary such as Judge Easterbrook in Kham &

Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908

F.2d 1351 (7th Cir. 1990), and Professor Baird in The

Elements of Bankruptcy (rev. ed. 1993) at 263, to spec-

ulate that equity holders will invoke the new value

corollary only when they are gaining at creditors’ ex-

pense. See Absolute Priority at 21 (investors in tax

driven partnership may be willing to make new value

contributions far exceeding those of a third party), and

44-45. Consequently, this case is not an appropriate

vehicle for addressing the continued existence of the

new value corollary.

“' The confirmation order in Coltex was stayed pending ap-

peal. Thus, the creditor's appeal in that case was not equitably

moot.

25>

Il.

THERE IS NO SPLIT IN THE CIRCUITS REGARDING

THE EXISTENCE OF THE NEW VALUE COROLLARY.

In addition to the Seventh Circuit in this case, the

Ninth Circuit in Jn re Bonner Mall Partnership, 2 F.3d

899 (9th Cir. 1993) has explicitly held that the new

value corollary survived enactment of the Bankruptcy

Code. No Circuit Court of Appeals has held otherwise."

Citing the Coltex and Bryson Properties decisions from

the Second and Fourth Circuits, the Bank asserts that

the opinion of the panel majority in this case conflicts

with the decisions of two other circuits. Petition at 11.

There is no such conflict. Neither Coltex nor Bryson

Properties denies the existence of the new value corol-

lary. On the contrary, as the Bank candidly acknow}-

edges, each of those decisions recognizes that there may

be circumstances under which a debtor’s equity holders

may retain their interest in a reorganized entity in ex-

change for an infusion of new capital. Those circum-

stances are present in this case.

In In re Bryson Properties, XVIII, 961 F.2d 496 (4th

Cir. 1991), Judge Restani of the United States Court of

International Trade, sitting by designation, held that

the debtor’s plan could not be confirmed because the

plan placed the undersecured creditor’s deficiency claim

in a separate class in violation of 11 U.S.C. § 1122.

“ The portion of the Fifth Circuit's opinion in Jn re Greystone

Ill Joint Venture, 995 F.2d 1274 (sth Cir. 1991) denying the

existence of the new value corollary was withdrawn in light of

this Court’s decision in Dewsnup v. Timm, 502 U.S. 410

(1992). See Greystone III at 1284. An opinion which has been

withdrawn has no precedential value. Alsberg v. Robinson, 68

F.3d 312, 315 (9th Cir. 1995).

Therefore, the court’s subsequent discussion of the new

value corollary is dictum. Even in that discussion, how-

ever, the court did not absolutely deny the continued

existence of the new value corollary. Rather, the court

observed that “even if some limited new value exception

were viable under the bankruptcy code, it would not be

so expansive as to apply under the facts of this case.” Id.

at 505 (emphasis added). Those facts were plan provi-

sions allowing the debtor’s equity holders the right (1)

to return of their new capital before the undersecured

creditor's recovery on it deficiency claim; (2) to “buy” the

debtor’s property without exposing it to the market or

otherwise allowing any other party, including the ob-

jecting undersecured creditor, the opportunity to bid;

and (3) to pay a 3.5 percent dividend in full satisfaction

of the undersecured creditor's $3,329,288 deficiency

while simultaneously paying unsecured trade claims in

full. Id. at 499, 504-505.

In Coltex Loop Central Three Partners, L.P. v.

BT/SAP Pool C Associates, No. 96-5140, slip op. (2d Cir.

Feb. 19, 1998) Judge Restani, this time writing for a

panel of the Second Circuit, again concluded that a

debtor may be able to confirm a new value cramdown

plan under certain circumstances:

{[wljhere no other party seeks to file a plan or

where the market for the property is adequately

tested, old equity may be able to demonstrate

that it can meet the requirements of 11 U.S.C.

§ 1129 and that, in essence, it receives nothing

on account of its prior position.

Although the discussion leading up to this conclusion

includes a lengthy quotation from Judge Kanne’s dissent

in this case, Judge Restani stops short of denying the

existence of the new value corollary.

Notably, the facts of this case are materially different

from the facts present in both Bryson Properties and

Coltex. In each of those cases, the court was properly

concerned that the proposed contributions of new capital

had not been tested by the marketplace to determine

whether those contributions were reasonably equivalent

to the value of the interests to be retained by the old

equity holders. The courts’ concerns arose because each

plan proposed to eliminate the undersecured creditor's

deficiency claim in exchange for a small up front cash

payment, thereby allowing equity holders to capture

future appreciation in the reorganized debtor's asset

that would otherwise been available to satisfy the elim-

inated deficiency claim. In this case, the Bank’s defi-

ciency claim is preserved, and the bankruptcy court had

ample, objective evidence to support its finding that the

interests which equity holders retained in Reorganized

LaSalle were not purchased at a bargain price. Under

the circumstances of this case, even Judge Restani

would have confirmed the Debtor’s Plan.

THE STATUS OF THE NEW VALUE COROLLARY IS

NO LONGER SUFFICIENTLY IMPORTANT TO RE-

QUIRE DECISION BY THIS COURT.

The issue of the new value corollary’s continued

existence has arisen primarily in Chapter 11 cases filed

by partnerships which own a single commercial real

estate project.” By filing Chapter 11, such partnerships

Prior to passage of the Bankruptcy Judges, United States

Trustees and Family Farmer Bankruptcy Act of 1986, family

farmers also filed r 11 cases in order to save their

attempt to prevent a foreclosure sale of the partner-

ship’s property and elimination of equity interests,

because those events trigger recapture of partnership

losses which have been passed through to partners

during prior tax years. 26 U.S.C. §§ 1001, 7701(g), 702.

The partners are required to treat those recaptured

losses as taxable income. Typically, the partners are left

without funds from the partnership with which to pay

the often sizeable tax on the resulting “phantom in-

come”.

In the 1986 Tax Reform Act, Congress amended the

Internal Revenue Code to eliminate the ability of

passive investors in single asset real estate partnerships

to offset losses which they received as limited partners

against wages and portfolio income. See Tax Reform Act

of 1986, P.L. 99-514, Section 501; 26 U.S.C. § 469. As a

result, partnerships, such as the former Debtor in this

case, have now largely lost their utility as a method for

passive investors to own commercial real estate. Conse-

quently, real estate investment trusts, whose shares are

publicly traded, have now largely supplanted limited

partnerships as the principal vehicle for passive inves-

tors to own interests in commercial real estate, and

sound economics, and not tax benefits, are now the

primary motivations for investing in commercial real

estate. Therefore, single asset real estate cases filed to

defer tax liabilities are approaching extinction.

Congressional amendments to the Bankruptcy Code

have also reduced the practical importance of the issue

of the new value corollary’s survival. As exemplified by

cases such as Norwest Bank Worthington v. Ahlers, 485

U.S. 197 (1988) the new value corollary often arose in

Chapter 11 cases filed to prevent lenders from foreclos-

ing on family farms. Congress responded to the plight of

family farmers with legislation. 8 Collier on Bankruptcy,

41200.01[b] at 1200-2 (15th ed. rev. 1997). In 1986, Con-

gress enacted the Bankruptcy Judges, United States

Trustees and Family farmer Bankruptcy Act of 1986

which added Chapter 12 to the Bankruptcy Code. Pub.

L. 99-554. Unlike Chapter 11, the cramdown provision

of Chapter 12, 11 U.S.C. 1225(b) does not require that

a plan be “fair and equitable” in order to be confirmed

over the objection of an unsecured creditor.

Thus, under a Chapter 12 plan, a family farmer may

use future earnings to retair its property over the

objection of an unsecured creditor which has not been

paid in full. 8 Collier on Bankruptcy, 41200.01(2)] at

1200-4 (15th ed. rev. 1997). As a result of Chapter 12,

family farmers no longer need to file Chapter 11 cases

in order to save their farms. Therefore, a case such as

Ahlers is now unlikely to recur.

Because of the foregoing legislative changes, the issue

which was important in 1994 when this Court granted

certiorari in the Bonner Mall case has ceased to be so

today." In effect, the foregoing legislative changes which

have occurred especially since the Ahlers decision, and

even since Bonner Mall, have transformed cases such as

this one into mere historical curiosities which no longer

require this Court’s attention.

‘* The continued existence of the new value corollary has cer-

tainly stimulated a steady stream of secondary literature. In

light of the legislative and economic changes which have di-

minished the likelihood of future litigation over the existence

of the new value corollary, this body of literature is now es-

sentially obsolete.

The Bank’s Petition attempts to paint a picture of

heated controversy in district and bankruptcy courts

over the continued existence of the new value corollary.

Petition at 12-13. Even if such a picture was accurate

five years ago at the time of the Bonner Mall decision,

the picture is dramatically different today. In the words

of the Bankruptcy Review Commission, which has rec-

ommended that Congress codify the new value corollary,

“{a] recent trend among bankruptcy and district courts

is an almost uniform recognition of the new value excep-

tion.” Commission Report at 561. Based on the settled

state of the law as it exists today, the Bank’s Petition

should be denied.

CONCLUSION

For the reasons set forth above, the Bank’s Petition