Amicus Curiae 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, U.S

7 FILED

) JUN 26 1998

No. 97-1418 | raat us Lie CLERK

In the Supreme Court of the Anited States

OCTOBER TERM, 1997

BANK OF AMERICA NATIONAL TRUST AND

SAVINGS ASSOCIATION, PETITIONER

203 NORTH LASALLE STREET PARTNERSHIP

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

SETH P. WAXMAN

Solicitor General

Counsel of Record

FRANK W. HUNGER

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

PATRICIA A. MILLETT

Assistant to the Solicitor

General

WILLIAM KANTER

BRUCE G. FORREST

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

SETS LE LE

QUESTION PRESENTED

Under Chapter 11 of the Bankruptcy Code of 1978, 11

U.S.C. 1101 et seq., a debtor’s plan of reorganization can be

imposed over the dissent of some creditors if the plan

meets certain criteria. One such requirement is the

“absolute priority rule,” which provides that, unless and

until unsecured creditors are paid in full, “the holder of

any claim or interest that is junior to the claims of such

class [of unsecured creditors] will not receive or retain

under the plan on account of such junior claim or interest

any property.” 11 U.S.C. 1129(b)(2)(B)(ii). The question

presented in this case is:

Whether a plan of reorganization that grants the

debtor’s equity owners an exclusive opportunity to retain

or purchase an ownership interest in the reorganized

debtor, without first paying a senior, objecting class of

unsecured creditors in full, violates the absolute priority

rule.

TABLE OF CONTENTS

Page

Interest of the United States ...............ccccccceececsseeeeeeeeeees l

SII tedtitetierinsrtcrinaretnennnetsetconasescoseepsovensetenecennctecees 2

SEITE MEUNIIIIEING cxccnssnevecnsseseteuyenssesesenescosestescessees 7

Argument:

Section 1129(b) of the Bankruptcy Code bars confir-

mation of a reorganization plan that permits the

debtor’s equity owners to retain or acquire property

over the objection of a senior, unpaid creditor

IE eelieetntesitieeneticemnnnscneonansnncceencacscesnsnsneecsccccesestecocoss 9

A. The plain language of the absolute priority rule

admits of no new value exception ................00 10

B. The legislative history recognizes no new value

exception to the absolute priority rule ............. 16

C. Rejection of a new value exception is consistent

with pre-Code practice ............cccccccceeeeeeeeeeeeeees 23

SITTIN Antnteseutradenencetentesustapenseccenssseenenoneccccenccenenececees 30

III, siislurtitidictindtaeiciasinamiapieenathidannnanentpacteeaseesenssceuseses la

TABLE OF AUTHORITIES

Cases:

A.V.B.1., Inc., In re, 143 B.R. 738 (Bankr. C.D. Cal.

Alicia eaditicinesdriceneaicemainmnerhnnnenenseunennsessees 11, 29

Bonner Mall Partnership, In re, 2 F.3d 899 (9th Cir.

1993), cert. dismissed, 513 U.S. 18 (1994) .......... 10, 12-13,

15, 21

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

Cir.), cert. denie’ 506 U.S. 866 (1992) ..............00. 10

Case v. Los Angeies Lumber Prods. Co., 308 U.S.

en 6, 17, 23, 24, 26

Cohen v. De La Cruz, 118 8. Ct. 1212 (1998) .......... 11, 14

Coltex Loop Central Three Partners, In re, 138 F.3d

I I irrietinisadennnnsangnuscanenmnebueserecccenee 10, 25

Consolidated Rock Prods. Co. v. Du Bois, 312 U.S.

IEE a ee ee 24

(IIT)

Cases—Continued: Page

Dewsnup v. Timm, 502 U.S. 410 (1992) ........... 23, 24, 28

Gozlon-Peretz v. United States, 498 U.S. 395

| eee 11

Greystone III Joint Venture, In re, 995 F.2d 1274

vacated in part, 995 F.2d 1284 (5th Cir. 1991), cert.

denied, 506 U.S. 821 (1992) ........ccccccce + cereeeees 10, 13, 25

Gulf Oil Corp. v. Copp Paving Co., 419 U 5. 186

ee 21

INS v. Cardoza-Fonseca, 480 U.S. 421 (1987) ........ 21

John Hancock Mutual Life Ins. Co. v. Harris Trust

& Sav. Bank, 510 U.S. 86 (1998) ..........ccccceceeeeeeeeees 22

Kansas City Terminal Ry. v. Central Union Trust

Co., 271 U.S. 445 (1926) .....ccccccccccrrsrrrererereereneeees 22, 23

Kawaauhau v. Geiger, 118 S. Ct. 974 (1998) ............ 13

Kelly v. Robinson, 479 U.S. 36 (1986) ...............c00000 24

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

908 F.2d 1351 (7th Cir. 1990) ..........ccccccceeeeeee 4, 10, 27, 28

Kroh Bros. Development Co., In re, 100 B.R. 487

(Bankr. W.D. Mo.), appeal denied, 101 B.R. 1000

CUB. Tie. GBD ccccccccscscenssevsccsssccesnccersenssteveuitecncsoces 29

Louisville Trust Co. v. Louisville N.A. & C. Ry.,

BUS TEA, GEG CD cececencecnscscstntnstnesersensesnetnntassmensces 16

Marine Harbor Properties v. Manufacturer's Trust

Car, SEF UD, TE CIBED ccccescesscscccsescvescosssssoctansescesess 24

Mason v. Paradise Irrigation Dist., 326 U.S. 536

eae 24, 25, 26

NLRB vy. Bildisco & Bildisco, 465 U.S. 513 (1984) .. 2

Northern Pacific Ry. v. Boyd, 228 U.S. 482

CIBBD ccccsnessertsnsccesncccestcccnsssnvsenessesentevinessinseetineanpeses 16

Norwest Bank Worthington v. Ahlers, 485 U.S.

BOT CRBBED nccoccececcssscesescscsecesocerscassense 2, 4, 10, 16, 24, 27, 29

Phillips v. Martin Marietta Corp., 400 U.S. 542

) | 14

Phillips v. Washington Legal Found., No. 96-1578

Beane 26, IBGE) ...ccccesccccesccssecosccccssesesecesenessesessenseseoss 10

Cases—Continued: Page

Railroad Co. v. Howard, 74 U.S. (7 Wall.) 392

GERD cecteactiinscitinivsigenisnnsenncinictinctepinessentiimaniduninnstaseenads 16

Shannon v. United States, 512 U.S. 573 (1994) ....... 11

Smiley v. Citibank (South Dakota), N.A., 517 US.

Pe ED acineccacsppinictesnnvenesadetasenematcipemaeningenaenessesss 14

Smith v. United States, 508 U.S. 223 (1993) ..... 13, 14, 15

Spallone v. United States, 493 U.S. 265 (1990) ....... 12

Toibb v. Radloff, 501 U.S. 157 (1991) ..........cccccceeeees 12

Turner Broadcasting System, Inc. v. FCC, 512

ee 12

Union Bank v. Wolas, 502 U.S. 151 (1991) ..... 16, 26, 28

United Savings Ass'n v. Timbers of Inwood Forest

Assoc., 484 U.S. 365 (1988) .................00sesssesseeeees 25, 26

United States v. Ron Pair Enterprises, Inc., 489

8 ae ees 2, 10, 15, 23, 25, 26

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

nerehip, 513 U.S. 18 (1994) ............ccececcosersrecesceeeseee 2, 24

U.S. Truck Co., In re, 300 F 2d 581 (6th Cir. 1986) .. 10

Statutes:

Bankruptcy Act of 1898, ch. 204, § 77(b), 47 Stat. 1475,

pS oe Ld 17, 25, 29

Bankruptcy Code, 11 U.S.C. (1970):

Ch. VITE, 11 U.S.C. 206 (1970) ...........cccccccccercesereseeee 16

eR 16

Ch. X, 11 U.S.C. 501-676 (1970) .............. 16, 17, 25, 26, 29

ey ee ee CIEE cdhtreeneepcatnceneminesnenennsene 16

Ch. XI, 11 U.S.C. 701-799 (1970) ................000.0000000 16, 25

Ch. XII, 11 U.S.C. 801-926 (1970) .........ccccceeceeecereeees 16

Code of 1978, Pub. L. No. 95-598, 92 Stat.

2549, 11 U.S.C. 101 et seg.:

28 ee 5

Ch. 5, 11 U.S.C, 501 et seq.:

ee Re ED cinenchdnaienteninnspaiediodinennbeuters 3, 5

Be Pes ED eevensorcnntsprsevencinssensessnscmnnsees 11

A yy 12

Oe Weel EOD cptrecinnpesemensenesepietiommpseteis ll

Statutes—Continued: Page

Ue 12

en 3

Ch. 11, 11 U.S.C. 1101 et seq. ...............cccceeeeees passim

BR CA BD erateintncersvcnmocmncscaneepesnnserstann 5

Rt \ ee 12

BS Ss RIED stetnienspnccecnsneneunipcesegserinmnensnnts 3

SR WS SIE pterasecccsdnnsasassenniccssentansanseesetes 3

BB Gees CIEE cbveianccncrepnsnccsngpentutesinnitionnoedia 3

RD le BD setnnettsennsccsccccesassesnnsismanmantniaition 3

SS Ge SD eptrecpensessernsetcepeniibiiiints 3, 6, 26

a 3, 7, 11, 14, 15, 17, 26, la

BE We BERD ceterccesnscccsscunessssnvsscsssins 3, 4, 26, la

ee 3, 2a

11 U.S.C. 1120 aX TAD) «.............0eceeereenees 12, 2a

12 U.S.C. LIZA TAB) ...........ccccssrrsseroveseeses 12, 2a

11 U.S.C. LIZBANB) ...............0cceecereeeees 3, 4, 26, 2a

RR 12, 3a

11 U.S.C. LIZHaNONC) ............cccrrrcrrcroveseeees 12, 3a

11 U.S.C. LIZA IO) ..............ccccccrercrcereeees 3, 6, 4a

By Wats SEED etenccncassscecsesevenissnicessudneenns 4, 7, 4a

ee 4, 26-27, 4a

Ue 4, 5a

11 U.S.C. LA29( DM 2KAMDD) .....eeeecceeeeeeeees 12, 5a

11 U.S.C. LIZADMANB) ..............cccrsrrerseeseseenees 4, 5a

11 U.S.C. LIZKOMZSABMi) ................000000e00 4, 12, 5a

11 U.S.C. 1129%b)\2)B)ii) ................... 4, 9, 12, 6a

RB ee 12, 6a

31 UB.C. DIZBENCNED) ...22...20..ccccccceceececesees 12, 6a

OO Ue 11

BD Fe SD ethatentsescnveevccasemcesnsentsscmeineepins 11

Uae 3, 11

FD Tle SERED cscnpescnnnecnsensdnmenmmininin 11

Miscellaneous:

The American Heritage Dictionary (1980) ................. 11

J. Ayer, Rethinking Absolute Priority after

Ahlers, 87 Mich. L. Rev. 963 (1989) .................. 16, 18, 25

D. Baird, The Elements of Bankruptcy (The

Foundation Press, Inc., 1993) .............c.-0ccserecserseeees 10

Vil

Miscellaneous—Continued: Page

B. Basil, The New Value Exception to Absolute

Priority in Bankruptcy, 101 Com. LJ. 290 (1996).... 29

Collier on Bankruptcy (15th ed. rev. 1998):

Wana: 0 euxtipinnsediabitasineniadthnnsttesteirienienidnimeataniitiateteentins 25, 26

aii Gi . cinaestinsidenertitasinnnittnsinnsctintabiitnbuenchdetipitityeatnbstittingsie 19

124 Cong. Rec. (1978):

i GUE steeneddienctubeinienetenedenninaniiimibetdameaiacseiedeeiens 20, 22

i TIEN cccncstsnpinniscinpesetapciatnninmensinaneuiminstinnsepteonsses 21

S. Jensen-Conklin, Do Confirmed Chapter 11

Plans Consummate?, 97 Com. L.J. 297 (1992) ......... 29

J. Franks & W. Torous, An Empirical

Investigation of U.S. Firms in Reorganization,

ab Es WEF CE ecncndcrptntiohbicneiemnatdtctidnetsesimarstene 27

H.R. 6, 95th Cong., Ist Sess. (1977) .........cccccccceeeeeeeeees 20

H.R. 31, 94th Cong., Ist Sess. (1975) .0............cccceeeeeees 19

H.R. 32, 94th Cong., Ist Sess. (1975) ...........cccccceeeeeeees 19

H.R. 31 and H.R. 32: Bankruptcy Act Revision:

Hearings Before the House Subcomm. on Civil and

Constitutional Rights of the Comm. on the Judi-

ciary, 94th Cong., 2d Sess. Pts. 1-4 (1976) ................ 19-20

H.R. 7330, 95th Cong., Ist Sess. (1977) ............c.cc000000 20

H.R. 8200, 95th Cong., Ist Sess. (1977) ..............00000000 20

H.R. 10792, 93d Cong., Ist Sess. (1973) ..............ccc00e- 19

H.R. 16643, 93d Cong., 2d Sess. (1974) .0..........ccccceceeee 19

H.R. Doc. No. 137, 93d Cong., Ist Sess. (1973) ........... 19

H.R. Rep. No. 595, 95th Cong., Ist Sess. (1977) ....... 16, 17,

18, 19, 20, 22, 27, 28

L. LoPucki & W. Whitford, Bargaining over

Equity’s Share in the Bankruptcy Reorganization

of Large, Publicly Held Companies, 139 U. Pa. L.

Bs PIED conkosncutcinsiniaansinittemepeapepensinainmieses 27

B. Markell, Owners, Auctions, and Absolute

Priority in Bankruptcy Reorganizations, 44 Stan.

ar OI TECTED nenicicncrihisihinitandennetnaianebibbcitiomnsteines 25

The Random House Dict. of the English Language (2d

GE TENE canctsnninsdpticnsrenpieviibiitiadiinsrmesnisnntigusitimatenanions 11

S. 235, 94th Cong., Ist Sess. (1975) .............cccceeeeeeeeeees 19

S. 236, 94th Cong., Ist Sess. (1975) .........cccccccececeeeeeeees 19

Vill

Miscellaneous—Continued: Page

S. 235 and S. 236: The Bankruptcy Reform Act:

Hearings Before the Senate Subcomm. on Improve-

ments in Judicial Machinery of the Comm. on the

Judiciary, 94th Cong., Ist Sess. Pt. 2 (1975) .........++. 20

S. 2565, 93d Cong., Ist Sess. (1973) ........ccccceeeeeeeeerees 19

S. 2266, 95th Cong., Ist Sess. (1977) .......cccecceeeeeeeeeeenes 20

S. 4046, 93d Cong., 2d Sess. (1974) ........c:cccsseeeeeeeeeerees 19

S. Rep. No. 989, 95th Cong., 2d Sess. (1978) ... 17, 18, 20, 22

Webster's Third New International Dictionary

CROWS). .occcscesccescscnsscnschesniesossssescocnesesussngatasesnsonneneees 11,12

In the Supreme Court of the United States

OCTOBER TERM, 1997

No. 97-1418

BANK OF AMERICA NATIONAL TRUST AND

SAVINGS ASSOCIATION, PETITIONER

Vv.

203 NORTH LASALLE STREET PARTNERSHIP

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

INTEREST OF THE UNITED STATES

The United States appears as a creditor in approxi-

mately 12,000 to 15,000 bankruptcy reorganization pro-

ceedings a year. A number of federal agencies—including

the Department of Housing and Urban Development, the

Rural Utility Service, the Maritime Administration, and

the Commerce Department’s Economic Development Ad-

ministration—frequently appear as the major creditor in

single-asset bankruptcy reorganizations analogous to the

case at hand. The Internal Revenue Service appears in

approximately 10,000 Chapter 11 cases annually, enforcing

governmental claims averaging $1.75 billion in aggregated

value. Other federal agencies, such as the Small Business

Administration, the Department of Agriculture’s Farm

Service Agency and Rural Housing Service, and the Fed-

eral Deposit Insurance Corporation, also often participate

as creditors in bankruptcy proceedings.

(1)

This case presents the question whether a Chapter 11

reorganization plan can grant the debtor’s equity owners

an exclusive opportunity to acquire or retain property in

the reorganized debtor before senior, unsecured creditors

are paid in full. Such plans of reorganization, by allowing

equity holders to acquire or retain property interests

while the claims of the United States go unpaid, would im-

pose an unwarranted burden on the public fise and could

adversely affect the operation of important governmental

programs, such as the provision of low-income housing. In

addition, the perpetuation or extension of loan relation-

ships that such plans frequently entail would require

taxpayers, in effect, to subsidize reorganization plans that

the federal government has concluded are not in the public

interest. Accordingly, the United States has an important

stake in the resolution of this case. '

STATEMENT

1. The Bankruptcy Reform Act of 1978, Pub. L. No. 95-

598, 92 Stat. 2549, comprehensively revised bankruptcy

law. See United States v. Ron Pair Enterprises, Inc., 489

U.S. 235, 238 (1989). As part of this effort, Congress en-

acted Chapter 11 “with the intention that business reor-

ganizations should be quicker and more efficient and

provide greater protection to the debtor, creditors, and the

public interest.” NLRB v. Bildisco & Bildisco, 465 U.S.

513, 517 n.1 (1984). The objective of a Chapter 11 proceed-

ing is judicial confirmation of a plan of reorganization that

restructures and reschedules the debtor’s obligations so

that the once-insolvent debtor may emerge as an ongoing

concern. See id. at 528.°

! We also participated in the two cases that previously presented

this issue to the Court. U.S. Amic. Br., Norwest Bank Worthington v.

Ahlers, 485 U.S. 197 (1988) (No. 86-958), and U.S. Bancorp Mortgage Co.

v. Bonner Mall Partnership, 513 U.S. 18 (1994) (No. 93-714).

2 Individuals, as well as businesses, can pursue reorganization un-

der Chapter 11. Toibb v. Radloff, 501 U.S. 157, 160-166 (1991). Individ-

During the first 120 days after a Chapter 11 petition is

filed, only the debtor may file a plan. 11 U.S.C. 1121(b).

This period of exclusivity may be extended “for cause.” 11

U.S.C. 1121(d). The debtor’s plan will generally group

creditors into classes based on the substantial similarity

of their claims. 11 U.S.C. 1122(a). A single creditor may

have more than one claim, thus placing it in more than one

class. For example, under 11 U.S.C. 506(a), a federal

agency that has a loan secured by property may have its

claim bifurcated into a secured claim for the appraised

value of the property and an unsecured, deficiency claim

for the difference remaining between the appraised value

and the balance of the loan.

Section 1129 of Chapter 11 sets forth two alternative

paths for judicial confirmation of a reorganization plan.*

First, Section 1129(a) details thirteen requirements for

confirmation of a plan based on the consent of the creditor

classes. A class of creditors is deemed to have accepted a

plan if their claims are unimpaired—that is, they retain all

of their pre-petition legal, equitable, and contractual

rights against the debtor. See 11 U.S.C. 1124, 1129(a)(8).

Alternatively, a class of creditors accepts a plan if a major-

ity of the creditors and two-thirds of the total dollar

amount of the claims within that class vote to approve the

plan. 11 U.S.C. 1126(c), 1129%a)(8). Such consent plans

must be approved by at least one class whose claims are

impaired. 11 U.S.C. 1129(a)(10). In addition, each individ-

ual creditor who opposes the plan must receive compensa-

tion in an amount that is at least equivalent to what

would be received in a Chapter 7 liquidation. 11 U.S.C.

1129(a)(7)(A).

ual Chapter 11 petitions are uncommon, however. Individuals gener-

ally prefer Chapter 13’s simplified proceedings for rescheduling con-

sumer debt. 11 U.S.C. 1301 et seq.

% The text of 11 U.S.C. 1129 is reproduced as an appendix to this

brief.

The second route to confirmation is commonly known as

a “cramdown,” because it imposes the plan over the dissent

of an impaired creditor class. See Kham & Nate’s Shoes

No. 2, Inc. v. First Bank, 908 F.2d 1351, 1359 (7th Cir.

1990). As long as all of the requirements of Section 1129(a)

— except, of course, Section 1129(a)(8)’s consent criterion

— are satisfied, the objection of an impaired creditor class

can be overridden if “the plan does not discriminate un-

fairly, and is fair and equitable, with respect to each class

of claims or interests that is impaired under, and has not

accepted, the plan.” 11 U.S.C. 1129(b)(1).

Paragraph (2) of Section 1129(b) sets forth the minimum

requirements for a proposed plan of reorganization to be

deemed “fair and equitable.” Subparagraph (B) provides

that, with respect to unsecured claims, a plan is “fair and

equitable” only if the allowed value of the claim is paid in

full, 11 U.S.C. 1129(b)(2)(B)G), or if

the holder of any claim or interest that is junior to the

claims of such [impaired, unsecured] class will not

receive or retain under the plan on account of such

junior claim or interest any property.

11 U.S.C. 1129(b)(2)(B)Gi). The latter requirement is

known as the “absolute priority rule.” See, e.g., Norwest

Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988).*

2. Respondent is an Illinois limited partnership that

owns 15 floors of office space in a building in Chicago’s

central business district. Pet. App. 2a. Petitioner holds a

non-recourse mortgage on the office property as security

for a $93 million loan. Jbid. Respondent defaulted in

January 1995. Shortly thereafter, petitioner’s predecessor

began foreclosure proceedings in state court. Jbid. Re-

spondent promptly filed a voluntary petition for reorgani-

4 Even if a plan satisfies all of paragraph 2’s minimum require-

ments, the court still must independently determine that the plan is

“fair and equitable.” 11 U.S.C. 1129(b)(1) and (2).

zation under Chapter 11, which automatically stayed the

foreclosure proceeding. Jbid.; 11 U.S.C. 362.

Petitioner is the major creditor in the bankruptcy pro-

ceeding. The only other outside creditors were a state

claim for real estate taxes and $90,000 in trade debt. Pet.

App. 3a, 103a. Respondent’s available assets were the

property and a cash account of approximately $8 million.

Id. at 103a. The bankruptcy court valued the office space

at $54.5 million. The court thus allowed petitioner a se-

cured claim in the amount of $54.5 million and an unse-

cured claim of $38.5 million, which reflected the deficiency

between the actual property value and the remaining debt

owed by respondent. See 11 U.S.C. 506(a), 1111(b).

It is undisputed that respondent’s primary motivation

for seeking reorganization was to retain ownership of the

property so that its partners could avoid approximately

$20 million in personal tax liabilities that would come due

upon a sale of the real estate. Pet. App. 3a, 59a. Accord-

ingly, respondent proposed a plan under which its partners

would contribute $6.125 million over the course of five

years and, in exchange, would retain an ownership inter-

est in the reorganized debtor. The trade creditors and

state tax claim would be paid in full. Petitioner’s secured

claim would be paid, but under new terms: prompt cash

payment of $1,149,500 plus a secured, 7-year note (ex-

tendable to 10 years at the debtor’s option). In addition,

petitioner would receive a “commitment fee” and a 50%

“participation interest” in the value of the Property at the

end of the note period. Id. at 4a-5a, 57a-59a.

® The plan proposed a fee between $266,975 and $545,000; the court

set the fee at $266,975. Pet. App. 127a n.4.

6 From the remaining value of the property at the time of sale or

refinance, payments would occur in the following order: “(a) on peti-

tioner’s unsecured deficiency claim, payment in full, without interest;

(b) for the new capital contributions, payment in full, with interest at

varying rates; (c) on the second mortgage held by the general partner,

Petitioner opposed the plan, but the class of trade credi-

tors voted to accept it." The bankruptcy court approved

the plan over petitioner’s objection that it violated the

absolute priority rule. Pet. App. 135a-140a. Th» district

court affirmed. /d. at 79a-82a.

3. Adivided panel of the Seventh Circuit affirmed. Pet.

App. la-47a. The majority ruled that this Court’s decision

in Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106

(1939), established a new value exception to the absolute

priority rule. Pet. App. 14a. The majority acknowledged

that, “[aJs a matter of abstract logic, and certainly of se-

mantics,” respondent’s partners were “receiving or re-

taining” property under the plan “on account of” their “old

equity interest” in the debtor, within the meaning of the

absolute priority rule. Jd. at 17a. The court determined,

however, that Congress “might well have intended” to

require “a more direct causation.” Jbid. Under this read-

ing, the partners were “allowed to participate in the reor-

ganized entity ‘on account of’ a new, substantial, neces-

sary and fair infusion of capital,” rather than on account of

their interest in the debtor. /bid.

Judge Kanne dissented. Pet. App. 32a-46a. He concluded

that the new value exception crafted by the majority “be-

littles the straightforward language of § 1129(b)(2)(B)(ii)”

and overlooks that the debtor’s partners were permitted to

infuse new value into the debtor solely “‘on account of’

full payment with 10% simple interest; and (d) to the debtor’s partners

in proportion to their contribution of new capital.” Pet. App. 58a.

* Because the plan classed petitioner’s unsecured claim separately

from the trade creditors’ unsecured claims, petitioner’s opposition did

not suffice to halt the plan. See 11 U.S.C. 1126(c), 1129%a)(10). The

bankruptcy court rejected petitioner’s contention that the classifications

were gerrymandered to obtain the requisite approval by a single class.

Pet. App. 147a-152a. Petitioner did not seek this Court’s review of that

issue. Petitioner raised a number of other objections to the plan (id. at

114a-135a, 141la-154a), but it did not seek this Court’s review of those

questions either.

their unique status as prior equity holders.” Jd. at 34a.

Judge Kanne further noted that, in the immediately pre-

ceding subsection of Section 1129, the phrase “‘on account

of such claim’ takes a simple, ordinary ‘but for’ or ‘because

of’ meaning,” and urged that the identical words in the two

subsections should be given the identical meaning. /d. at

37a. In addition, the dissent challenged the majority’s

assumption that Congress implicitly incorporated the new

value exception into the 1978 Bankruptcy Code. /d. at 41la-

42a. Finally, the dissent pointed out that the new value

exception “creates an anachronism by cutting and pasting

pre-Code practice into a fundamentally different bank-

ruptcy context.” Jd. at 46a.

SUMMARY OF ARGUMENT

As evidenced by the plain language, structure, and

legislative history of the Bankruptcy Code, Congress in-

tended the absolute priority rule to be absolute. Respon-

dent’s attempt to engraft a new value exception onto

Section 1129(b) rests upon an unnatural and artificial con-

struction of the statutory text and relies upon 40-year-old

dicta and policy arguments that have little modern cur-

rency due to Congress’s fundamental restructuring of

bankruptcy law in 1978. If Congress had wanted to craft

an exception for new value or to permit debtors to retain

property interests in advance of creditors, it would have

said so explicitly, as it has in other chapters of the

Bankruptcy Code.

1. The absolute priority rule prohibits confirmation of

any plan under which the owners of a failed business retain

or receive property “on account of” their interest in the

debtor while objecting senior creditors go unpaid. As it

does throughout Chapter 11, “on account of” means “for”

or “because of.” The phrase thus refers to the basis on

which the holder of a claim or interest has some

entitlement to the debtor’s property.

The office space retained by and the equity interests ac-

quired by the debtor’s owners in this case were “on

account of” their prior equity claims. The owners’ claim

or interest in the debtor was the defining criterion for

acquiring property under the plan. Money alone was

insufficient. The court of appeals, in effect, read the

absolute priority rule to prohibit junior interests from

acquiring property ahead of senior unpaid claimants only

when that property is obtained “entirely on account of” or

“solely on account of” a prior, junior interest, and not

where new money is also contributed. Such words of

limitation, however, make no appearance in the statutory

text, and judicial imposition of such a construction would

be inconsistent with the phrase’s meaning elsewhere in

Chapter 11.

2. Resort to legislative history is unnecessary because

the statutory text forecloses the new value exception. In

any event, the history of the Bankruptcy Reform Act of

1978 confirms the inappropriateness of reading such an

exception into the absolute priority rule. The exception

makes no appearance in the House or Senate Report, and

the categorical terms in which the House Report speaks

counsel against such a substantial deviation from the stat-

ute’s text. Congress, moreover, considered and rejected

proposed bills that explicitly contained a new value excep-

tion. Congress chose, instead, to allow voting by classes of

claimants and the economic interests of creditors to deter-

mine whether a debtor’s plan to infuse capital is workable

and in the creditors’ best interests. Allowing the debtor

and the bankruptcy court to impose a new value plan over

the objection of a major creditor, as occurred here, would

frustrate Congress’s carefully calibrated scheme and fun-

damentally skew the balance between debtors and credi-

tors struck by Chapter 11.

3. Modification of the statutory text cannot be justified

on the ground that Congress implicitly incorporated the

new value exception into the Bankruptcy Code. At the

time the Code was enacted, the new value exception lived

only in infrequent dicta. Neither this Court nor any other

decisions of which we are aware had upheld imposition of a

new value plan over the objection of a dissenting creditor.

A rule of statutory construction that places on Congress

the burden of expressly disavowing every bankruptcy op-

tion mentioned in dicta would be both inappropriate and

unworkable.

The bankruptcy world in which the new value dicta were

uttered, moreover, bears little resemblance to that gov-

erned by the 1978 Bankruptcy Code. Under prior law, a

single, minority creditor could derail a reorganization

plan over the consent of all creditor classes. The provision

for class-based consent to plans in the 1978 Bankruptcy

Code eliminates that problem. Thus, new value plans

under the modern Bankruptcy Code would serve, not to

circumvent the gadfly creditor, but to impose a plan over

the objection of the debtor’s largest creditor. There is no

adequate basis to believe that Congress’s plainly worded

absolute priority rule was intended to permit—as occurred

here—schemes that leave property in the hands of the

very owners who presided over the business’s insolvency

solely to perpetuate their tax shelter, while the property’s

major creditor goes unpaid.

ARGUMENT

SECTION 1129(b) OF THE BANKRUPTCY CODE

BARS CONFIRMATION OF A REORGANIZATION

PLAN THAT PERMITS THE DEBTOR'S EQUITY

OWNERS TO RETAIN OR ACQUIRE PROPERTY

OVER THE OBJECTION OF A SENIOR, UNPAID

CREDITOR CLASS

The “absolute priority rule” provides that the “holder of

any claim or interest that is junior to the claims of” an

unsecured and unpaid creditor class “will not receive or

retain under the plan on account of such junior claim or

interest any property.” 11 U.S.C. 112%b)(2)B)(ii). Here,

the equity interests of respondent’s owners are unques-

tionably junior to petitioner’s unsecured deficiency claim.

Nor is there any doubt that the plan permitted the junior

equity interests both to retain and receive “property.”

The owners retained possession of the office space and

received the exclusive option to purchase ownership

interests in the reorganized debtor.” The only question is

whether that property was received and retained “on

account of” the owners’ equity interest in the debtor. The

language, structure, and legislative history of Chapter 11

leave no doubt that it was.’

A. The Plain Language Of The Absolute Priority Rule

Admits Of No New Value Exception

1. The task of determining whether an unwritten new

value exception exists “begins where all such inquiries

must begin: with the language of the statute itself.”

United States v. Ron Pair Enterprises, Inc., 489 U.S. 235,

241 (1989). Nothing in the text of Chapter 11 recognizes or

supports the existence of a new value exception. To the

contrary, the absolute priority rule is (true to its name)

* See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207-208

(1988); see also Phillips v. Washington Legal Found., No. 96-1578 (June

15, 1998), slip op. 12; In re Coltex Loop Central Three Partners , 138 F 3d

39, 43 (2d Cir. 1998); In re Bryson Properties, XVIII, 961 F.2d 496, 504

(4th Cir.), cert. denied, 506 U.S. 866 (1992); Kham & Nate's Shoes No. 2,

Inc. v. First Bank, 908 F.2d 1351, 1360 (7th Cir. 1990); D. Baird, The

Elements of Bankruptcy 261 (1993) (“The right to get an equity interest

for its fair market value is ‘property’ as the word is ordinarily used.

Options to aequire an interest in a firm, even at its market value, trade

for a positive price. They are bought and sold every day.”).

% The courts of appeals have split on this question. Compare Coltez,

138 F.3d at 42-45 (no new value exception); Jn re Greystone Ill Joint

Venture, 995 F.2d 1274, 1282-1284 (same), vacated in part, 995 F.2d 1284

(5th Cir. 1991), cert. denied, 506 U.S. 821 (1992), with Pet. App. la-3la

(new value exception exists); Jn re Bonner Mall Partnership, 2 F.3d

899, 906-917 (9th Cir. 1993) (same), cert. dismissed, 513 U.S. 18 (1994);

see also Bryson , 961 F.2d at 503-505 (new value exception is question-

able) (dicta); In re U.S. Truck Co., 800 F.2d 581, 588 (6th Cir. 1986)

(assuming that new value exception exists).

absolute in its terms. The new value exception relied upon

by the court of appeals thus “has no statutory reference

point.” Shannon v. United States, 512 U.S. 573, 583 (1994).

By contrast, when Congress wishes to carve out excep-

tions to its general rules based on the payment of “new

value,” it does so explicitly. See 11 U.S.C. 547(a\(2) and (c)

(exception to power of trustee to avoid certain pre-petition

transfers). Similarly, where Congress intends to permit

debtors to retain some property before creditors are paid

in full — as in Chapters 12 and 13 of the Bankruptcy Code

— it omits the absolute priority rule from the criteria for

confirmation of a plan. 11 U.S.C. 1225, 1325; see also In re

A.V.B.1., Inc., 143 B.R. 738, 747 (Bankr. C.D. Cal. 1992).

“(Wjhere Congress includes particular language in one

section of a statute but omits it in another section of the

same Act,” courts must “presume[] that Congress acts in-

tentionally and purposely in the disparate inclusion or

exclusion.” Gozlon-Peretz v. United States, 498 U.S. 395,

404 (1991).

2. The statutory language, moreover, is unambiguous

in prohibiting new value plans. According to the absolute

priority rule, until senior creditors are paid in full, junior

claimants may not obtain any property “on account of”

their junior interest in the debtor. The common under-

standing of the phrase “on account of,” both now and at the

time the Bankruptcy Code was enacted, is “for,” “because

of,” and “by reason of.”” Throughout Chapter 11, and Sec-

tion 1129 in particular, the phrase “on account of” appears

in a context that confirms that ordinary meaning because

it describes the basis on which a claimant: may receive

” See, e.g., The Random House Dict. of the English Language 13

(2d ed. 1987); Webster's Third New Int! Dictionary 13 (1976); The

American Heritage Dictionary 9 (1980), cf. Cohen v. De La Cruz, 118 8.

Ct. 1212, 1217 (1998) (under Bankruptcy Code, debt “for” means debt “on

account of”).

property of the debtor." In other words, in bankruptcy

proceedings, creditors receive property distributions

“for,” “because of,” and “on account of” their respective

claims and interests in the debtor.”

Even outside the bankruptcy context, “on account of” is

generally accorded a similar connotation. See, e..,

Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622,

641 (1994) (discussing government action “that stifles

speech on account of its message”); Spallone v. United

States, 493 U.S. 265, 268 (1990) (discussing housing dis-

crimination “on account of race or national origin”).

The plan explicitly provided for the debtor’s owners to

retain and receive property “because of” and “by reason

of” their equity interests in the debtor. The plan gave the

partners the exclusive right to contribute new capital and

receive, in exchange, ownership shares in the reorganized

debtor. J.A. 37-39. No other creditor, participant in the

bankruptcy proceeding, or outsider was eligible to receive

that property. The owners’ “junior claim or interest” in

the debtor, 11 U.S.C. 1129(b)(2)(B)\(ii), thus defined their

eligibility both to retain possession of the office space and

to obtain shares in the reorganized debtor. It would

therefore blink reality to say that the owners did not ob-

tain property “because of” or “on account of” their equity

holdings in the debtor.” .

MN See, e.g., 11 U.S.C. 1111(b) 1A); 11: U.S.C. 112%aX 7 AMii) and

(B), (aX9M A) and (C); 11 U.S.C. 112%b)2(AKDCUD, (2B), (20CKi)

and (ii).

Other provisions of the Bankruptcy Code employ the phrase in a

similar manner. See, e.g., 11 U.S.C. 547(b)(2), 547(cX 4B). Webster's

also adds “for the sake of” to its definition of “on account of.” Webster's

Third , supra, at 13. That definition is unhelpful to respondent and is an

unnatural connotation for the phrase as it appears in other sections of

the Code.

% Itis sometimes suggested that such exclusivity simply reflects

the fact that no one other than the debtor's owners would want to

acquire interests in an insolvent business. E.g., Bonner Mall, 2 F.3d at

3. While both courts of appeals that have recognized a

new value exception invoked the alleged ambiguity of Con-

gress’s language to justify resort to non-textual interpre-

tation, neither court, in fact, had difficulty understanding

the absolute priority rule’s ordinary meaning. The Sev-

enth Circuit candidly acknowledged that “[aJs a matter of

abstract logic, and certainly of semantics,” the owners’

acquisition and retention of property was “on account of”

their equity interests in the debtor. Pet. App. 17a. Like-

wise, the Ninth Circuit in Jn re Bonner Mall Partner-

ship, 2 F.3d 899 (1993), cert. dismissed, 513 U.S. 18 (1994),

“recognize[d] that in some larger sense the reason that

former owners receive new equity interests in reorgan-

ized ventures is that they are former owners.” /d. at 909.

Both courts nevertheless concluded that Congress in-

tended a “more direct causation,” and thus ruled that the

property interests were obtained “on account of” the infu-

sion of new capital. Pet. App. 17a; see also Bonner Mall, 2

F.3d at 909. There are three flaws in that reasoning.

First, that construction rests on an artificial single-

ness of causality. The court of appeals effectively inserted

“solely” or “entirely” in front of the phrase “on account

of,” insisting that the junior claim or interest be the ex-

clusive cause for the property acquisition. “Had Congress

intended the narrow construction” that the court of

appeals adopted, “it could have so indicated. It did not, and

{this Court should] decline to introduce that additional

requirement on [its] own.” Smith v. United States, 508

U.S. 223, 229 (1993); see also Kawaauhau v. Geiger, 118 S.

Ct. 974, 977 (1998) (declining to adopt interpretation of

911. Even if accurate, that observation would not change the plain

language of the statute its signification. Furthermore, major

creditors may well be inte ed in acquiring shares in the reorganized

debtor so that they can ob_.in a controlling interest in the business and

thus dictate its future operation or dissolution. See Greystone, 995 F 2d

at 1283.

Bankruptcy Code where, if Congress so intended, “Con-

gress might have selected an additional word or words”).

Such a straitened reading, moreover, does not comport

with ordinary usage. Indeed, under most plans, a claimant

is not paid solely or entirely because of its claim, but also

because the debtor believes that the manner in which pay-

ment is allotted will increase the prospects for business

revitalization or for plan confirmation. That the phrase

“on account of” is sufficiently capacious to embrace more

than one causative factor at a time does not justify alter-

ing or limiting its core meaning.“

In addition, “on account of” does not appear in contra-

distinction to any words or phrases that warrant accord-

ing it such a narrow reading. See Smith, 508 U.S. at 229;

Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735,

746-747 (1996). Nor, given the proliferation of the phrase

“on account of” throughout Section 1129, would there have

been any reason for Congress to impose such a cramped

construction in those other contexts. See Cohen, 118 S.

Ct. at 1217 (“equivalent words have equivalent meaning

when repeated in the same statute”).

Second, the court of appeals’ reasoning overlooks that

the plan afforded the equity holders an option to purchase

shares before they contributed any capital at all. The

acquisition of that property interest — the option to pur-

chase new shares — was entirely and exclusively attribut-

able to the partner’s junior equity interest in the debtor.

The plan did not offer any creditor, or anyone else for that

matter, an equivalent opportunity to purchase interests in

the reorganized debtor.

Third, the court of appeals’ ruling fails its own direct

causation test. The contribution of new money alone could

4 Cf. Smith, 508 U.S. at 228-237 (“use” of a firearm includes both

use as a firearm and for barter); Phillips v. Martin Marietta Corp. , 400

U.S. 542, 544 (1971) (employment discrimination against women with

pre-school-age children constitutes discrimination on account of sex)

(per curiam).

not entitle a person to equity interests under the plan.

Otherwise, petitioner or another creditor could have pur-

chased a controlling interest in respondent. While the

willingness to pay money was a necessary condition of the

purchase, it was not sufficient. Status as the holder of an

existing equity interest was the indispensable prerequi-

site to participation in the sale.”

4. Holding that the owners acquired property “on

account of” or because of their equity interests would not,

as some have suggested, render the phrase surplusage.

See Bonner Mall, 2 F.3d at 909. The “on account of”

language identifies for which claim persons are receiving

property under a plan. The phrase, in other words, makes

clear that the absolute priority rule is claim specific,

rather than creditor specific. Bankruptcy creditors can,

and often do, have more than one type of claim. “On ac-

count of” ensures that, while those creditors cannot re-

ceive property because of their equity interests ahead of

an unsecured creditor, payments on account of their

separate secured and non-junior unsecured claims will not

run afoul of the absolute priority rule.

5. Just as the task of construing Section 1129 begins

with its plain text, “{iJn this case it is also where the in-

quiry should end, for where, as here, the statute’s lan-

guage is plain, the sole function of the courts is to enforce

it according to its terms.” Ron Pair, 489 U.S. at 241

(internal quotation marks omitted). Given the precision

with which Congress has spoken, “reference to legislative

history and to pre-Code practice is hardly necessary.”

Ibid. Policy arguments and (alleged) historical practice

alone cannot justify the creation of “an extra-statutory

doctrine,” Bonner Mall, 2 F.3d at 910 n.25. In any event,

The court of ay als erred in finding the statutory text ambigu-

ous merely because sume courts and law professors disagree about its

construction. See, e.g., Smith, 508 U.S. at 227-237 (ordinary meaning of

“use” discerned entirely from statutory text; despite inter-circuit con-

flict and dissent of three Justices).

neither the legislative history nor pre-Code practice

supports the court of appeals’ decision.

B. The Legislative History Recognizes No New Value

Exception To The Absolute Priority Rule

“Given the clarity of the statutory text, respondent’s

burden of persuading [the Court] that Congress intended

to create or to preserve a special rule” for new value plans

“is exceptionally heavy.” Union Bank v. Wolas, 502 U.S.

151, 155-156 (1991). The legislative history of the Bank-

ruptey Reform Act provides respondent no assistance in

that task.

1. The predecessor to the 1978 Bankruptcy Code con-

tained four separate reorganization chapters: Chapter

VIII, 11 U.S.C. 205 (1970), governed railroad reorganiza-

tions; Chapter X, 11 U.S.C. 501-676 (1970), covered corpo-

rate reorganizations; Chapter XI, 11 U.S.C. 701-799 (1970),

regulated arrangements and compositions for corpora-

tions, partnerships, and individuals; and Chapter XII, 11

U.S.C. 801-926 (1970), established reorganization proce-

dures for non-corporate entities engaged in real estate.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 221 (1977). Of the

four, only Chapters VIII and X predicated confirmation of

a reorganization plan on a finding by the court that the

plan was “fair and equitable.” See 11 U.S.C. 205(e), 621

(1970). Those sections, however, offered no definition of

“fair and equitable.” It was in the course of defining the

“fair and equitable” standard that courts adopted the abso-

lute priority rule to limit insider collusion. Ahlers, 485

U.S. at 202."

(1913) (absolute priority rule prevents senior creditors and stockholders

from colluding to impair the interests of intermediate creditors); Louis-

ville Trust Co. v. Louisville N.A. & C. Ry., 174 U.S. 674, 684 (1899);

Railroad Co. v. Howard, 74 U.S. (7 Wall.) 392, 409-411 (1869); J. Ayer,

Rethinking Absolute Priority after Ahlers, 87 Mich. L. Rev. 963, 1022

(1989).

By the time of Case v. Los Angeles Lumber Prods. Co.,

308 U.S. 106 (1939), the absolute priority rule had become a

“fixed principle” for the determination of whether reor-

ganization plans satisfied the “fair and equitable” stan-

dard. Jd. at 116. In Los Angeles Lumber, this Court re-

fused to confirm a reorganization plan under Section 77(b)

of the Bankruptcy Act of 1898, ch. 204, 47 Stat. 1475, 11

U.S.C. 205(e) (1934) (Chapter X’s predecessor), because it

violated the absolute priority rule. 308 U.S. at 122-132.

The Court ruled that the stockholders’ pledge of their

“financial standing and influence in the community” and

the “continuity of management” constituted too “ephem-

eral” a contribution to justify retention of ownership in-

terests in the reorganized enterprise at the expense of

unpaid senior creditors. Jd. at 122-125. The Court stated

in dicta, however, that “there are circumstances under

which stockholders may participate in a plan of reor-

ganization of an insolvent debtor.” Jd. at 121. Where the

old stockholders’ participation is a “necessity” and they

“make a fresh contribution and receive in return a partici-

pation reasonably equivalent to their contribution,” the

Court explained, “the creditor cannot complain that he is

not. accorded his full right of priority against the corpo-

rate assets.” /d. at 121-122 (internal quotation marks

omitted). Nothing in the legislative history suggests that

Congress intended to incorporate those new value dicta

into the absolute priority rule it codified in Section 1129.

2. Neither the House nor the Senate Report mentions,

let alone supports, the existence of the new value excep-

tion discussed in Los Angeles Lumber. See H.R. Rep. No.

595, supra; S. Rep. No. 989, 95th Cong., 2d Sess. (1978).

The House Report does note the Los Angeles Lumber

decision. H.R. Rep. No. 595, supra, at 222n.8. The citation

only indicated, however, that the absolute priority rule

applied to Chapter X reorganizations. That statement

could hardly be characterized as an endorsement of the

new value dicta.

Indeed, the House Report’s discussion of the absolute

priority rule is emphatic and unconditional -in its breadth.

“Simply put, the bill requires that the plan pay any

dissenting class in full before any class junior to the

dissenter may be paid at all.” H.R. Rep. No. 595, supra, at

224 (emphasis added). Under the absolute priority rule,

the Report reiterated, if an impaired class is paid less than

in full, “then no class junior [to it] may receive anything

under the plan.” Jd. at 413 (emphasis added)."

Furthermore, the House Report acknowledged that its

codification of the absolute priority rule did not entail a

wholesale importation of the judicially created rule. Id. at

224 (“The rule is a partial application of the absolute

priority rule now applied under chapter X.”); id. at 414.

Because Congress explicitly modified the scope of the

judicial rule it incorporated, this Court should be

especially reluctant to superimpose additional judicial

glosses on the statutory text.

3.a. The evolution of the bankruptcy reform legislation

also evidences Congress’s intention not to codify a new

value exception to the absolute priority rule. In this

regard, “it is crucial here to grasp not only what Congress

did, but what it chose not to do.” J. Ayer, Rethinking

Absolute Priority after Ahlers, 87 Mich. L. Rev. 963, 978

(1989).

The revision process began in 1970 with the creation of

the Commission on the Bankruptcy Laws of the United

17 See also H.R. Rep. No. 595, supra, at 416 (cramdown plan can be

confirmed if “junior classes will receive nothing under the plan”)

(emphasis added), 417 (the Bill “allows confirmation if junior interests

are not compensated”), 225 (discussing absolute priority rule without

hinting at new value exception). The Senate Report offered little

discussion of the absolute priority rule and contained no mention of the

new value exception. S. Rep. No. 989, supra, at 126-128. Because the

version of Chapter 11 that was ultimately enacted derived

predominantly from the House bill, the statements in the House Report

are more relevant to the statutory inquiry presented in this case.

States “to study and recommend changes in the bank-

ruptcy laws.” H.R. Rep. No. 595, supra, at 2 (footnote

omitted). The Commission filed a report with Congress in

1973 in which it proposed the explicit adoption of a new

value exception. H.R. Doc. No. 137, 93d Cong., Ist Sess.

(1973), reprinted at Vol. B Collier on Bankruptcy App. Pt.

4-518 to 4-519, 4-815 (15th ed. rev. 1998). The Commission

also suggested expanding the new value exception to allow

non-monetary contributions that are “important to the

operation of the reorganized debtor.” Jd. at App. Pt. 4-815.

The recommended new value language was included in

four proposed bills submitted to the 98d Congress." While

the proposed bills contained provisions requiring as a

condition of confirmation that a plan be “fair and equit-

able,” none of the proposed bills contained language

explicitly codifying the absolute priority rule. The “fair

and equitable” standard, moreover, was expressly limited

by the proposed new value provision.” No further action

was taken on the bills. However, each of those bills, with

the new value language and the concomitant limitation on

the “fair and equitable” standard retained, was reintro-

duced in the next session of Congress.” Extensive hear-

ings were held, during which critics targeted various

facets of the proposed new value rule.”

H.R. 10792, 93d “ong., Ist Sess. § 7-303 (1973); H.R. 16643, 93d

Cong., 2d Sess. § 7-301(4) (1974); S. 4046, 93d Cong., 2d Sess. § 7-301(4)

(1974); S. 2565, 93d Cong., Ist Sess. § 7-303(4) (1973).

H.R. 10792, supra, § 7-310(d)(2)B); H.R. 16643, supra,

§ 7-308(d)(2)B); S. 4046, supra, § 7-308(d)2)B); S. 2565, supra, § 7-

310(d)(2)(B).

» H.R. 31, 94th Cong., Ist Sess. §§ 7-303(4), 7-310(d)(2)(B) (1975);

H.R. 32, 94th Cong., Ist Sess. §§ 7-301(4), 7-308(d)(2)(B) (1975); S. 235,

94th Cong., Ist Sess. §§ 7-301(4), 7-308(d)2B) (1975); S. 236, 94th

Cong., Ist Sess. §§ 7-303(4), 7-310(d)(2)(B) (1975).

21 See H.R. 31 and H.R. 32: Bankruptcy Act Revision: Hearings

Before the House Subcomm. cn Civil and Constitutional Rights of the

Comm. on the Judiciary, 94th Cong., 2d Sess. Pt. 4, at 2160, 2180-2182,

b. In light_ of the hearings, substantially revised bills

emerged from both the House and Senate. The House bill

eliminated the language authorizing new value plans and

reiterated the “fair and equitable” condition for plan con-

firmation. The bill did not, however, propose to codify the

absolute priority rule. See H.R. 6, 95th Cong., Ist Sess.

§§ 1123, 1129(b) (1977). After Congress received further

comments from judges, practitioners, and academics, a

lengthy mark-up session produced H.R. 8200, 95th Cong.,

Ist Sess. (1977), the bill that would eventually become law.

See H.R. Rep. No. 595, supra, at 3; see also H.R. 7330, 95th

Cong., Ist Sess. (1977). In the Senate, a bill analogous to

H.R. 8200, S. 2266, 95th Cong., Ist Sess. (1977), was

introduced. See S. Rep. No. 989, supra, at 2.

As in H.R. 6, the new value language was absent from

both the House and Senate bills. H.R. 8200, supra, §§ 1123,

1129; S. 2266, supra, §§ 1123, 1130; see also H.R. 7330,

supra, §§ 1123, 1129. Unlike the predecessor bills, how-

ever, the House and Senate bills now also included a strict

codification of the absolute priority rule. See H.R. 8200,

supra, § 1129(b)(2)(B)(iv) (“the holders of claims or inter-

ests of any class of claims or interests, as the case may be,

that is junior to such class will not receive or retain under

the plan on account of such junior claims or interests any

property”); S. 2266, supra, § 1130(c)(2)(B)(iv) (same); H.R.

7330, supra, § 1129(b)(2)(B\(iv). With slight modifications,

H.R. 8200's elimination of new value language and explicit

codification of the absolute priority rule became law on

November 6, 1978.”

2470, 2636 (1976); S. 235 and S. 236: The Bankruptcy Reform Act:

Hearings Before the Senate Subcomm. on Improvements in Judicial

Machinery of the Comm. on the Judiciary, 94chn Cong., Ist Sess. Pt. 2,

at 382, 557, 624, 710, 716-717, 733, 1044 (1975).

2 Floor statements by the managers of the legislation confirmed

the categorical operation of the absolute priority rule. See 124 Cong.

Rec. 32,408 (1978) (statement of Rep. Edwards) (cramdown plan can be

confirmed “as long as no class junior to the dissenting class receives

ce. The foregoing history of the legislation refutes any

contention that Congress meant to retain the very new

value language it eliminated and meant to weaken the

strictly worded absolute priority rule it enacted. “Few

principles of statutory construction are more compelling

than the proposition that Congress does not intend sub

silentio to enact statutory language that it has earlier

discarded.” INS v. Cardoza-Fonseca, 480 U.S. 421, 442-443

(1987); see also Gulf Oil Corp. v. Copp Paving Co., 419

U.S. 186, 200 (1974) (Court will not assume “that Congress

intended a result that it expressly declined to enact”).

Significantly, earlier drafts containing the new value

language also felt it necessary to qualify the “fair and

equitable” standard for plan confirmation by making it

expressly subject to the proposed new value exception.

This suggests an understanding that, unless specifically

qualified, ordinary operation of the fair and equitable

standard—and its component absolute priority rule—

would preclude the confirmation of anew value plan. Thus,

the fact that the legislation Congress enacted not only

deleted the new value provision, but also restored the fair

and equitable standard free of such restrictions and

separately codified the absolute priority rule in broadly

worded terms forecloses any argument that Chapter 11

implicitly carried forward the new value exception.

For similar reasons, the suggestion (e.g., Pet. App. 20a;

Bonner Mall, 2 F.3d at 913) that Congress’s rejection of

the new value proposal signified only opposition to the

bills’ broad definition of value misses the mark. Had

Congress desired a narrower version of the new value ex-

ception, it presumably would have revised the proposed

new value language rather than erased it entirely and

codified instead an unconditional absolute priority rule. In

construing the Bankruptcy Code, this Court should be

anything at all”); 124 Cong. Ree. 34,007 (1978) (statement of Sen.

DeConcini) (same).

“directed by [the statute’s] words, and not by the discarded

draft[{s].” John Hancock Mutual Life Ins. Co. v. Harris

Trust & Sav. Bank, 510 U.S. 86, 101 (1993).

4. Congress’s rejection of analogous “give-up” plans

further undercuts any argument that new value plans are

permissible. Under a give-up plan, senior claim holders

consent to have some of the property that is owed to them

allocated instead to junior classes, even though intermedi-

ate classes are not paid in full. See, eg., Kansas City

Terminal Ry. v. Central Union Trust Co., 271 U.S. 445

(1926) (bondholders’ surrender of value in favor of

stockholders). As reported out of committee, the Senate

bill would have permitted “a senior creditor to adjust his

participation for the benefit of stockholders.” S. Rep. No.

989, supra, at 127. The Report explained that “junior

creditors, who have not been satisfied in full, may not

object if, absent the ‘give-up’, they are receiving all that a

fair and equitable plan would give them.” Jbid. The House

Report, by contrast, stated that the absolute priority rule

contained in H.R. 8200, supra, § 1129(b)(2)(B\iv) would

foreclose give-up plans. H.R. Rep. No. 595, supra, at 416

(the absolute priority rule “is designed to prevent a senior

class from giving up consideration to a junior class unless

every intermediate class consents, is paid in full, or is

unimpaired”). The House’s language choice prevailed, and

the floor statements that were made in lieu of a conference

report confirm that the absolute priority rule bars give-up

plans.

Of course, if “on account of” bore the narrow meaning

ascribed by the court of appeals, then give-up plans would

2 See 124 Cong. Rec. 32,408 (1978) (statement of Rep. Edwards)

(“{T]he House report remains an accurate description of confirmation of

section 112%b). Contrary to the example contained in the Senate re

port, a senior class will not be able to give up value to a junior class

over the dissent of an intervening class unless the intervening class

receives the full amount, as opposed to value, of its claims or inter-

ests.”).

be permissible, because the value the junior interests re-

ceive would arguably be “on account of” an independent

decision of the senior creditors. The “on account of” lan-

guage, however, should not be construed to admit through

the back door schemes circumventing the absolute prior-

ity rule—whether new value or give-up plans—that Con-

gress specifically considered and rejected during the leg-

islative process.

C. Rejection Of A New Value Exception Is Consistent

With Pre-Code Practice

This Court is “reluctant to accept arguments that

would interpret the [Bankruptcy] Code * * * to effect a

major change in pre-Code practice that is not the subject

of at least some discussion in the legislative history.”

Dewsnup v. Timm, 502 U.S. 410, 419 (1992). The court of

appeals concluded that the new value exception was “en-

sconced” in pre-Code bankruptcy practice and thus that

Congress “‘must have enacted the Code with a full under-

standing’ of the absolute priority rule and its new value

corollary.” Pet. App. 20a (quoting Dewsnup, 502 U.S. at

419). There are several significant flaws in that rea-

soning.

1. Resort to pre-Code practice is appropriate only

when the statutory language is ambiguous. Ron Pair, 489

U.S. at 241; ef. Dewsnup, 502 U.S. at 417 (noting ambigu-

ity in text at issue), 419-420. Congress spoke with such

straightforward language in enacting the absolute prior-

ity rule that resort to extra-statutory tools of interpre-

tation is both unnecessary and inappropriate.

“4 Los Angeles Lumber relied heavily on Kansas City Terminal,

supra, to undergird its new value dicta. 308 U.S. at 121-122. Kansas

City Terminal, however, involved a give-up plan, not a new value

plan. 271 U.S. at 453-456. The fact that the absolute priority rule pro-

hibits give-up plans further counsels against a construction of the rule

that would implicitly authorize new value plans while barring the

give-up plans that provided the foundation for the new value dicta.

2. The ability of a court to perceive references to a

bankruptcy procedure in a few cases prior to 1978 is an

insufficient basis for engrafting an unwritten exception

onto the Bankruptcy Code. The pre-Code practice must

have been “clearly established.” Dewsnup, 502 U.S. at

418; see also Kelly v. Robinson, 479 U.S. 36, 45 n.6, 46

(1986) (rule that criminal restitution obligations are non-

dischargeable was “widely accepted” and “established” by

1978; only one court had ruled otherwise). The new value

exception was not. To the contrary, it lived only in

occasional dicta: this Court has never confirmed a new

value plan, and neither (to our knowledge) did any other

court before 1978.

a. In Los Angeles Lumber, the Court first intimated in

dicta that a new value exception might be available. 308

U.S. at 121-122.” The Los Angeles Lumber dicta appeared

again in Marine Harbor Properties v. Manufacturer's

Trust Co., 317 U.S. 78 (1942), but the issue decided was

whether the petition was properly dismissed because it

was not filed in good faith. /d. at 81. The new value dicta

arose only in a hypothetical discussion of potential

reorganization options. /d. at 85-86; see also Consolidated

Rock Prods. Co. v. Du Bois, 312 U.S. 510, 529 n.27 (1941).

The dicta made their final pre-Code appearance in Mason

v. Paradise Irrigation Dist., 326 U.S. 536, 541-543 (1946),

* A brief filed by the United States as amicus curiae in Los Ange-

les Lumber recognized the potential application of a narrow new value

exception to the judicially created absolute priority rule. See U.S.

Amic. Br. at 14, 40-42, Case v. Los Angeles Lumber Prods. Co., supra,

(Nos. 23 & 24). Our subsequent research has shown that suggestion not

to be a correct reflection of the law at that time. In any event, what-

ever the state of the law in 1939, we have consistently taken the posi-

tion in subsequent filings in this Court, as we do here, that no new

value exception was clearly established at the time of the Bankruptcy

Reform Act of 1978, and that Chapter 11 of the 1978 Code does not con-

tain a new value exception. See U.S. Amic. Br., Ahlers, supra, and

Bonner Mall Partnership, supra.

more than 30 years before enactment of the Code. That

case involved the provision of new value by a creditor (not

an equity holder) and concerned only whether the differen-

tial treatment of creditors within a class precluded con-

firmation of the plan. /d. at 538-542.

Accordingly, the fact that this Court never has ad-

dressed the new value issue except in dicta “or relied upon

this limitation * * * counsels against concluding that

the limitation was well recognized.” Ron Pair, 489 U.S.

at 247.

b. The new value dicta also had no independent exis-

tence in the decisions of lower courts. In fact, we are

aware of no reported case under the old Chapter X (or its

predecessor Section 77(b)) adopting the new value dicta as

the basis for confirmation of a plan in the years before

1978.6 In any event, even if the lower courts had occasion-

ally relied on this Court’s dicta, that would not render the

practice “well recognized” for purposes of incorporation

into the Code. Ron Pair, 489 U.S. at 247; see also United

Savings Ass'n v. Timbers of Inwood Forest Assoc., 484

U.S. 365, 381 (1988).

*® See Pet. App. 42a n.5 (“Under Chapter X, no shareholder ever

convinced a court that it contributed sufficient value to retain an

interest under the new value concept, and no reported case expressly

adopted Case’s new value dicta as its holding until the Code’s

enactment in 1978.”"); Coltex, 138 F.3d at 44; Greystone, 995 F.2d at 1282

(“There is no there there.”); 7 Collier, supra, 4 1129.04{4)[c], at 1129-106

to 1129-108 & n.164 (15th ed. rev. 1998); B. Markell, Owners, Auctions,

and Absolute Priority in Bankruptcy Reorganizations, 44 Stan. L.

Rev. 69, 92 (1991); Ayer, supra, 87 Mich. L. Rev. at 1016 (new value “is

nowhere present as a rule of decision in Chapter X cases. New value

under Chapter X, then, is an illusion.”). Because Chapter XI, under

which most other reorganizations were filed prior to 1978, did not

contain the absolute priority rule, no cases under that provision

addressed the new value dicta either. Coltex, 138 F.3d at 44; 7 Collier,

supra, J 1129.04[4)[c}, at 1129-106 to 1129-107.

c. In sum, rather than “ensconced in our bankruptcy

practice” (Pet. App. 20a), the new value exception was

“seemingly moribund” by 1978. 7 Collier, supra, 4

1129.04[4}[c], at 1129-108. The new value exception’s brief

flicker in bankruptcy practice is an insufficient basis for

importing it into the Code, especially in the face of

Congress’s- plain language and the adverse legislative

history. See Ron Pair, 489 U.S. at 246 (practice of deny-

ing post-petition interest was “recognized by only a few

courts and often dependent on particular circumstances”);