Bankruptcy's new value exception: No longer a necessity

Boston University Law Review

Volumn 77, Issue 5, 1997, Pages 975-1023

  Miller Jr , Walter W ^a  

^a NONE

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EID: 0031330861     PISSN: 00068047     EISSN: None     Source Type: Journal    
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References (368)

1. See infra Part I (defining the absolute priority rule and its new value exception).
2. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 n.1 (1994) ("express[ing] no view on the existence of [a new value] exception under the Bankruptcy Code"); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988) (finding it unnecessary to reach the issue of survival of the new value exception under the Bankruptcy Code to resolve the dispute before the Court).
3. See, e.g., Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 409 (1868) ("Equity regards the property of a corporation as held in trust for the payment of the debts of the corporation.").
4. See Garrard Glenn, The Basis of the Federal Receivership, 25 COLUM. L. REV. 434, 437-38 (1925) (describing the secured creditor's remedies for debtor default). See generally VERN COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR 3-218 (1964) (detailing creditor remedies, including writs of execution, judgment liens, and judicial sales).
5. See Garrard Glenn, The Basis of the Federal Receivership, 25 COLUM. L. REV. 434, 437-38 (1925) (describing the secured creditor's remedies for debtor default). See generally VERN COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR 3-218 (1964) (detailing creditor remedies, including writs of execution, judgment liens, and judicial sales).
6. See, e.g., Macon & Ry. v. Parker, 9 Ga. 377, 393 (1851) (stating that "all creditors will be restrained from prosecuting their respective claims [against railroads] at law"); see also Arthur H. Dean, Corporate Reorganization, 26 CORNELL L.Q. 535, 539 (1941) (stating that among objectives of equity receivership was the prevention of "piecemeal liquidation [of railroads] by the exercise of the common law remedy of attachment and execution"); Glenn, supra note 4, at 441-42 (citing Macon as the earliest American case denying creditors the right to their common law remedies); Edward H. Levi & James W. Moore, Bankruptcy and Reorganization: A Survey of Changes, 5 U. CHI. L. REV. 219, 227 (1937-38) (noting that equity receivership protected the railroad debtor from attacks of separate creditors).
7. See, e.g., Macon & Ry. v. Parker, 9 Ga. 377, 393 (1851) (stating that "all creditors will be restrained from prosecuting their respective claims [against railroads] at law"); see also Arthur H. Dean, Corporate Reorganization, 26 CORNELL L.Q. 535, 539 (1941) (stating that among objectives of equity receivership was the prevention of "piecemeal liquidation [of railroads] by the exercise of the common law remedy of attachment and execution"); Glenn, supra note 4, at 441-42 (citing Macon as the earliest American case denying creditors the right to their common law remedies); Edward H. Levi & James W. Moore, Bankruptcy and Reorganization: A Survey of Changes, 5 U. CHI. L. REV. 219, 227 (1937-38) (noting that equity receivership protected the railroad debtor from attacks of separate creditors).
8. See, e.g., Macon & Ry. v. Parker, 9 Ga. 377, 393 (1851) (stating that "all creditors will be restrained from prosecuting their respective claims [against railroads] at law"); see also Arthur H. Dean, Corporate Reorganization, 26 CORNELL L.Q. 535, 539 (1941) (stating that among objectives of equity receivership was the prevention of "piecemeal liquidation [of railroads] by the exercise of the common law remedy of attachment and execution"); Glenn, supra note 4, at 441-42 (citing Macon as the earliest American case denying creditors the right to their common law remedies); Edward H. Levi & James W. Moore, Bankruptcy and Reorganization: A Survey of Changes, 5 U. CHI. L. REV. 219, 227 (1937-38) (noting that equity receivership protected the railroad debtor from attacks of separate creditors).
9. See, e.g., Macon & Ry. v. Parker, 9 Ga. 377, 393 (1851) (stating that "all creditors will be restrained from prosecuting their respective claims [against railroads] at law"); see also Arthur H. Dean, Corporate Reorganization, 26 CORNELL L.Q. 535, 539 (1941) (stating that among objectives of equity receivership was the prevention of "piecemeal liquidation [of railroads] by the exercise of the common law remedy of attachment and execution"); Glenn, supra note 4, at 441-42 (citing Macon as the earliest American case denying creditors the right to their common law remedies); Edward H. Levi & James W. Moore, Bankruptcy and Reorganization: A Survey of Changes, 5 U. CHI. L. REV. 219, 227 (1937-38) (noting that equity receivership protected the railroad debtor from attacks of separate creditors).
10. See Dean, supra note 5, at 538-39 (describing consent receivership reorganizations and stating that assenting creditors could be paid in securities); Levi & Moore, supra note 5, at 228-31 (describing formation and operation of reorganization committees, and noting that committees' plans could pay assenting creditors in the form of securities in the reorganized corporation).
11. See, e.g., Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 176 (1916) (recognizing the "equitable right of creditors to be preferred to stockholders against the property of a debtor corporation"); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 504 (1913) (noting that a single unpaid creditor "could assert his superior rights against the subordinate interest of the . . . stockholders"); Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 684 (1899) (stating that, as a rule, "the stockholder's interest in the property is subordinate to the rights of creditors"); Howard, 74 U.S. (1 Wall.) at 409-10 (noting that, because creditors equitably own the corporation, shareholders "are not entitled to any share . . . until the debts of the corporation are paid").
12. See supra note 7 (citing cases that expressed and followed the absolute priority rule).
13. 11 U.S.C. §§ 101-1330 (1994 & Supp. 1997). Prior statutory and case law illustrate that even those creditors who attempted to waive their absolute priority rights by agreeing to the confirmation plan could not waive them if the plan was not fair and equitable to each creditor. See Chandler Act of 1938, ch. 575, § 221, 52 Stat. 840, 897 (repealed 1978) (requiring the plan to be fair and equitable and feasible to be confirmed); Act of June 7, 1934, ch. 424, § 77B(f)(1), 48 Stat. 916, 919 (repealed 1938) (noting that the plan must be fair and equitable to every class); Boyd, 228 U.S. at 482-515 (invalidating a sale 16 years after completion because a single creditor holding slightly more that 2% of the total debt objected); Howard, 74 U.S. (1 Wall.) at 413, 416 (voiding a foreclosure sale that provided for shareholders while leaving unsecured creditors unpaid). If consenting creditors could waive their absolute priority rights, the courts could simply have remedied Boyd's and Howard's injury by making the railroad pay their claims in full and leaving be the creditors who assented. In both cases, however, the Court invalidated the sales, requiring that all creditors, whether or not they assented, be treated fairly and equitably. See Boyd, 228 U.S. at 482-515; Howard, 74 U.S. (1 Wall.) at 392-416.
14. See, e.g., Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (stating that shareholders can contribute new money and receive an interest in the reorganized corporation "equivalent to their contribution").
15. See id. (noting the acceptability of new money from shareholders when "essential to the success of the [reorganization]"); see also Albro Martin, Railroads and the Equity Receivership: An Essay on Institutional Change, 34 J. ECON. HIST. 685, 687 (1974) (noting that "raising fresh capital was usually a critical feature of reorganization plans").
16. See Act of June 7, 1934, ch. 424, § 77B, 48 Stat. 911, 912-22 (repealed 1938) (non-railroad corporate reorganization statute); Act of Mar. 3, 1933, ch. 204, § 77, 47 Stat. 1474, 1474-82 (repealed 1938) (railroad reorganization statute).
17. See § 77B(b)(10), 48 Stat. at 915 ("[U]nsecured claims which would have been entitled to priority . . . shall be entitled to such priority."); § 77(c)(9), 47 Stat. at 1477 ("[C]laims against a railroad corporation which would have been entitled to priority . . . if a receiver in equity of the property of the debtor had been appointed . . . shall be entitled to such priority.").
18. Congress incorporated railroad reorganizations into statutory bankruptcy law with its enactment of section 77. See § 77, 47 Stat. at 1474-82.
19. Congress incorporated reorganization into statutory law for all other corporations with its enactment of section 77B. See § 77B, 48 Stat. at 912-22.
20. See Case, 308 U.S. at 121 (permitting shareholders to receive an interest in the reorganized railroad in return for money contribution).
21. Compare 11 U.S.C. § 1129(a) (1994) (permitting plan confirmation without considering whether the plan is fair and equitable as long as all impaired classes accept it), with id. § 1129(b)(1) (permitting plan confirmation when one or more impaired classes reject the plan only if non-accepting classes of unsecured creditors receive property in an amount equal to the full value of their claims, or shareholders receive nothing).
22. See id. § 1129(a)(7)-(9) (permitting plan confirmation if all impaired classes accept the plan).
23. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 n.1 (1994) ("express[ing] no view on the existence of [a new value] exception under the Bankruptcy Code"); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988) (stating that the Court's decision "should not be taken as any comment on the continuing vitality" of the new value exception).
24. See RICHARD HOFSTADTER ET AL., THE UNITED STATES: THE HISTORY OF A REPUBLIC 264-65 (1960) (discussing Manifest Destiny); FREDERICK JACKSON TURNER, THE FRONTIER IN AMERICAN HISTORY 269-89 (1950) (discussing pioneering ideals).
25. See RICHARD HOFSTADTER ET AL., THE UNITED STATES: THE HISTORY OF A REPUBLIC 264-65 (1960) (discussing Manifest Destiny); FREDERICK JACKSON TURNER, THE FRONTIER IN AMERICAN HISTORY 269-89 (1950) (discussing pioneering ideals).
26. See HOFSTADTER ET AL., supra note 20, at 159 (describing America's Manifest Destiny); TURNER, supra note 20, at 311-12 (noting the "rush of American energy upon the . . . remaining wilderness"). From 1792 to 1837, 11 new states entered the Union. See HOFSTADTER ET AL., supra note 20, at 266 (depicting the United States map as of 1840 and listing dates the states became part of the Union). By the 1880s, the American frontier was disappearing. The Superintendent of the Census for 1880 reported: Up to and including 1880 the country had a frontier settlement, but at present the unsettled area has been so broken into . . . that there can hardly be said to be a frontier line. In the discussion of its extent, its westward movement, etc., it cannot, therefore any longer have a place in the census reports. Id. at 1.
27. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
28. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
29. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
30. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
31. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
32. The United States' ideal to settle and develop stood out as unique in North America. The French in Canada combined fur trading posts and converting the indigenous population. See John Fiske, Introduction to 1 FRANCIS PARKMAN, PIONEERS OF FRANCE AND ENGLAND IN THE NEW WORLD at xxvii-xli (Frontenac ed. 1910) (discussing France and its approach to colonization in Canada); FRANCIS PARKMAN, THE JESUITS IN NORTH AMERICA IN THE SEVENTEENTH CENTURY 272-75 (Frontenac ed. 1910) (discussing the decline of the Jesuit presence in Canada); FRANCIS PARKMAN, THE OLD REGIME IN CANADA, FRANCE AND ENGLAND 197-204 (Frontier ed. 1910) (comparing the development of Canada and the United States during the period from 1663-1763). As late as 1869, Hudson's Bay Co. utilized large portions of what is now Canada as a private preserve, discouraging settlement as a disruption of its commerce. See 1 PETER C. NEWMAN, COMPANY OF ADVENTURERS 2 (1985). The Spanish in Mexico limited their activities to searching for gold and converting the natives to Christianity. See generally MICHAEL C. MYER & WILLIAM L. SHERMAN, THE COURSE OF MEXICAN HISTORY 99-113 (1987) (discussing the Spaniards' search for gold); WILLIAM H. PRESCOTT, CONQUEST OF MEXICO 52-104 (1934) (detailing phases of the Spanish colonization of Mexico).
33. See HOFSTADTER ET AL., supra note 20, at 160-63 (discussing the Louisiana Purchase).
34. See id. at 278-84 (discussing the Mexican war).
35. See id. at 272-74 (discussing the Oregon problem).
36. The first great canal route connected Buffalo and the Upper Great Lakes with the Hudson River in New York City. See HOFSTADTER ET AL., supra note 20, at 199-200 (discussing the Erie Canal). Goods could move more quickly and less expensively by canals than by turnpikes, but canals froze over for four months of the year. See id. at 201 (discussing the advances in commerce brought about by canals). During the same period, steamboats began to ply the Mississippi and Ohio Rivers, carrying goods to New Orleans and beyond. See id. at 197-98 (discussing steamboats and their effects on the growth of commerce). Western settlers grew very frustrated with the difficulties of river transportation. See id. at 200.
37. See OLIVER JENSEN, THE AMERICAN HERITAGE HISTORY OF RAILROADS IN AMERICA 34-40, 54 (1981).
38. See id. at 54.
39. See id. at 34-35, 54, 120-23 (discussing railroads' role in inhabiting and developing the West); see also Our Foreign-Born Citizens, NAT'L GEOGRAPHIC, Feb. 1917, at 96 (stating that "[t]he immigrants of the United States and their children would populate to its present density all of the United States west of the Mississippi with Alabama and Mississippi added"). Fifty percent or more of the population of Illinois, Michigan, Minnesota, Montana, North and South Dakota, Utah, and Wisconsin consisted of immigrants and children of at least one immigrant parent. See id. (depicting a U.S. map illustrating the distribution of the immigrant population).
40. See id. at 34-35, 54, 120-23 (discussing railroads' role in inhabiting and developing the West); see also Our Foreign-Born Citizens, NAT'L GEOGRAPHIC, Feb. 1917, at 96 (stating that "[t]he immigrants of the United States and their children would populate to its present density all of the United States west of the Mississippi with Alabama and Mississippi added"). Fifty percent or more of the population of Illinois, Michigan, Minnesota, Montana, North and South Dakota, Utah, and Wisconsin consisted of immigrants and children of at least one immigrant parent. See id. (depicting a U.S. map illustrating the distribution of the immigrant population).
41. See Martin, supra note 11, at 687-88 (noting that innovations in dealing with railroad insolvencies "recognized the demand of a rapidly growing society that transportation services be preserved at all costs").
42. See 11 U.S.C. § 109(b) (1994) (excluding railroads from the definition of debtors eligible to file for bankruptcy under Chapter 7).
43. See Act of June 7, 1934, ch. 424, § 77B, 48 Stat. 911, 912-22 (repealed 1938); Act of Mar. 3, 1933, ch. 204, § 77, 47 Stat. 1474, 1474-82 (repealed 1938).
44. See, e.g., Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 166 (1916) (railroad consent receivership); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 482 (1913) (same); Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 674 (1899) (same); Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 392 (1868) (railroad irregular mortgage foreclosure); see also New England Coal & Coke v. Rutland R.R., 143 F.2d 179, 184 (7th Cir. 1944) (stating that consent receiverships were necessary "to make possible the continued operation of the railroad and its preservation as a unity"); Dean, supra note 5, at 539 (discussing protections afforded railroads); Glenn, supra note 4, at 441-42 (citing earliest case of railroad consent receivership, stressing that the process prevented creditors from seizing and selling separate portions of the railroad).
45. See, e.g., Louisville Trust Co., 174 U.S. at 682-84 (discussing the differences between regular mortgage foreclosures and railroad mortgage foreclosures).
46. See id.
47. See, e.g., Howard, 74 U.S. (1 Wall.) at 408-09 (describing the mortgage foreclosure on the Mississippi & Missouri Railroad Company); see also Dean, supra note 5, at 538-39 (detailing equity receivership proceeding); Levi & Moore, supra note 5, at 227, 231 (same).
48. See, e.g., Howard, 74 U.S. (1 Wall.) at 408-09 (stating that the real party in interest bought the railroad through an intermediary corporation in order to avoid title problems).
49. See, e.g., id. (noting that the intermediary bid only $2.2 million and the purchaser in turn paid $5.5 million to purchase the intermediary corporation).
50. Cf. Thomas A. Thacher, Some Tendencies of Modern Receiverships, 4 CAL. L. REV. 32, 47 (1915). Thacher describes the consent receivership process as one in which the creditor must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price. Since the committee formed will in all probability be the only bidder, the property will be sold for a fraction of its value, and the bondholder staying out of the reorganization scheme will receive little. The small bondholder, therefore, has practically no choice. Id.
51. See, e.g., Howard, 74 U.S. (1 Wall.) at 407-09 (describing the mortgage foreclosure process).
52. See Dean, supra note 5, at 539.
53. 42 See, e.g., Howard, 74 U.S. (1 Wall.) at 407-09; Levi & Moore, supra note 5, at 231 ("The property is conveyed to a new company which issues certificates of ownership or indebtedness in some form to the committee which then distributes them according to the plan of reorganization.")
54. See D.H. Chamberlain, New-Fashioned Receiverships, 10 HARV. L. REV. 139, 140 (1896) (explaining that receivership of railroads entailed "possession of railways by the courts"); Dean, supra note 5, at 538-39 (noting that a receiver would administer all of the debtor's properties, and that the federal court administering the receivership had "the exclusive right to entertain all actions to enforce liens on property within its jurisdiction").
55. See Dean, supra note 5, at 539; Levi & Moore, supra note 5, at 227.
56. See Dean, supra note 5, at 538-39 (noting that the debtor corporation would file an answer admitting allegations of creditor's complaint); Glenn, supra note 4, at 444 (noting that it is "quite proper for the debtor to persuade a friendly creditor to file" for a receivership); Levi & Moore, supra note 5, at 227 (noting that the Court "placed its full blessing on the equity receivership obtained on the petition of a non-executing creditor if the debtor consented").
57. In the early railroad equity receivership cases, the consent receiver was appointed "merely to operate the railroad and conserve assets under the watchful eye of the court." Martin, supra note 11, at 687. Later, under § 77, the receiver would take title to the railroad's assets, operate it, and develop a reorganization plan. See id.; see also Dean, supra note 5, at 538 (describing the consent receivership process).
58. See Chamberlain, supra note 43, at 141-46 (discussing the Wabash receivership, in which the Court upheld a receivership requested directly by the railroad, bypassing even the guise of a friendly creditor); Glenn, supra note 4, at 444 (acknowledging that a court cannot appoint receivers if the corporate defendant opposes the creditor's suit); Levi & Moore, supra note 5, at 225 (noting that "[t]he defect of a lack of a judgment creditor with execution returned unsatisfied . . . was . . . cured by the debtor's consent to the appointment of a receiver").
59. See Chamberlain, supra note 43, at 146 (citing cases in which former officers were chosen as receivers); Dean, supra note 5, at 539 (noting that, "[o]ften one of the receivers was the president of the company ").
60. See Dean, supra note 5, at 539 (noting that a receivership "stay[ed] creditors seeking judgments and execution against the debtor"); Levi & Moore, supra note 5, at 227 (noting that the "receivership protected [debtors] from the attacks of separate creditors").
61. See Dean, supra note 5, at 538; Levi & Moore, supra note 5, at 228.
62. See Dean, supra note 5, at 538; Levi & Moore, supra note 5, at 228-29.
63. See Dean, supra note 5, at 538. An upset price is the price below which property will not be sold. See BLACK'S LAW DICTIONARY 1540 (6th ed. 1990). In the beginning, the upset price equaled the sum of the court costs and the amount of the stocks and bonds not deposited with the committee. See Levi & Moore, supra note 5, at 232. Later, the upset price approached a value slightly less than the estimated market price of the new securities. See id. (discussing the upset price's role in the committee system); see also Walter J. Blum, The Law and Language of Corporate Re-organization, 17 U. CHI. L. REV. 565, 592-93 (1928) (suggesting that the upset price should be enough to cover what junior creditors would receive under a fair plan).
64. See Dean, supra note 5, at 538. An upset price is the price below which property will not be sold. See BLACK'S LAW DICTIONARY 1540 (6th ed. 1990). In the beginning, the upset price equaled the sum of the court costs and the amount of the stocks and bonds not deposited with the committee. See Levi & Moore, supra note 5, at 232. Later, the upset price approached a value slightly less than the estimated market price of the new securities. See id. (discussing the upset price's role in the committee system); see also Walter J. Blum, The Law and Language of Corporate Re-organization, 17 U. CHI. L. REV. 565, 592-93 (1928) (suggesting that the upset price should be enough to cover what junior creditors would receive under a fair plan).
65. See Dean, supra note 5, at 538. An upset price is the price below which property will not be sold. See BLACK'S LAW DICTIONARY 1540 (6th ed. 1990). In the beginning, the upset price equaled the sum of the court costs and the amount of the stocks and bonds not deposited with the committee. See Levi & Moore, supra note 5, at 232. Later, the upset price approached a value slightly less than the estimated market price of the new securities. See id. (discussing the upset price's role in the committee system); see also Walter J. Blum, The Law and Language of Corporate Re-organization, 17 U. CHI. L. REV. 565, 592-93 (1928) (suggesting that the upset price should be enough to cover what junior creditors would receive under a fair plan).
66. See Dean, supra note 5, at 538. An upset price is the price below which property will not be sold. See BLACK'S LAW DICTIONARY 1540 (6th ed. 1990). In the beginning, the upset price equaled the sum of the court costs and the amount of the stocks and bonds not deposited with the committee. See Levi & Moore, supra note 5, at 232. Later, the upset price approached a value slightly less than the estimated market price of the new securities. See id. (discussing the upset price's role in the committee system); see also Walter J. Blum, The Law and Language of Corporate Re-organization, 17 U. CHI. L. REV. 565, 592-93 (1928) (suggesting that the upset price should be enough to cover what junior creditors would receive under a fair plan).
67. The bid and sale price was low because the committee was generally the only bidder because it could pay in stock and securities, while outside bidders would have to pay in cash. See Dean, supra note 5, at 539; Levi & Moore, supra note 5, at 230-31; Thacher, supra note 39, at 47 (describing the committee's role in the consent receivership process).
68. See Dean, supra note 5, at 538-39; Levi & Moore, supra note 5, at 230-31; Thacher, supra note 39, at 47.
69. See Dean, supra note 5, at 538-39; Levi & Moore, supra note 5, at 230-31; Thacher, supra note 39, at 47.
70. See Dean, supra note 5, at 539; Levi & Moore, supra note 5, at 231; Thacher, supra note 39, at 47.
71. Creditors could either dissent and demand cash equal to their portion of the upset price, or could agree to the plan and receive new securities worth substantially more. See Dean, supra note 5, at 538-39 (indicating that dissenters only received a share of the foreclosure sale price); Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541, 563 (1933) (stating that "the cash [the dissenter] receives [from a foreclosure sale] is invariably less than the market value of the new securities he would receive if he assented to the plan"); Levi & oore, supra note 5, at 230-31 (indicating that dissenters receive their pro rata share of the foreclosure sale price); Stanley L. Sabel, The Corporate Reorganization Act, 19 MINN. L. REV. 34, 42 (1934) (noting that dissenters' "distributive share of he proceeds of the [foreclosure] sale would be less than the market value of the securities offered under the reorganization plan"); Thacher, supra note 39, at 47 (stating that the creditor "must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price").
72. Creditors could either dissent and demand cash equal to their portion of the upset price, or could agree to the plan and receive new securities worth substantially more. See Dean, supra note 5, at 538-39 (indicating that dissenters only received a share of the foreclosure sale price); Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541, 563 (1933) (stating that "the cash [the dissenter] receives [from a foreclosure sale] is invariably less than the market value of the new securities he would receive if he assented to the plan"); Levi & oore, supra note 5, at 230-31 (indicating that dissenters receive their pro rata share of the foreclosure sale price); Stanley L. Sabel, The Corporate Reorganization Act, 19 MINN. L. REV. 34, 42 (1934) (noting that dissenters' "distributive share of he proceeds of the [foreclosure] sale would be less than the market value of the securities offered under the reorganization plan"); Thacher, supra note 39, at 47 (stating that the creditor "must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price").
73. Creditors could either dissent and demand cash equal to their portion of the upset price, or could agree to the plan and receive new securities worth substantially more. See Dean, supra note 5, at 538-39 (indicating that dissenters only received a share of the foreclosure sale price); Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541, 563 (1933) (stating that "the cash [the dissenter] receives [from a foreclosure sale] is invariably less than the market value of the new securities he would receive if he assented to the plan"); Levi & oore, supra note 5, at 230-31 (indicating that dissenters receive their pro rata share of the foreclosure sale price); Stanley L. Sabel, The Corporate Reorganization Act, 19 MINN. L. REV. 34, 42 (1934) (noting that dissenters' "distributive share of he proceeds of the [foreclosure] sale would be less than the market value of the securities offered under the reorganization plan"); Thacher, supra note 39, at 47 (stating that the creditor "must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price").
74. Creditors could either dissent and demand cash equal to their portion of the upset price, or could agree to the plan and receive new securities worth substantially more. See Dean, supra note 5, at 538-39 (indicating that dissenters only received a share of the foreclosure sale price); Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541, 563 (1933) (stating that "the cash [the dissenter] receives [from a foreclosure sale] is invariably less than the market value of the new securities he would receive if he assented to the plan"); Levi & oore, supra note 5, at 230-31 (indicating that dissenters receive their pro rata share of the foreclosure sale price); Stanley L. Sabel, The Corporate Reorganization Act, 19 MINN. L. REV. 34, 42 (1934) (noting that dissenters' "distributive share of he proceeds of the [foreclosure] sale would be less than the market value of the securities offered under the reorganization plan"); Thacher, supra note 39, at 47 (stating that the creditor "must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price").
75. Creditors could either dissent and demand cash equal to their portion of the upset price, or could agree to the plan and receive new securities worth substantially more. See Dean, supra note 5, at 538-39 (indicating that dissenters only received a share of the foreclosure sale price); Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541, 563 (1933) (stating that "the cash [the dissenter] receives [from a foreclosure sale] is invariably less than the market value of the new securities he would receive if he assented to the plan"); Levi & oore, supra note 5, at 230-31 (indicating that dissenters receive their pro rata share of the foreclosure sale price); Stanley L. Sabel, The Corporate Reorganization Act, 19 MINN. L. REV. 34, 42 (1934) (noting that dissenters' "distributive share of he proceeds of the [foreclosure] sale would be less than the market value of the securities offered under the reorganization plan"); Thacher, supra note 39, at 47 (stating that the creditor "must deposit his bonds ultimately with the committee or he will be excluded from participation in the reorganization and receive only his cash pro rata of the foreclosure sale price").
76. See Sabel, supra note 57, at 42 (claiming that "one function of the upset price . . . [was] to force dissenters . . . into a reorganization"); Thacher, supra note 39, at 47 (acknowledging that the small creditor "ha[d] practically no choice" but to accept the reorganization plan).
77. See Levi & oore, supra note 5, at 231 (noting that "[t]he defect of a lack of a judgment creditor with execution returned unsatisfied . . . was cured by the debtor's consent to the appointment of a receiver").
78. See, e.g., Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 174-78 (1916) (applying the absolute priority rule in the context of a consent receivership); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 502 (1912) (same); Louisville Trust Co. v. Louisville, Albany & hicago Ry., 174 U.S. 674, 684 (1899) (same); Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 410-11 (1868) (applying the absolute priority rule in the irregular mortgage foreclosure context).
79. See Glenn, supra note 4, at 444 (stating that a creditor cannot invoke a receivership absent a writ of execution against the debtor's property without the debtor's consent).
80. See Dean, supra note 5, at 539; Levi & Moore, supra note 5, at 231.
81. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (suggesting, in dicta, that shareholders could contribute new money and receive an ownership interest in the corporation).
82. See Martin, supra note 11, at 687 (noting that raising fresh capital was usually critical to the reorganization plan).
83. See Dean, supra note 5, at 538-39; Levi & Moore, supra note 5, at 228-31.
84. See, e.g., McGill v. Commercial Credit Co., 243 F. 637, 647 (D. Md. 1917) (expressing the difficulty of valuating the debtor's assets); see also infra note 156 and accompanying text (setting forth the judge's rather colorful expression of discontent with the available valuation methods).
85. See supra notes 20-30 and accompanying text (discussing the historical setting in which the absolute priority rule and its new value exception developed); see also Martin, supra note 11, at 686 (noting the importance of railroads in the 19th century).
86. 74 U.S. (1 Wall.) 392 (1868).
87. See id. at 393.
88. See id. at 393-94.
89. See id. at 408.
90. See id. at 394-95. The committee system lasted until enactment of the Chandler Act Amendments, which required an independent trustee to formulate and the SEC to approve the reorganization plan. See Chandler Act of 1938, ch. 575, §§ 172-173, 52 Stat. 840, 890-91 (repealed 1978) (stating that if debts are less than $3 million a judge may, and if debts exceed $3 million a judge must, submit reorganization plans to the SEC, and the judge cannot approve a reorganization plan until either he receives a report from the SEC or the SEC notifies the judge that the SEC will not file a report); id. § 156, 52 Stat. at 890-91 (stating that the court must appoint an independent disinterested trustee if the debt exceeds $250,000); see also Walter W. Miller, Jr., Bankruptcy Code Cramdown Under Chapter 11: New Threat to Shareholder Interests, 62 B.U. L. REV. 1059, 1102 n.273 (1982) (noting the abuses inherent in the committee system).
91. See Howard, 74 U.S. (1 Wall.) at 393.
92. See id. at 395.
93. See id. at 394-95.
94. See id. at 396-97.
95. See id. at 396.
96. See id. at 402.
97. See id. at 403.
98. See id. at 398.
99. See id. Rock Island only paid a portion of this in cash. See id. at 396.
100. See id. The legislative history of § 1129 of the Bankruptcy Code echoes this question of who may give what to whom in noting that: Paragraph 9(A) would permit a senior creditor to adjust his participation for the benefit of stockholders. In such a case, 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. S. REP. No. 95-989, at 127 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5913. The Senate Report proposed a solution with the following example. A business valued at $1.5 million owes $1.2 million to secured creditors and $.5 million to unsecured creditors, and the stock has no value. See id. Under the absolute priority rule, the secured creditors should receive $1.2 million, the unsecured creditors $.3 million, and the shareholders nothing. However, a distribution of $1.1 million to the secured, $.3 million to the unsecured, and $.1 million to the shareholders would satisfy the Senate Report version of the fair and equitable requirement, because secured creditors are simply giving away a portion of their distribution to the shareholders. See id. This clearly conflicts with Howard. See Howard, 74 U.S. (1 Wall.) at 424-25 (holding that secured creditors cannot give a portion of their distribution to the shareholders if the unsecured go even partially unpaid). The Code did not adopt the Senate's version of the fair and equitable requirement. See 11 U.S.C. § 1129(b) (1994) (listing alternatives for achieving the fair and equitable standard for secured creditors, unsecured creditors, and shareholders).
101. See Howard, 74 U.S. (1 Wall.) at 398-99.
102. See id.
103. See id. at 409-10 ("Equity regards the property of a corporation as held in trust for the payment of the debts of the corporation.").
104. See id. at 414-15 (describing the relationship among creditors, shareholders, and the debtor with respect to the debtor's assets and any proceeds from those assets).
105. See id.
106. See id.
107. See id. at 410.
108. See Robert T. Swaine, Reorganizations of Corporations: Certain Developments of the Last Decade, 27 COLUM. L. REV. 901, 901-02 n.3 (1927) (noting that in March 1916, over 80 railroads owning approximately 42,000 miles of track - about 16% of the total track mileage - were in receivership; at the end of 1925, 48 railroads owning 18,000 miles of track were in receivership; for the years 1916 through 1924, an average of 68 railroads owning 17,000 miles of track were in receivership).
109. 174 U.S. 674 (1899).
110. See id. at 675.
111. See id. (stating that New Albany had guaranteed $1.185 million of first mortgage bonds of a Kentucky railroad).
112. See id. at 676-78.
113. See id. at 679-80.
114. See FED. R. BANKR. P. 8013 ("Findings of fact . . . shall not be set aside unless clearly erroneous.").
115. Compare Louisville Trust Co., 174 U.S. at 687-89 (stating the Court's holding and remanding because of the suspicious nature of the foreclosure and consent receivership), with In re U.S. Truck Co., 800 F.2d 581, 588 (6th Cir. 1986) (upholding under a clearly erroneous standard of review a plan giving shareholders ownership in exchange for $100,000, even though the reorganized corporation's profits exceeded $100,000 per month, because the plan opponents presented no direct evidence to support their objection, only cross-examination of the debtor's witnesses).
116. Louisville Trust Co., 174 U.S. at 682 (discussing how and why railroad debts are different from other debts).
117. See id. at 685, 687-88.
118. Id. at 688; see also Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 410 (1868) (noting that mere sale or transfer does not destroy the creditor's equitable right to the debtor's assets).
119. 228 U.S. 482 (1912).
120. See id. at 508.
121. See id. at 504 (acknowledging the "superior rights [of the unpaid creditor] against the subordinate interests of the old stockholders").
122. Id.
123. See id. at 507-08. Although the accepted bid for the reorganized corporation was only $61 million, the reorganization plan recited that the property was worth $345 million. See id.
124. The Court held that, without competition, the upset price did not necessarily establish the value of the railroad. See id. at 508. Therefore, the railroads could not claim that no equity remained in the property because the debts exceeded the upset price. See id.
125. Id.
126. See id. at 482, 489 (the Court decided the case in 1913; the sale occurred in 1896).
127. See id. at 495 (stating the railroads' arguments). Counsel for the railroad stated in part: [B]etween 1892 and 1900, a large number of the railroad companies of the United States . . . were forced to submit to foreclosure. They have been succeeded by a system of vigorous, solvent, prosperous and useful corporations. The change . . . was the result of reorganizations . . . . The principle of such [reorganization] plans was that financial necessities . . . could be met only by . . . additional cash capital . . . and that . . . [t]he most available source was . . . those who had been interested in the old company, either as bondholders or stockholders, and not necessarily or probably those who were its general creditors. Prior to the decree in the present suit, no court has held to be fraudulent the reorganization of an insolvent corporation under a plan which permitted interests in the new company to be acquired by stockholders of the old company only upon making substantial money payments. Id. (emphasis added).
128. See id.
129. See id. at 512-13 (Lurton, J., dissenting).
130. Id. at 512 (Lurton, J., dissenting).
131. See id. at 513 (Lurton, J., dissenting).
132. See id. at 512 (Lurton, J., dissenting) (noting that the reorganized corporation probably could not raise the cash necessary for continuing operations by sale of stock in the market because the value of the stock would be speculative).
133. Id. at 511 (Lurton, J., dissenting) (referring to the absolute priority rule).
134. See, e.g., Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (acknowledging a new value exception); Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 178 (1916) (accepting that reorganized corporations often required money from shareholders in order to succeed, and that it may be impossible to obtain the money unless stockholders are permitted to contribute and retain an interest "sufficiently valuable to move them").
135. Boyd, 228 U.S. at 511 (Lurton, J., dissenting).
136. See id. at 511-12 (Lurton, J., dissenting).
137. 240 U.S. 166 (1916). Justice Holmes, who had dissented in Boyd, see Boyd, 228 U.S. at 511 (Holmes, J., dissenting), wrote the majority opinion in Kansas City Southern Railway, see Kansas City S. Ry., 240 U.S. at 166.
138. See Kansas City S. Ry., 240 U.S. at 178 (stating the reasons for the Court's holding). The plan valued the reorganized corporation at $1 million, but the Court doubted this valuation given the value of the securities that were exchanged under the plan. See id. at 176.
139. Id.
140. 271 U.S. 445 (1926).
141. See id. at 453.
142. Id. at 450.
143. See id. at 455 (noting that shareholders are the most likely source of additional capital, and that shareholders are unlikely to contribute that capital without receiving something in return).
144. See id. at 454 (quoting Louisville Trust Co.'s articulation of the absolute priority rule).
145. See id.
146. See id.
147. Id. at 454-55.
148. Id. at 455.
149. See, e.g., id. at 453-54 (accepting as authoritative the absolute priority rule as expressed in Howard, Bayd, and Kansas City Southern Railway); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 504 (1913) (acknowledging the "superior rights [of the unpaid creditors] against the subordinate interests of the old stockholders"); Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 683-84 (1899) (noting that "the stockholder's interest in the [debtor's] property is subordinate to the rights of creditors"); Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 409-10 (1868) (stating that "[e]quity regards the property of the corporation as held in trust for the payment of debts of the corporation").
150. See Kansas City Terminal Ry., 271 U.S. at 454-55 (endorsing the new value exception); Kansas City S. Ry., 240 U.S. at 178 (same); see also Boyd, 228 U.S. at 511-12 (Lurton, J., dissenting) (suggesting that shareholder participation in the reorganization of an insolvent debtor may be acceptable in some cases).
151. See, e.g., Louisville Trust Co., 174 U.S. at 679-80 (outlining the basis of the creditor's complaint).
152. See, e.g., Kansas City S. Ry., 240 U.S. at 167 (stating in the argument for the railroads that the creditor, Guardian Trust Company, had agreed to the plan and benefited under it).
153. See Kansas City Terminal Ry., 271 U.S. at 453-54; Kansas City S. Ry., 240 U.S. at 174-78; Boyd, 228 U.S. at 504; Lousiville Trust Co., 174 U.S. at 683-84; Howard, 74 U.S. (1 Wall.) at 410-11.
154. See Kansas City Terminal Ry., 271 U.S. at 454-55 (endorsing the new value exception); Kansas City S. Ry., 240 U.S. at 178 (acknowledging the need for new value); see also Boyd, 228 U.S. at 511-15 (Lurton, J., dissenting) (endorsing the new value exception).
155. See Act of June 7, 1934, ch. 424, § 77B, 48 Stat. 911, 912-22 (repealed 1938) (enacting § 77B, a reorganization provision for all non-railroad corporations); Act of Mar. 3, 1933, ch. 204, § 77, 47 Stat. 1474, 1474-82 (repealed 1938) (enacting § 77, a reorganization provision for railroads).
156. See supra Part II.A (discussing railroads' role in the development of irregular mortgage foreclosures and consent receivership).
157. See id.
158. See id.
159. See § 77B(b)(5), 48 Stat. at 914 (stating that dissenting creditors must receive their pro rata share of the upset price, or the debtor's property must be transferred subject to the creditor's lien, or the property must be appraised and the dissenter paid in cash); see also supra notes 32-67 and accompanying text (discussing irregular mortgage foreclosures and consent receiverships). The reorganization plan fixed the rights of debtor, creditors, and shareholders as of the effective date of the plan, the same as if an actual sale had taken place and proceeds had been distributed. See § 77B(g)(1), 48 Stat. at 920. The present value requirement in today's Bankruptcy Code embodies this same foreclosure sale model: the valuation of the reorganized corporation at the time of confirmation fixes the values of creditors' and shareholders' claims and interests. See 11 U.S.C. § 1129(b)(2)(A)(i)(II) (1994) (stating that secured creditors must receive "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property"); id. § 1129(b)(2)(B)(i) (stating that unsecured creditors must receive "property of a value as of the effective date of the plan, equal to the allowed amount of such claim").
160. See § 77B(f)(1), 48 Stat. at 919 (requiring a plan to be fair and equitable and not to "discriminate unfairly in the favor of any class of creditors or stockholders"); Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (acknowledging the new value exception in certain circumstances).
161. See § 77B(f)(1), 48 Stat. at 919.
162. See, e.g., Sabel, supra note 57, at 43 (noting that the term "fair and equitable" embraced the absolute priority rule).
163. See § 77B(f)(1), 48 Stat. at 919.
164. See § 77B(g), 48 Stat. at 920 (stating that the confirmed plan binds the debtor, all shareholders whether or not accepting, and all creditors whether or not accepting and whether or not paid in full); Sabel, supra note 57, at 44-45 (noting that the court's determination that a plan is fair and equitable binds the whole world as part of an in rem proceeding); see also Northern Pac. Ry. v. Boyd, 228 U.S. 482, 482, 490 (1913) (overturning a sale made 16 years earlier).
165. See § 77B(f)(1), 48 Stat. at 919; see also Sabel, supra note 57, at 43.
166. See § 77B(e)(1), 48 Stat. at 918 (stating that creditor classes either had to accept the plan or satisfy (b)(5) for the plan to be confirmed); § 77B(b)(5), 48 Stat. at 914 (stating that dissenting creditor classes must receive their pro rata share of the upset price, or the debtor's property transfers subject to the creditors' liens, or the creditors receive the appraised value of their claim in cash); § 77B(f)(1), 48 Stat. at 919 (requiring a plan to be fair and equitable for every shareholder and creditor class for confirmation).
167. See § 77B(b)(5), 48 Stat. at 914 (outlining the requirements for class acceptance); § 77B(f)(1), 48 Stat. at 919; § 77B(g), 48 Stat. at 920 (binding the debtor, all shareholder classes whether or not they accept, and all creditor classes whether or not they accept and whether or not they are paid in full).
168. See, e.g., Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (acknowledging that an infusion of new capital from shareholders may be necessary for the success of the reorganization).
169. See § 77B(b)(5), 48 Stat. at 914 (requiring "adequate protection for the realization [by dissenting classes] . . . of the value of their claims by a sale at the upset price"); see also Sabel, supra note 57, at 45 n.53 (noting that the upset price represented one means of assuring that dissenting creditors realized the value of their interests).
170. See § 77B(f)(1), 48 Stat. at 919.
171. Sabel, supra note 57, at 46.
172. Sabel lists § 77B's test for valuing the creditor's claim. See id. at 45 n.54 (listing and describing the valuation methods). Section 77B incorporates four tests of value. See id. at 45. If the fair value of the debtor's assets exceeds the amount of debts, the debtor is insolvent and can reorganize without the consent of its shareholders. See id. at 45 n.52 (explaining the fair value method of valuation). The fair upset price determines how much dissenters will receive as payment. See id. at 45 n.53 (explaining the upset price method of valuation). The appraisal value, the value of shareholders equity, determines how much dissenting shareholders will receive as payment. See id. at 45 n.54 (explaining the appraisal value method of valuation). The value of the collateral securing a claim determines what portion of the secured creditor's claim will be considered secured. See id. at 45-46 n.55 (explaining the value of the collateral method of valuation).
173. See § 77B(g)(1), 48 Stat. at 920 (stating that the plan binds the debtor, all classes of shareholders whether or not they accept, and all classes of creditors whether or not they accept and whether or not they are paid in full).
174. McGill v. Commercial Credit Co., 243 F. 637, 647 (D. Md. 1917) (discussing tests of insolvency for bankruptcy purposes).
175. See Sabel, supra note 57, at 60 (suggesting litigation as the fairest valuation tool When a secured creditor is substantially secured, but also is an unsecured creditor). But see Harry J. Haynsworth IV, Valuation of Business Interests, 33 MERCER L. REV. 457, 486-87 (1982) (noting that an adversarial proceeding could turn into nothing more than a battle of the experts, with each expert taking an extreme position, and the judge compromising by choosing a value somewhere in the middle).
176. See Sabel, supra note 57, at 60 (suggesting litigation as the fairest valuation tool When a secured creditor is substantially secured, but also is an unsecured creditor). But see Harry J. Haynsworth IV, Valuation of Business Interests, 33 MERCER L. REV. 457, 486-87 (1982) (noting that an adversarial proceeding could turn into nothing more than a battle of the experts, with each expert taking an extreme position, and the judge compromising by choosing a value somewhere in the middle).
177. A lack of specific rules means that: Valuation cases usually end up as battles between expert witnesses, each of whom will give more or less weight to each factor . . . . [T]he court will . . . decide on a value which represents a compromise between the range of values found by each side's experts. This . . . increases the possibility that each side will choose experts who will take an extreme position favorable to its contention. This . . . increases the likelihood that the court will produce a compromise decision. Haynsworth, supra note 157, at 486-87.
178. Chandler Act of 1938, ch. 575, §§ 1-703, 52 Stat. 840-940 (repealed 1978).
179. See id. §§ 101-276, 52 Stat. at 883-905.
180. See id. §§ 172-173, 52 Stat. at 890-91 (stating that if debts are less than $3 million a judge may, and if debts are greater than $3 million a judge must, submit confirmation plans to the SEC, and the judge cannot approve a plan until either he receives a report from the SEC, or the SEC notifies him that the Commission will not file a report).
181. See, e.g., SEC v. Canandaigua Enter., 339 F.2d 14, 20 n.5 (1964) (noting the SEC's potential for familiarity with the structure and business of financially troubled corporations because of its role under the Securities and Exchange Act of 1934).
182. Compare Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 178 (1916) (using vague and cryptic phrases such as "[i]n short, while it is true that reorganization plans often would fail if the old stockholders could not be induced to come in and contribute some fresh money, and that the necessity of such arrangements should lead Courts to avoid artificial scruples" (emphasis added)), with Consolidated Rock Prods. Co. v. DuBois, 312 U.S. 510, 525 (1941) (using stronger and more direct language, such as "little . . . effort was made to value the whole enterprise by a capitalization of prospective earnings. The necessity for such an inquiry is emphasized by the poor earnings record of this enterprise in the past. Findings as to the earning capacity of an enterprise are essential" (emphasis added)).
183. See Chandler Act, § 156, 52 Stat. at 890-91 (stating that the court must appoint an independent, disinterested trustee if the debt exceeds $250,000).
184. See id. § 221(2), 52 Stat. at 897 (stating that a judge must find the plan fair and equitable in order to confirm it); see also Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 115 (1939) (stating that fair and equitable are terms of art with a fixed meaning, and are to be interpreted against this fixed meaning unless context requires otherwise); id. at 118 (stating that fair and equitable includes the absolute priority rule); Sabel, supra note 57, at 43 (noting that "fair and equitable" embraces the absolute priority rule).
185. 308 U.S. 106 (1939).
186. See id. at 111-12.
187. See id. at 115. The going concern value of the assets of the debtor was $830,000. See id. at 111. The complainants, therefore, represented only a little over 2% of debtor's value. Creditors with only 2% of debtor's value could and did block plan confirmation. See id. at 132 (reversing plan confirmation because the plan was not fair and equitable).
188. See id. at 119-21. The Court states that even if bondholders received all of the debtor's assets, "they would realize less than 25 per cent on their claims." Id. at 119. Nevertheless, the plan required bondholders to surrender "23 percent of the value of the enterprise" to the shareholders, id., violating the absolute priority rule. See id. at 119-20.
189. See id. at 132 (reversing plan confirmation because the plan was not fair and equitable); id. at 119 (finding the absolute priority rule "firmly embedded" in § 77 B's fair and equitable requirement); id. at 119-20
190. Id. at 121 n.15 (quoting In re Dutch Woodcraft Shops, 14 F. Supp. 467, 471 (W.D. Mich. 1935)).
191. Id. at 122.
192. See OXFORD COMPANION TO THE SUPREME COURT 233-35 (Kermit L. Hall et al. eds., 1992) (biography of Justice Douglas).
193. See Case, 308 U.S. at 108.
194. See, e.g., id. at 113, 114, 119 (analyzing the plan under § 77B).
195. The Court decided the case on November 6, 1939. See id. at 106. Chapter X was enacted June 22, 1938. See Chandler Act of 1938, §§ 1-703, ch. 575, 52 Stat. 840-940 (repealed 1978).
196. See Case, 308 U.S. at 115-16 (discussing the term "fair and equitable").
197. See id. at 116. The Court quoted Louisville Trust Co.'s articulation of the absolute priority rule as follows: "[T]he stockholder's interest in the property is subordinate to the rights of creditors . . . [and] any arrangement . . . by which the subordinate rights . . . of stockholders are attempted to be secured at the expense of the prior rights . . . of creditors comes within judicial denunciation." Id. (quoting Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 684 (1899)).
198. Id. at 121.
199. See, e.g., id. at 121 n.15 (noting that "new money was commonly necessary in equity reorganizations not only to provide new working capital, but also to pay dissenting creditors").
200. The plan could pay dissenters in securities. See Consolidated Rock Prods. Co. v DuBois, 312 U.S. 510, 528-29 (1941) (noting that creditors can be given securities under the reorganization plan, even securities that are inferior to the securities given to shareholders); Sabel, supra note 57, at 42 (noting that prior to § 77B, dissenters had a right to cash).
201. See supra notes 161-65 (discussing the role of the SEC and appointment of independent trustees).
202. Case, 308 U.S. at 121 & n.15 (articulating the new value exception to the absolute priority rule).
203. See id. at 132 (reversing plan confirmation because the plan was not fair and equitable); id. at 119 (finding that fair and equitable embraces the absolute priority rule); id. at 119-20 (finding that the plan did not satisfy the absolute priority rule).
204. See id. at 121.
205. 312 U.S. 510 (1941).
206. See id, at 520-21 (affirming the absolute priority rule as expressed in Boyd).
207. Id. at 526.
208. See id. (finding that a "sum of values based on physical factors and assigned to separate units of the property without regard to the earning capacity of the whole enterprise is plainly inadequate").
209. See S.J. Res. 88, 91st Cong., 84 Stat. 468 (1970) (establishing the Commission); see also 1 COLLIER ON BANKRUPTCY ¶ 1.02[2] (15th ed. 1997) (noting the establishment of the Commission).
210. See S.J. Res. 88, 91st Cong., 84 Stat. 468 (1970) (establishing the Commission); see also 1 COLLIER ON BANKRUPTCY ¶ 1.02[2] (15th ed. 1997) (noting the establishment of the Commission).
211. REPORT OF THE COMM'N ON BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 93-137, pt. 1, at 25-26 (1973) (proposing a Bankruptcy Administration), reprinted in 251 Bankr. L. Rep. (CCH) 19-21 (extra ed. Aug. 3, 1973).
212. REPORT OF THE COMM'N ON BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 93-137, pt. 1, at 25-26 (1973) (proposing a Bankruptcy Administration), reprinted in 251 Bankr. L. Rep. (CCH) 19-21 (extra ed. Aug. 3, 1973).
213. See Bankruptcy Reform Act, Pub. L. No. 95-598, 92 Stat. 2549, 2549-688 (1978) (codified at 11 U.S.C. §§ 101-1330 (1994 & Supp. 1997)).
214. See 11 U.S.C. § 1129(a)(7)-(8) (1994) (stating that the court shall confirm a plan if, among other things, each impaired class has accepted the plan and if each class member has either accepted the plan or received liquidation value).
215. See id. § 1129(a) (listing requirements for confirmation).
216. See id. § 1126(c) (defining acceptance for creditor classes); H. REP. NO. 95-595, at 410 (1977), reprinted in 1978 U.S.C.C.A.N. 5967, 6366 (explaining that the two-thirds and majority are based on claims voting, not total claims); S. REP. NO. 95-989, at 123 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5909 (same).
217. See 11 U.S.C. § 1126(d) (defining acceptance for shareholder classes); H. REP. NO. 95-595, at 410; S. REP. NO. 95-989, at 123.
218. See 11 U.S.C. § 1124 (defining impaired classes).
219. See id. § 1129(a)(8) (stating that the court can confirm a plan if, among other things, all creditor classes accept). Section 1129(a) contains no fair and equitable requirement. See id. § 1129(a) (listing requirements for plan confirmation).
220. See id. § 1129(a)(7) (stating that an impaired dissenter must receive at least liquidation value of its claim for a court to confirm the reorganization plan).
221. See id. § 1129(b) (stating an alternative for plan confirmation if the plan satisfies all of the § 1129(a) requirements except the requirement that each class accepts the plan or is not impaired by it); id. § 1129(a)(10) (requiring at least one impaired class to accept the plan).
222. Secured creditors usually have different claims including different amounts owing, different interest rates, different collateral, or different priorities in the same collateral. Only creditors with similar claims may be placed in the same class. See id. § 1122(a) (explaining when claims may be placed in the same class); see also In re U.S. Truck Co., 800 F.2d 581, 582-87 (6th Cir. 1986) (noting that a union creditor with a claim resulting from a rejection of a collective bargaining agreement and other creditors with claims resulting from rejections of executory contracts may be classified separately, because their interests concerning future dealings with the debtor are substantially different); In re Bragg, 172 B.R. 781, 783-84 (Bankr. E.D. Pa. 1994) (noting that secured creditors with liens on different properties cannot be classified together because their legal rights are not substantially similar).
223. Under § 1124, any plan that alters the legal, equitable, or contractual rights of a class impairs that class. See 11 U.S.C. § 1124. Changing the interest rate by 1/100 of a percent, moving back maturity by one day, or reducing interest rates would constitute impairments. See, e.g., In re Witt, 60 B.R. 556, 562 (Bankr. N.D. Iowa 1986) (noting that the impairment does not have to be material to be adverse).
224. See 11 U.S.C. § 1129(b) (requiring, among other things, fair and equitable treatment of impaired rejecting classes for plan confirmation).
225. Id. § 1111(b).
226. Id. § 506(a).
227. See id. § 1111(b)(2) (noting that the claim of a creditor electing § 1111(b)(2) is secured for the full amount of the claim).
228. See id. § 1129(b)(2)(A)(i)(II) (stating that the creditor must receive at least the allowed amount of the claim, with a value equal to at least the value of the collateral, for the plan to be fair and equitable to that creditor's class).
229. See id. § 506(a) (stating that an undersecured creditor is deemed secured for an amount equal to the value of the collateral and unsecured for the remainder of its claim).
230. See id. § 1129(b)(2)(A)(i)(II).
231. See id. § 1129(b)(2)(B)(i) (stating an alternative for satisfying the absolute priority rule for unsecured creditors).
232. Id. § 1129(b)(2)(B)(ii).
233. Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392 (1868).
234. Northern Pac. Ry. v. Boyd, 228 U.S. 482 (1913).
235. Northwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988).
236. Barnhill v. Johnson, 503 U.S. 393 (1992).
237. See REPORT OF THE COMM'N ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. NO. 93-137, pt. 1, at 25-26 (1973), reprinted in 251 Bankr. L. Rep. (CCH) 19-21 (extra ed. Aug. 3, 1973).
238. See REPORT OF THE COMM'N ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. NO. 93-137, pt. 1, at 25-26 (1973), reprinted in 251 Bankr. L. Rep. (CCH) 19-21 (extra ed. Aug. 3, 1973).
239. See LAWRENCE P. KING, BANKRUPTCY CODE 991 (Collier Pamphlet ed. 1997) (noting that the debtor remains in possession of the business unless a party in interest or the United States Trustee requests that a trustee be appointed); see also 11 U.S.C. § 1104 (1994) (stating the conditions for appointing a trustee).
240. See 11 U.S.C. § 1121(b) (stating that only the debtor can file a reorganization plan in the four months after requesting Chapter 11 relief).
241. See id. § 1125(b) (requiring a disclosure to accompany any proposed plan for which the debtor solicits acceptance).
242. See id. ("The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor's assets.").
243. See id. (stating that notice and a hearing is necessary for approval of the disclosure statement).
244. See id. § 102(1) (defining "after notice and a hearing" as notice "appropriate in the particular circumstances," and hearing demanded by an interested party); see also FED. R. BANKR. P. 3017 (stating that the disclosure statement and notice of the hearing only has to be mailed to the debtor, any trustee or committee appointed under the Code, the SEC, and any party in interest who requests a copy of the statement in writing).
245. See 11 U.S.C. § 1144 (stating that, in cases of fraud, the court may revoke plan confirmation on the request of a party in interest within 180 days of the confirmation).
246. See id. § 1125(b) (requiring notice and a hearing before the court can approve a disclosure statement).
247. See FED. R. BANKR. P. 3017 (stating that a party in interest may request a copy of the disclosure statement).
248. See 11 U.S.C. § 1125(b) (listing the procedure and requirements for approving a disclosure statement).
249. Cf. supra notes 52-53 and accompanying notes (discussing the function of a low upset price in consent receiverships as forcing creditors to accept the reorganization plan because they would fare better under the plan).
250. For example, if the debtor's property has an appraised value of $2 million and the plan distributes cash and other property with a present value of $2 million to creditors, no value remains in the corporation. Therefore, theoretically, the shareholders could retain 100% ownership without retaining property. See In re Star City Rebuilders, Inc., 62 B.R. 983, 988-89 (Bankr. W.D. Va. 1986) (finding that shares in a corporation that had no value did not constitute property, so shareholders did not receive "property" on account of their status); see also Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1047-50 (1987) (discussing and criticizing this "no value" argument). The Supreme Court roundly rejected this theory. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207-08 (1988) (noting that a shareholder who retains an ownership interest in a corporation, even if the corporation's debts greatly exceed the value of its assets, retains property).
251. For example, if the debtor's property has an appraised value of $2 million and the plan distributes cash and other property with a present value of $2 million to creditors, no value remains in the corporation. Therefore, theoretically, the shareholders could retain 100% ownership without retaining property. See In re Star City Rebuilders, Inc., 62 B.R. 983, 988-89 (Bankr. W.D. Va. 1986) (finding that shares in a corporation that had no value did not constitute property, so shareholders did not receive "property" on account of their status); see also Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1047-50 (1987) (discussing and criticizing this "no value" argument). The Supreme Court roundly rejected this theory. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207-08 (1988) (noting that a shareholder who retains an ownership interest in a corporation, even if the corporation's debts greatly exceed the value of its assets, retains property).
252. For example, if the debtor's property has an appraised value of $2 million and the plan distributes cash and other property with a present value of $2 million to creditors, no value remains in the corporation. Therefore, theoretically, the shareholders could retain 100% ownership without retaining property. See In re Star City Rebuilders, Inc., 62 B.R. 983, 988-89 (Bankr. W.D. Va. 1986) (finding that shares in a corporation that had no value did not constitute property, so shareholders did not receive "property" on account of their status); see also Raymond T. Nimmer, Negotiated Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 EMORY L.J. 1009, 1047-50 (1987) (discussing and criticizing this "no value" argument). The Supreme Court roundly rejected this theory. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207-08 (1988) (noting that a shareholder who retains an ownership interest in a corporation, even if the corporation's debts greatly exceed the value of its assets, retains property).
253. See In re Bonner Mall Partnership, 2 F.3d 899, 909-10 (9th Cir. 1993) (noting that shareholders receive an interest on account of their investments); In re U.S. Truck Co., 800 F.2d 581, 587-88 (6th Cir. 1986) (same); In re Woodscape Ltd. Partnership, 134 B.R. 165, 168, 172-74 (Bankr. D. Md. 1991) (same);
254. See In re Bonner Mall Partnership, 2 F.3d 899, 909-10 (9th Cir. 1993) (noting that shareholders receive an interest on account of their investments); In re U.S. Truck Co., 800 F.2d 581, 587-88 (6th Cir. 1986) (same); In re Woodscape Ltd. Partnership, 134 B.R. 165, 168, 172-74 (Bankr. D. Md. 1991) (same);
255. See In re Bonner Mall Partnership, 2 F.3d 899, 909-10 (9th Cir. 1993) (noting that shareholders receive an interest on account of their investments); In re U.S. Truck Co., 800 F.2d 581, 587-88 (6th Cir. 1986) (same); In re Woodscape Ltd. Partnership, 134 B.R. 165, 168, 172-74 (Bankr. D. Md. 1991) (same);
256. see also Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69, 96-102 (1991) (discussing the new value exception and noting that shareholders receive an interest on account of their contributions);
257. Nimmer, supra note 228, at 1050-52 (claiming that shareholders who inject new value retain an interest because of their contributions, not because of their status as shareholders).
258. See infra note 278.
259. See, e.g., Dewsnup v. Timm, 503 U.S. 410, 419 (1992) (upholding a pre-Code rule of law in light of ambiguous language in the text of the Code).
260. See infra note 278.
261. See In re Star City Rebuilders, Inc., 62 B.R. 983, 988-89 (Bankr. W.D. Va. 1986) (finding that because valueless shares do not constitute property, shareholders are not receiving "property" on account of their status); see also Nimmer, supra note 228, at 1047-50 (1987) (discussing and criticizing this "no value" theory).
262. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207-08 (1988) (noting that ownership interest in a corporation is property, even if the corporation's debts far exceed the value of its assets).
263. See id.
264. See id. (stating that a retained equity interest is property, "whether the value is 'present or prospective, for dividends or only for purposes of control' . . . to 'which the creditors [are] entitled before the stockholders [can] retain it for any purpose whatever'" (quoting Northern Pac. Ry. v. Boyd, 228 U.S. 482, 508 (1913))).
265. See supra note 229; see also 11 U.S.C. § 1129(2)(B)(ii) (1994) (stating that for confirmation under the fair and equitable standard, each class of unsecured claims must receive either property equal to the amount of the claim, or the "holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property" (emphasis added)).
266. See 11 U.S.C. § 726 (listing the distribution priorities in a Chapter 7 liquidation). Section 1129(b)(2)(B)(ii) reflects this same principle. See id. § 1129(b)(2)(B)(ii) (stating that unsecured creditors must be paid in full or junior classes - shareholders - can receive or retain no property).
267. The Boyd majority pointed out this same problem over three-quarters of a century ago. See Northern Pac. Ry. v. Boyd, 228 U.S. 482, 502 (1913) (stating that "a transfer by stockholders from themselves to themselves cannot defeat the claim of a nonassenting creditor").
268. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (noting that shareholders' contributions in exchange for an interest in the reorganized corporation run afoul of the absolute priority rule if they are not "essential to the success of the undertaking").
269. Sections 1161-1174 address railroad reorganizations, see 11 U.S.C. §§ 1161-1174, and §§ 1101-1114, 1121-1129, 1141-1146 apply to all other reorganizations, see id. §§ 1101-1114, 1121-1129, 1141-1146. The railroad provisions stress the public interest, and even contain special provisions for labor relations in order to prevent strikes. See id. § 1165 (entitled "Protection of the Public Interest"); id. § 1167 (mandating that collective bargaining agreements not be modified).
270. See id. § 1129(a) (permitting plan confirmation without a judicial determination that the plan is fair and equitable if all classes or shareholders and creditors agree to confirmation); id. § 1126(b) (permitting a creditor or shareholder to accept a plan before the debtor commences bankruptcy proceedings in certain circumstances); id. § 1121(b) (encouraging cooperation by stating that only the debtor may file a plan for the first four months); see also 7 COLLIER ON BANKRUPTCY ¶ 1100.01 (15th ed. rev. 1997) (noting the importance of negotiation under the new Code).
271. See supra note 9 (discussing statutory and case law illustrating the inability of creditors to waive their absolute priority rights)
272. See supra note 242.
273. See supra note 9.
274. See 11 U.S.C. § 1129(a)(8) (listing acceptance by all impaired classes as a requirement for confirmation); id. § 1129(b) (permitting plan confirmation if at least one impaired class accepts and the plan is fair and equitable to each of the impaired, rejecting classes).
275. See id. § 1129(a) (listing no fair and equitable requirement for plan confirmation when all impaired classes accept the plan).
276. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939).
277. See 11 U.S.C. § 1129(a).
278. See Case, 308 U.S. at 121 (stressing "the necessity, at times, of seeking new money 'essential to the success of the undertaking' from the old stockholders").
279. See 11 U.S.C. § 1129(a); see also Case, 308 U.S. at 115 (stating that the term fair and equitable embraces the absolute priority rule).
280. See Case, 308 U.S. at 111, 115 (stating that 92.81% of bondholders, 99.75% of Class A stock, and 90% of Class B stock accepted the plan, and the complainant held only $18,500 of a large bond issue); see also supra note 168 (calculating the complainant's share of the debt to be slightly over 2%).
281. See 11 U.S.C. § 1122(a). Section 1122(a) states that, "a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class." Id. Individuals holding bonds from the same bond issue would have the same rights, and thus would probably have similar claims. See, e.g., In re Greystone III Joint Venture, 948 F.2d 134, 137 (5th Cir. 1991) (stating that claims that share common priority and rights against a debtor should be placed in the same class).
282. See 11 U.S.C. § 1129(a)(7) (stating that for plan confirmation, each holder of a claim in an impaired class must either accept the plan or receive liquidation value).
283. Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 409-10 (1868).
284. See, e.g., Case, 308 U.S. at 121 (acknowledging the creditors' superior rights in the debtor's assets); Kansas City Terminal Ry. v. Central Union Trust Co., 271 U.S. 445, 453-54 (1926) (noting that "no [reorganization plans] can be rightfully carried to consummation which recognize and preserve any interests in the stockholders without also recognizing and preserving the interests . . . of every creditor"); Kansas City S. Ry. v. Guardian Trust Co., 240 U.S. 166, 176, 178 (1916) (affirming the "equitable right of creditors to be preferred to stockholders against the property of a debtor corporation"); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 504 (1913) (noting that creditors' rights are superior to shareholders' rights); Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 684 (1899) ("[A]ny arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation.").
285. See Case, 308 U.S. at 121 (acknowledging the absolute priority rule and stating that despite the absolute priority rule, stockholders may sometimes be permitted to participate in the reorganized corporation); Kansas City Terminal Ry., 271 U.S. at 455 (noting that shareholders may provide the reorganized corporation with needed money in exchange for an interest in the corporation; however, the creditors must still be paid in full, though the creditors can be paid in securities, even inferior securities); Kansas City S. Ry., 240 U.S. at 176, 178 (acknowledging that plans would often fail without new money from shareholders, but refusing to confirm the plan for transgressing the absolute priority rule nevertheless); Boyd, 228 U.S. at 511-14 (Lurton, J., dissenting) (discussing a reorganized corporation's need for new capital, and urging courts to abandon the rigid absolute priority rule and examine the circumstances case by case).
286. See 11 U.S.C. § 1129(a).
287. See supra note 9 (discussing statutory and case law illustrating the inability of creditors to waive their absolute priority rights).
288. See, e.g., Macon & Ry. v. Parker, 9 Ga. 377, 393 (1851) (an early case stating that "all [railroad] creditors will be restrained from prosecuting their respective claims at law"); Glenn, supra note 4, at 437 (describing the secured creditor's remedies for default); see also supra notes 4-6 and accompanying text (discussing creditors' remedies); supra notes 32-67 and accompanying text (examining irregular mortgage foreclosure and consent receivership cases in which creditors were barred from pursuing their common law rights).
289. Creditors equitably own the debtor's property. See, e.g., Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 409-10 (1868).
290. See 11 U.S.C. § 1129(a)(7).
291. See id. (requiring no judicial determination that the reorganization plan is fair and equitable as long as all classes accept the plan).
292. See, e.g., Bankruptcy Reform Act of 1994 - Section by Section Description, § 213, 2-3, reprinted in 397 Bankr. L. Rep. (CCH) 57 (Oct. 20, 1994) (demonstrating congressional interest in protecting creditors). The report stated that: If creditors vote for the plan or reorganization, it can be confirmed over the vote of a dissenting class of creditors only if it complies with the fair and equitable test under § 1129(b) of the Bankruptcy Code and it can be confirmed over the vote of dissenting individual creditors only if it complies with the "best interests of the creditors" test under § 1129(a)(7) of the Bankruptcy Code. The words "fair and equitable" are terms of art that have a well established meaning under the case law of the Bankruptcy Act as well as under the Bankruptcy Code. Specifically, courts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors' claims must be paid in full, including postpetition interest before equity holders may participate in any recovery. See, e.g., Consolidated Rock Products Co. v. DuBois, 312 U.S. 510 (1941). Id.
293. See, e.g., Bankruptcy Reform Act of 1994 - Section by Section Description, § 213, 2-3, reprinted in 397 Bankr. L. Rep. (CCH) 57 (Oct. 20, 1994) (demonstrating congressional interest in protecting creditors). The report stated that: If creditors vote for the plan or reorganization, it can be confirmed over the vote of a dissenting class of creditors only if it complies with the fair and equitable test under § 1129(b) of the Bankruptcy Code and it can be confirmed over the vote of dissenting individual creditors only if it complies with the "best interests of the creditors" test under § 1129(a)(7) of the Bankruptcy Code. The words "fair and equitable" are terms of art that have a well established meaning under the case law of the Bankruptcy Act as well as under the Bankruptcy Code. Specifically, courts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors' claims must be paid in full, including postpetition interest before equity holders may participate in any recovery. See, e.g., Consolidated Rock Products Co. v. DuBois, 312 U.S. 510 (1941). Id.
294. See, e.g., Bankruptcy Reform Act of 1994 - Section by Section Description, § 213, 2-3, reprinted in 397 Bankr. L. Rep. (CCH) 57 (Oct. 20, 1994) (demonstrating congressional interest in protecting creditors). The report stated that: If creditors vote for the plan or reorganization, it can be confirmed over the vote of a dissenting class of creditors only if it complies with the fair and equitable test under § 1129(b) of the Bankruptcy Code and it can be confirmed over the vote of dissenting individual creditors only if it complies with the "best interests of the creditors" test under § 1129(a)(7) of the Bankruptcy Code. The words "fair and equitable" are terms of art that have a well established meaning under the case law of the Bankruptcy Act as well as under the Bankruptcy Code. Specifically, courts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors' claims must be paid in full, including postpetition interest before equity holders may participate in any recovery. See, e.g., Consolidated Rock Products Co. v. DuBois, 312 U.S. 510 (1941). Id.
295. See 11 U.S.C. § 1129(b) (requiring the court to find the plan fair and equitable in order to confirm when the plan fails to satisfy the § 1129(a)(8) requirement); see also id. § 1129(a)(8) (requiring all classes to either accept or remain unimpaired by the plan in order for the judge to confirm the plan).
296. Id. § 1129(b)(2) (emphasis added).
297. Id. § 102(3).
298. 124 CONG. REC. H32,407 (daily ed. Sept. 28, 1978).
299. Id.
300. See supra note 7 and accompanying text (citing examples of cases that expressed and applied the absolute priority rule).
301. See H. REP. No. 95-595, at 412-18 (1977), reprinted in 1978 U.S.C.C.A.N. 5967, 6368-74 (stating that the Code codifies the absolute priority rule from the dissenting class down, and discussing application of the fair and equitable requirement in detail without ever mentioning new value).
302. See 11 U.S.C. § 1129(b)(2)(A) (listing alternatives for satisfying the fair and equitable requirement for secured creditors).
303. See id. § 1129(b)(2)(B) (listing alternatives for satisfying the fair and equitable requirement for unsecured creditors).
304. See id. § 1129(b)(2)(C) (listing alternatives for satisfying the fair and equitable requirement for shareholders).
305. See, e.g., Consolidated Rock Prods. Co. v. DuBois, 312 U.S. 510, 528-29 (1941) (noting that, "while creditors may be given inferior grades of securities, their 'superior rights' must be recognized"); Kansas City Terminal Ry. v. Central Union Trust Co., 271 U.S. 445, 454-55 (1926) (stating that while creditors have absolute priority over shareholders, the plan can satisfy this priority by paying creditors securities inferior "in grade or rank" to those given to shareholders); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 508 (1913) (stating that a creditor's absolute priority can be protected "by issuance on equitable terms of income bonds or preferred stock").
306. 124 CONG. REC. H32,407 (daily ed. Sept. 28, 1978).
307. 502 U.S. 410 (1992).
308. See In re Bonner Mall Partnership, 2 F.3d 899, 912-18 (9th Cir. 1993) (discussing the survival of the new value exception in terms of statutory interpretation). The In re Bonner Mall Partnership court cited Dewsnup for the proposition that because "the text of the Code does not unambiguously abrogate [the new value exception], courts should presume that Congress intended it to continue unless the legislative history dictates a contrary result." Id. at 913. The Fifth Circuit withdrew the portion of a majority opinion claiming the new value exception did not survive enactment of the Bankruptcy Code after the Supreme Court decided Dewsnup. See In re Greystone III Joint Venture, 995 F.2d 1274, 1284 (5th Cir. 1992) (en banc).
309. See Dewsnup, 502 U.S. at 412-13 (stating the facts and the issues to be resolved).
310. See id. at 416-20 (stating that the rule that a lien on real property passes through bankruptcy unaffected had been clearly established before enactment of the Code, and using this established rule to justify interpreting the phrase "allowed claim" differently in § 506(a) and § 506(d)).
311. See In re Bonner Mall Partnership, 2 F.3d at 912-18 (discussing the survival of the new value exception in terms of statutory interpretation).
312. See 11 U.S.C. § 506 (1994) (entitled "Determination of secured status").
313. See id. § 1129(b) (incorporating the absolute priority rule through the phrase fair and equitable, but totally omitting any mention of a new value exception).
314. See supra notes 20-67 (examining the historical context for the development of the absolute priority rule and its new value exception); supra Part II.B (tracing development of the absolute priority rule and its new value exception through case law); supra notes 264, 268-69, 271 and accompanying text (examining legislative history relevant to the new value exception).
315. See Dewsnup, 502 U.S. at 417 (stating that if the lien passes through bankruptcy unaffected, the creditor will benefit from any increase in value between the time of filing for bankruptcy and the actual sale).
316. See id. at 415, 417 (noting that interpreting "allowed claim" the same in § 506(a) and (d) would "freeze the creditor's interest"); see also 11 U.S.C. § 506(a), (d).
317. See Dewsnup, 502 U.S. at 418 (stating that under pre-Code law, a lien passed through bankruptcy unaffected).
318. See id. at 417 (stating that the creditor would benefit from any increase in value of the collateral).
319. See id. at 417-18.
320. See id. at 416-20 (stating the Court's reasoning and holding).
321. See, e.g., Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (stating that shareholders may receive an ownership interest in the reorganized corporation even when the creditors remain not fully paid); Railroad Co. v. Howard, 74 U.S. (1 Wall.) 392, 409 (1868) (noting that the corporation's assets are held in trust for the payment of its debts).
322. See 11 U.S.C. § 1129(b) (1994).
323. See, e.g., H. REP. NO. 95-595, at 413-18 (1977), reprinted in 1978 U.S.C.C.A.N. 5967, 6368-74 (noting that a "dissenting class must be paid in full before any junior class may share under the plan").
324. See, e.g., Case, 308 U.S. at 121 (noting that shareholders may participate in the reorganization plan only when their new money is "essential to the success of the undertaking"); Northern Pac. Ry. v. Boyd, 228 U.S. 482, 511-14 (1913) (Lurton, J., dissenting) (acknowledging a reorganized corporation's need for new money and recognizing shareholders as the most likely source); see also supra note 9 (discussing statutory and case law illustrating the inability of creditors to waive their absolute priority rights).
325. See Dewsnup, 502 U.S. at 419.
326. See 11 U.S.C. § 1129(a) (permitting plan confirmation without judicial consideration of whether the plan is fair and equitable as long as all impaired classes accept the plan).
327. See supra Part II. A-B (examining the historical development of the absolute priority rule and the new value exception).
328. See supra notes 20-30 and accompanying text (discussing the railroads' historic role).
329. See 11 U.S.C. §§ 1161-1167 (Subchapter IV Railroad Reorganization).
330. See Thomas Lauricella, Index Funds Outpace Managed Funds Despite Turmoil in Stock Market, WALL ST. J., NOV. 24, 1997, at B14F.
331. See supra notes 101-36 and accompanying text (discussing the development of the new value exception, and stressing the need for new capital to operate the reorganized corporation as the factor driving the development).
332. See 11 U.S.C. § 364 (permitting the debtor to obtain both unsecured and secured credit in certain circumstances).
333. See id. § 363(c)(2) (permitting the debtor to use, sell, or lease cash collateral in certain circumstances).
334. The amicus curiae brief of the United States in Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), stated: It is not surprising that the Code has dropped the infusion-of-new-capital exception to the absolute priority rule. The exception reflected two conditions that have since changed. First, the Court believed in 1939 (and earlier) that new capital to fund a reorganization beneficial to creditors might be available only from old equity holders. In today's capital markets, which make it far easier for worthwhile ventures to obtain financing, that is a much less realistic concern. Indeed, the inability of a reorganized company to convince anyone other than a pre-petition equity holder to lend it money today suggests not a failure of the capital markets as much as a realistic assessment that the reorganization is not likely to succeed. Second, the underlying philosophy of the Code is to allow classes of of [sic] creditors to determine what is in their own best interest. When a class of creditors dissents from a proposed plan that provides for equity-holder participation, that indicates that the necessary percentages of the class do not believe that the equity holders' participation in a reorganization would increase the value of their claims. The Bankruptcy Code leaves that decision to the creditors, and there is not longer any need for a court to decide whether, in a particular case, continuing participation by equity holders might be in their best interests. Brief for the United States as Amicus Curiae Supporting the Petitioners at 22 (U.S. Gov't Printing Office 1997) (citations omitted).
335. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 121 (1939) (stating that the interest the shareholders receive must be "reasonably equivalent to their contribution").
336. See Haynsworth, supra note 157, at 486 (noting that, because appraisal is an inexact science and valuation is a difficult task, valuation cases often turn into a battle between experts taking extreme positions, with the judge compromising by choosing a value somewhere in the middle). Sometimes a single expert gives the court a wide range of values. See, e.g., JAMES J. WHITE, BANKRUPTCY AND CREDITORS' RIGHTS § 3, at 349-51 (1985) (reprinting an expert's evaluation of a corporation's going concern value that estimated the corporation's value as falling between $69,272,000 and $174,982,000).
337. See Haynsworth, supra note 157, at 486 (noting that, because appraisal is an inexact science and valuation is a difficult task, valuation cases often turn into a battle between experts taking extreme positions, with the judge compromising by choosing a value somewhere in the middle). Sometimes a single expert gives the court a wide range of values. See, e.g., JAMES J. WHITE, BANKRUPTCY AND CREDITORS' RIGHTS § 3, at 349-51 (1985) (reprinting an expert's evaluation of a corporation's going concern value that estimated the corporation's value as falling between $69,272,000 and $174,982,000).
338. See supra notes 190-92 and accompanying text (stating that the Bankruptcy Code abandoned SEC oversight and the independent trustee without replacing them with the Bankruptcy Administration, as proposed).
339. See FED. R. BANKR. P. 8013 (stating the standard of review for bankruptcy court cases).
340. See Louisville Trust Co. v. Louisville, New Albany & Chicago Ry., 174 U.S. 674, 687-89 (1899) (stating the Court's holding and remanding because of the suspicious nature of the irregular mortgage foreclosure and consent receivership, despite no actual evidence of fraud or wrongdoing).
341. See id. at 688.
342. See id.
343. See id. (reluctantly upholding the lower court's finding).
344. See 11 U.S.C. § 1129(b) (1994) (permitting confirmation if, among other things, at least one impaired class accepts).
345. Section 1129(a) does not require the judge to determine whether the plan is fair and equitable, thereby avoiding complex evaluation issues. See id. § 1129(a) (stating requirements for confirmation when all impaired classes accept the plan). Section 1129(b), on the other hand, requires a judicial determination that the plan is fair and equitable. See id. § 1129(b).
346. See In re Waterville Valley Town Square Assocs., 208 B.R. 90 (Bankr. D.N.H. 1997).
347. See id. at 96-100 (stating the court's analysis and findings).
348. See id. at 100 (noting that such a contribution would satisfy the new value excep tion).
349. See id. (noting the payout to unsecured creditors under the plan).
350. See id. at 94-99 (outlining the plan opponent's arguments).
351. See id. at 99.
352. Id. at 100.
353. See Reaction to Judge Bufford's Articles on Single Asset Real Estate, 31 Bankr. Ct. Dec. (CRR) A5 (Aug. 5, 1997) (remarks of Robin Phelan).
354. Id.
355. See FED. R. BANKR. P. 8013 (stating that factual findings should not be overturned unless clearly erroneous).
356. See supra notes 52-53 and accompanying text (describing the function of the upset price).
357. See supra notes 101-36 (discussing the development of the new value exception).
358. See, e.g., Dean, supra note 5, at 539 (noting that committees needed cash to pay dissenters); Levi & Moore, supra note 5, at 231 (same); Martin, supra note 11, at 687 (stating that raising fresh capital was usually a critical feature of the reorganization plan); Thacher, supra note 39, at 47 (noting that committees needed cash to pay dissenters).
359. See supra notes 302-06 and accompanying text (discussing options available under the Code for raising cash, and the likely reason that a debtor would be unable to raise any required cash in the capital markets).
360. See National Bankruptcy Review Commission, Chapter 11, Working Group Proposal #1: Absolute Priority and Exclusivity (visited Aug. 19, 1997) 〈http://www.abiworld.org/legis/review/proposals/apr.htm〉.
361. See supra notes 32-58 and accompanying text (discussing the sale model under irregular mortgage foreclosures and consent receiverships); supra note 141 and accompanying text (discussing the sale model under the 1934 Act and the current Code).
362. See 11 U.S.C. § 1141(a) (1994) (noting that confirmation binds all parties).
363. See id.
364. See id. § 363(k) (permitting the debtor to apply the value of the mortgage to the bid price).
365. See id. § 1129(b).
366. See, e.g., In re Waterville Valley Town Square Assocs., 208 B.R. 90, 99 (Bankr. D.N.H. 1997) (demonstrating that the new value exception harms creditors).
367. See 11 U.S.C. § 1129(b)(2)(B)(ii) ("[T]he holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property").
368. See id. § 1129(a) (requiring no judicial determination of fair and equitable if all impaired classes accept the plan).