REINHARDT, Circuit Judge:
This case requires us to decide whether the new value "exception" to the absolute priority rule survives the enactment of the Bankruptcy Reform Act of 1978 (better known as the Bankruptcy Code), which replaced the Bankruptcy Act of 1898.
In 1984-85, Northtown Investments built Bonner Mall. The project was financed by a $6.3 million loan, secured by the mall property, from First National Bank of North Idaho, which later sold the note and deed of trust to appellant U.S. Bancorp Mortgage Co. ("Bancorp"). In October 1986 the mall was purchased by appellee Bonner Mall Partnership ("Bonner"), subject to the lien acquired by Bancorp. Bonner is composed of six partners, five trusts and one individual investor,
On March 13, 1991, Bonner filed a Chapter 11 (reorganization) bankruptcy petition, which automatically stayed the foreclosure sale. 11 U.S.C. § 362(a). Bancorp moved for relief from the stay under section 362(d)(2).
Bonner filed a reorganization plan relying on the new value doctrine. In response Bancorp renewed its motion to lift the stay. Bancorp argued 1) that the new value exception did not survive the enactment of the Bankruptcy Code; and 2) even if it did, Bonner's plan was still unconfirmable as a matter of law. The parties stipulated that the motion involved only legal questions, so no evidence was taken. The bankruptcy court accepted Bancorp's first argument but did not reach the second. The bankruptcy judge noted that after his original order the Fifth Circuit had concluded in its "convincing" decision in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.1991), petition for rehearing granted in part and opinion withdrawn in part, 995 F.2d 1284 (5th Cir.) (per curiam), cert. denied, ___ U.S. ___, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992), that there is no longer a new value exception. On that basis, the judge granted Bancorp's motion for relief from the automatic stay. After the bankruptcy judge stayed his order at Bonner's request, Bonner appealed to the district court.
On appeal, the district judge determined that the only issue before him was whether the Bankruptcy Code had eliminated the new value exception. He found that it had not. In doing so he relied on the Supreme Court's ruling in Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which was handed down after the bankruptcy court's decision and which emphasized the Court's reluctance to overturn pre-Code practice (see infra). Moreover, by the time of the district court's opinion the relevant portion of the Fifth Circuit's Greystone opinion had been withdrawn.
The parties agree that we have jurisdiction to hear Bancorp's appeal. Nevertheless, we have an independent duty to examine our own subject matter jurisdiction. Pizza of Hawaii, Inc. v. Shakey's Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1377 (9th Cir.1985). Twenty Eight U.S.C. section 158(d) provides that "[t]he courts of appeal shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section." Subsection (a) states in relevant part that:
28 U.S.C. § 158(a).
The more difficult question is whether the district court's order was final.
Under Ninth Circuit law, if the district court affirms or reverses a final bankruptcy court order, its order is final. King v. Stanton (In re Stanton), 766 F.2d 1283, 1287 (9th Cir.1985). However, difficult questions regarding finality sometimes arise when a district court reverses a final order of a bankruptcy court and remands. Vylene, 968 F.2d at 895. In such circumstances we balance two important policies: avoiding piecemeal appeals and enhancing judicial efficiency. Id.; Zolg v. Kelly (In re Kelly), 841 F.2d 908, 911 (9th Cir.1988). We also consider the systemic interest in preserving the bankruptcy court's role as the finder of fact. Stanton, 766 F.2d at 1287.
However, Stanton suggests that we should assert jurisdiction even though a district court has remanded a matter for factual findings on a central issue if that issue is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding;
The instant case presents a situation analogous to the one we faced in Pizza of Hawaii, which was cited with approval in Stanton and Fowler. In Pizza of Hawaii the bankruptcy court confirmed Pizza's proposed plan (a final order) over Shakey's objection that the plan did not make sufficient provision for a debt that Pizza might owe Shakey's on account of a pending civil case. On appeal, the district court 1) vacated the order of confirmation; 2) ordered the bankruptcy court to grant Shakey's leave to amend its proof of claim; 3) ordered the bankruptcy court to value the claim; and 4) ordered the bankruptcy court to reconsider the plan's feasibility in light of the value of Shakey's claim. 761 F.2d at 1376. Pizza appealed the order to this court. Despite the fact that the
For the above reasons, we conclude that we have subject matter jurisdiction over Bancorp's appeal under 28 U.S.C. section 158(d).
BONNER'S PLAN, CONFIRMATION, AND THE NEW VALUE EXCEPTION
Bonner's proposed reorganization plan ("the Plan") provides for the transfer of all of Bonner Mall Partnership's assets (the mall for all practical purposes) to a new corporation, Bonner Mall Properties, Inc., created by the Plan to carry out its provisions. One of the most significant features of the Plan is the treatment of Bancorp's $6.6 million claim, for which the mall is collateral. In the course of his original order denying Bancorp's motion for relief from the stay, the bankruptcy judge valued the mall at $3.2 million. This meant that Bancorp's claim against Bonner was undersecured: it was secured as to $3.2 million and unsecured as to $3.4 million. See 11 U.S.C. § 506(a). The unsecured portion of Bancorp's claim represents the vast majority of Bonner's unsecured debt. Under the Plan, the $3.2 million debt to Bancorp secured by the mall would be paid 32 months after the Plan's confirmation, with interest payments payable monthly in the interim. Payment of all other secured debt would be deferred. All unsecured creditors of Bonner who are owed more than $1000 would be paid according to a pro-rata distribution of 300,000 shares of preferred stock in the new corporation. Each share would be valued at $1.00.
Under the Plan the equity owners, i.e. the partners, would receive nothing on their claims. However, to raise additional capital for the new corporation, the partners would contribute a total of $200,000 in cash to Bonner Mall Properties in exchange for 2 million of the 4 million authorized shares of the new corporation's common stock. No other persons are designated to receive stock in exchange for such contributions. The Plan also states that the partners would subsidize any shortfall in working capital during the first 32 months after confirmation of the plan.
Section 1129(a) of Chapter 11 establishes thirteen requirements for confirmation of a reorganization plan, all of which must generally be satisfied. One such requirement is set forth in subsection (a)(8), which mandates that "[w]ith respect to each class [of claims], A) such class has voted to accept the plan or B) such class is not impaired under the plan." 11 U.S.C. § 1129(a)(8).
The resolution of this question turns on whether there is a reasonable possibility that a bankruptcy judge could find Bonner's Plan "fair and equitable." Section 1129(b)(2) of the Code defines "fair and equitable" as including several enumerated requirements. The section, which is at the heart of the controversy between the parties, states, inter alia, that a plan will be considered "fair and equitable" only if:
(emphasis added). Section 1129(b)(2)(B) is a two-part codification of the judge-made absolute priority rule, compliance with which was a prerequisite to any determination that a plan was "fair and equitable" under the Bankruptcy Act.
Here, each of the unsecured claims against Bonner will not be paid in full on the effective date of the Plan. As a result, section 1129(b)(2)(B)(i) cannot be satisfied. Therefore, Bonner's Plan cannot be held to be "fair and equitable" unless it complies with the provisions of section 1129(b)(2)(B)(ii). If it fails to meet the requirements of that section it is unconfirmable as a matter of law. A critical area of dispute in this case is whether Bonner's Plan violates section 1129(b)(2)(B)(ii) and, in turn, the absolute priority rule and the "fair and equitable" principle.
Under pre-Code Bankruptcy Act practice, a plan that allowed stockholders in the business that had filed for bankruptcy protection (old equity) to receive stock in the reorganized debtor in exchange for contributions of added capital (new value) could under certain conditions satisfy the absolute priority rule and be considered "fair and equitable" even though a senior class was not paid in full. See Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 121, 60 S.Ct. 1, 10, 84 L.Ed. 110 (1939); Marine Harbor Properties, Inc. v. Manufacturers Trust Co., 317 U.S. 78, 85-86, 63 S.Ct. 93, 97-98, 87 L.Ed. 64 (1942); Mason v. Paradise Irrigation Dist., 326 U.S. 536, 541-43, 66 S.Ct. 290, 292-93, 90 L.Ed. 287 (1946). That set of conditions became known collectively as the "new value exception" to the absolute priority rule; the terms of that "exception" will be discussed below.
Although the question we must ultimately answer is whether the new value exception survived the enactment of the Bankruptcy Code, we should note, preliminarily, that the term "exception" is misleading. The doctrine is not actually an exception to the absolute priority rule but is rather a corollary principle, or, more simply a description of the limitations of the rule itself. It is, as indicated above, the set of conditions under which former shareholders may lawfully obtain a priority interest in the reorganized venture. The Supreme Court appeared to recognize as much in Case v. Los Angeles Lumber when it stated that if a new capital contribution satisfies certain conditions "the creditor cannot complain that he is not accorded full right of priority against the corporate assets." 308 U.S. at 122, 60 S.Ct. at 10 (internal quotation
The question whether the adoption of the Code served to eliminate the new value exception was before the Supreme Court in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). While there is language in the opinion questioning the viability of the doctrine, the Court explicitly stated that it was not deciding the issue.
Other appellate courts have given mixed signals on whether the principle survives. The Seventh Circuit seems internally divided on the question: In one case it analyzed a reorganization plan in light of the exception, while stating that the status of the doctrine is an open question after Ahlers; another panel criticized the exception and strongly hinted that it is moribund; and a third stopped just short of holding that the exception survives.
While there is a division in the district and bankruptcy courts of our circuit and nationwide, the majority of courts that have considered the question have held that the new value exception is alive and well. We share the view that the doctrine remains a vital legal principle. Accordingly, we hold that the Code permits the confirmation of a reorganization plan that provides for the infusion of capital by the shareholders of the bankrupt corporation in exchange for stock if the plan meets the conditions that plans were required to meet prior to the Code's adoption.
THE NEW VALUE EXCEPTION AND THE CODE
Our explanation of why we hold that the new value exception survives will address several distinct but related issues. First, we determine that the Code provision codifying the absolute priority rule does not prohibit confirmation of a new value plan. Second, we decide that Congress' failure expressly to include the new value doctrine as a standard to be considered in applying the "fair and equitable" principle does not reflect an intent
The Codification of the Absolute Priority Rule Does Not Serve to Eliminate the New Value Exception.
The parties take diametrically opposed positions as to the consistency of the new value exception with 11 U.S.C. section 1129(b)(2)(B)(ii). Bancorp argues that: 1) Bonner's Plan violates the absolute priority rule because the old equity owners will have an ownership interest in the new company even though Bancorp's unsecured claim will not be paid in full and 2) the plain meaning of 11 U.S.C. section 1129(b)(2)(B)(ii) demonstrates that the new value exception did not survive the enactment of the Code. Bonner contends that: 1) the infusion of new capital from a source outside the bankruptcy estate, even if the source is a former equity holder, is an independent act that does not violate the absolute priority rule and 2) section 1129(b)(2)(B)(ii) does not forbid confirmation of plans that meet the requirements of the new value exception.
In determining whether section 1129(b)(2)(B)(ii) abolishes the new value exception we apply the traditional tools of statutory construction. The interpretation of a statutory provision must begin with the plain meaning of its language. Pennsylvania Public Welfare Dept. v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990). Where statutory language is unambiguous the judicial inquiry is complete. Connecticut Nat. Bank v. Germain, ___ U.S. ___, ___, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992). It is a cardinal principle of statutory construction that a court must give effect, if possible, to every clause and word of a statute. Negonsott v. Samuels, ___ U.S. ___, ___, 113 S.Ct. 1119, 1123, 122 L.Ed.2d 457 (1993). When the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language. United States v. Ron Pair Enterp., Inc., 489 U.S. 235, 240-41, 109 S.Ct. 1026, 1029-30, 103 L.Ed.2d 290 (1988). Applying these familiar rules, we conclude that the plain language of section 1129(b)(2)(B)(ii) demonstrates that Bonner's, and not Bancorp's, reading of the provision is correct.
1. Because Qualifying New Value Plans Do Not Give Old Equity Holders Stock in the Reorganized Debtor "On Account Of" Their Prior Ownership Interests, They Do Not Violate 11 U.S.C. Section 1129(b)(2)(B)(ii).
Eleven U.S.C. section 1129(b)(2)(B)(ii) requires that a plan provide that with respect to a class of unsecured claims that has not received full payment —
In plainer English the provision bars old equity from receiving any property via a reorganization plan "on account of" its prior equitable ownership when all senior claim classes are not paid in full. E.g., Snyder v. Farm Credit Bank of St. Louis (In re Snyder), 967 F.2d 1126, 1130 (7th Cir.1992); Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 588 (6th Cir.1986); Prudential Ins. Co. v. F.A.B. Indus. (In re F.A.B. Indus.), 147 B.R. 763, 768-69 (C.D.Cal.1992), appeal docketed, No. 93-55055 (9th Cir. Jan. 13, 1993); In re Pullman Construction Indus, 107 B.R. 909, 944 (N.D.Ill.1989). The central inquiry in determining the reach of the prohibition is the meaning of the critical words "on account of".
We have no difficulty in reconciling the "on account of" language with the new value exception. Under Bankruptcy Act practice, old equity was required to meet several requirements in order to take advantage of that doctrine. Former equity owners were required to offer value that was 1) new, 2) substantial, 3) money or money's worth, 4) necessary for a successful reorganization and 5) reasonably equivalent to the value or interest received. Case v. Los Angeles Lumber, 308 U.S. at 121-22, 60 S.Ct. at 10-11; Snyder, 967 F.2d at 1131. Several courts have concluded that if a proposed plan satisfies all of these requirements, i.e. the new
We recognize that in some larger sense the reason that former owners receive new equity interests in reorganized ventures is that they are former owners. But it is also true that in new value transactions old equity owners receive stock in exchange for the additional capital they invest. Causation for any event has many and varied levels. Here, the answer to the meaning of the phrase "on account of" lies in the level of causation Congress had in mind when it prohibited old equity owners from receiving property "on account of" their prior interests. A reading of the full text of section 1129(b)(2)(B)(ii) makes it clear that what Congress had in mind was direct or immediate causation rather than a more remote variety, and that it did not intend to prohibit persons who receive stock because they have provided new capital from becoming participants in the reorganized debtor simply because they were also owners of the original enterprise.
Had Congress intended that old equity never receive any property under a reorganization plan where senior claim classes are not paid in full, it could simply have omitted the "on account of" language from section 1129(b)(2)(B)(ii). We would then be left with an absolute prohibition against former equity owners' receiving or retaining property in the reorganized debtor in such circumstances. The expansive reading of the phrase "on account of such junior claim or interest" suggested by Bancorp would lead to the identical result, thus rendering the disputed phrase superfluous. Under that interetation any distribution to old equity would always be "on account of" its former interest in some sense. We decline Bancorp's invitation to nullify Congress' deliberate use of the term "on account of such junior claim or interest", particularly since nearly identical language can be found throughout the Code.
We believe that Congress intended the "on account of" phrase in section 1129(b)(2)(B)(ii) to require bankruptcy courts to determine whether a reorganization plan that gives stock to former equity holders does so primarily because of their old interests in the debtor or for legitimate business reasons. The new value doctrine provides the means by which a court can discover whether a particular new capital transaction is proposed "on account of" old equity's prior ownership or "on account of" its new contribution. In other words, in evaluating whether a reorganization plan satisfies the requirements of the new value exception a court is in fact determining whether old equity is unjustifiably attempting to retain its corporate ownership powers in violation of the absolute priority rule or whether there is genuine and fair exchange of new capital for an equity interest.
Contrary to Bancorp's contentions, section 1129(b)(2)(B)(ii) does not by its terms eliminate, or even refer to, the new value exception.
2. The "On Account Of" Language of Section 1129(b)(2)(B)(ii) Does Not Bar Plans That Give Old Equity Alone the Opportunity to Acquire Stock for a New Capital Contribution.
As Bancorp notes, several courts have held that where a reorganization plan gives old equity alone the right to obtain an interest in the reorganized debtor in exchange for new value, as Bonner's Plan does, the old equity holders are given "property" on account of their prior ownership interests and the absolute priority rule is violated. The Fourth Circuit held that such plans violate section 1129(b)(2)(B)(ii), even assuming the new value exception still exists. Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 504 (4th Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992);
We disagree with this analysis. Even assuming that an exclusive opportunity is "property",
As stated earlier, whether a particular plan gives old equity a property interest "on account of" its old ownership interests in violation of the absolute priority rule or for another, permissible reason is a factual question. The answer depends upon whether the requirements of the new value exception are met. We believe that this same analysis applies whether a plan gives old equity an exclusive or non-exclusive right of participation in a new value transaction. What matters instead is whether the proposed transaction meets the criterion "necessary to the success of the reorganization".
In sum, where the strictures of the new value exception are met, there is simply no violation of the absolute priority rule, whether the plan provides for exclusive or non-exclusive participation, because old equity will not retain or receive property "on account of" its old ownership interests in violation of section 1129(b)(2)(B)(ii).
Congress' Failure to List the New Value Exception as a Specific Doctrine Permitted under the "Fair and Equitable" Principle Does Not Demonstrate an Intent to Eliminate It.
While the absolute priority rule clearly does not prohibit confirmation of a new value exception plan in a cramdown, this does not necessarily mean that the "fair and equitable" provisions of the Code should be interpreted as permitting confirmation of such a plan. Bancorp argues that Congress' failure expressly to provide for the continuation of the new value exception in the provision setting forth the requirements of the "fair and equitable" principle must be interpreted as an implicit statement that it did not intend the doctrine to survive the adoption of the Code. Recognizing that the Code does not unambiguously allow for new capital contribution plans, Bonner argues that such plans are consistent with the "fair and equitable" principle and that despite the absence of an express provision, Congress intended to maintain the new value exception.
At oral argument Bancorp suggested that the new value exception was mentioned once in dicta by the Supreme Court in Case v. Los Angeles Lumber Products and thereafter never heard from again. Consequently, Bancorp argues that Congress would not have known of the principle when it enacted the Code. Cf. United States v. Ron Pair Enterp., Inc., 489 U.S. 235, 246, 109 S.Ct. 1026, 1033, 103 L.Ed.2d 290 (1988) (practice of denying post-petition interest to holders of non-consensual liens was an exception to an exception practiced only by a few courts so Congress would not have known of it). We disagree.
There is simply no question that the new value exception was an established pre-Code Bankruptcy practice of which Congress would have had (and did have) knowledge. Snyder v. Farm Credit Bank of St. Louis (In re Snyder), 967 F.2d 1126, 1129 (7th Cir. 1992). First, several Supreme Court cases had mentioned the principle, albeit the last time in 1946. Second, several appellate court cases recognized the new value doctrine after 1946: E.g., Phelan v. Middle States Oil Corp., 220 F.2d 593, 614 (2d Cir.), cert. denied, 349 U.S. 929, 75 S.Ct. 772, 99 L.Ed. 1260 (1955); Security & Exch. Comm'n v. Canandaigua Enterp. Corp., 339 F.2d 14, 21 (2d Cir.1964). Finally, a proposal to broaden the new value exception was put before Congress during the drafting of the Code. While the proposal was rejected, that action demonstrates that Congress knew of the doctrine when it enacted the Code.
Once it has been shown that Congress was aware of a pre-Code practice, the remaining inquiry under Dewsnup and Davenport is whether it has made clear its intent to change that practice. Bancorp argues that the codification of the formerly judicially-defined concept of "fair and equitable" without a reference to the new value exception shows Congress' clear intent to eliminate the doctrine.
Where the text of the Code does not unambiguously abrogate pre-Code practice, courts should presume that Congress intended it to continue unless the legislative history dictates a contrary result. See Dewsnup, ___ U.S. at ___, 112 S.Ct. at 779. It does not do so here. If anything, the legislative history of the Code supports the continued existence of the new value doctrine. It contains statements by sponsors of the Code that although section 1129(b)(2) lists several specific factors interpreting "fair and equitable", others were omitted to avoid statutory complexity and because courts would independently find that they were fundamental to "fair and equitable treatment".
As stated earlier, in enacting the Code Congress rejected a proposal by the Bankruptcy Commission to expand the new value exception significantly. See Victor Brudney, The Bankruptcy Commission's Proposed Modifications of the Absolute Priority Rule, 48 Am.Bankr.L.J. 305, 335-36 (1974). That proposal would have eliminated the "money or money's worth" requirement set forth in Case v. Los Angeles Lumber and permitted new "important" contributions, including contributions of management, to suffice. Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 93-137, 93d Cong., 1st Sess., pt. I, 258-59; pt. II, §§ 7-303(7), 7-310 (1973); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 205-06, 108 S.Ct. 963, 968-69, 99 L.Ed.2d 169 (1988). Congress' rejection of the Bankruptcy Commission's proposal shows only that it did not want to broaden the exception; it does not indicate rejection of the exception itself. Travelers Ins. Co. v. Bryson Properties, XVIII, (In re Bryson Properties, Inc., XVIII), 961 F.2d 496, 504 n. 13 (4th Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992). Indeed, "the Commission's proposal presupposed the existence of the new value exception, and Congress's rejection of the modification could just as easily be construed as an endorsement of the status quo." Snyder, 967 F.2d at 1130.
In sum, neither the text nor the legislative history of section 1129(b)(2) justifies the conclusion that the new value exception was eliminated. See Bryson, 961 F.2d at 504 n. 13. Congress' failure to include explicitly the well-established requirements of the new value exception in section 1129(b)(2) is of no assistance to Bancorp. Given that there is no evidence of a clear intent on the part of Congress to eliminate the new value exception in either the statutory text or the legislative history, under Dewsnup and Davenport pre-Code practice continues to apply.
Congress' Overhaul of the Reorganization Process Does Not Justify a Conclusion that the New Value Exception was Abolished.
Bancorp contends that where the Code totally revamps an area of bankruptcy law, pre-Code practice may appropriately be ignored. Bancorp relies on Union Bank v. Wolas, ___ U.S. ___, 112 S.Ct. 527, 116 L.Ed.2d 514 (1992), in support of this proposition. In Wolas the Court unanimously found that the text of the Code sharply limited the pre-Code practice at issue. Under the Bankruptcy Act a trustee could avoid a debtor's payments on a long-term debt if they were made during the ninety days prior to bankruptcy. However, he could not avoid
Bancorp next argues that the changes made to the reorganization process were more drastic than those at issue in Wolas and therefore pre-Code practice should be discarded. As Bancorp notes, under the Bankruptcy Act there were two reorganization chapters, X (publicly held companies) and XI (privately held companies), which varied in certain important respects.
Specifically, Bancorp recounts that under the Act voting on the confirmation of a plan was by individual creditors rather than by classes of creditors, as is the case under the Code.
Bancorp also contends that the Code meant to give creditors, not the bankruptcy court, the power to decide when to waive the absolute priority rule. See Kham & Nate's Shoes No. 2 v. First Bank, 908 F.2d 1351, 1360 (7th Cir.1990) (creditors effectively own bankrupt firms and they should decide whether old equity should participate). It is true that 11 U.S.C. section 1126(c) allows creditors to consent to confirmation of a plan that does not comply with the absolute priority rule. However, that section permits creditors to waive a priority they possess. The new value exception allows bankruptcy courts to afford a priority to others over the creditors. There is simply no logical analysis that would allow us to conclude that by permitting
Finally, Bancorp argues that the Code's creation of the entity of the debtor-in-possession to run the business in lieu of a trustee would cause self-dealing by insiders if the new value exception were still allowed. See A.V.B.I., 143 B.R. at 743. However, the very purpose of the Code's creation of the debtor-in-possession was to increase the power of those in control of the debtor during the reorganization process. Bankruptcy law is very formalistic in that it treats the debtor, the debtor-in-possession, and old equity as legally distinct entities when in reality they may all be one and the same. See, e.g., In re Kendavis Industries Int'l, Inc., 91 B.R. 742, 751, 754 (N.D.Tex.1988) (law firm has conflict of interest in representing both the debtor and equity in bankruptcy proceeding); In re Rusty Jones, Inc., 134 B.R. 321, 343 (Bankr. N.D.Ill.1991) (same). The risk of self-dealing among these entities at the expense of creditors is a risk created by the Code itself. The stringent requirements of the new value exception are designed to mitigate that risk. The enactment in the Code of changes that aggravate the self-dealing problem constitutes good reason for courts to make certain that a proposed new value plan strictly adheres to the requirements of the exception. The modifications to the reorganization process are not, however, cause for us to ignore several decades of bankruptcy practice in determining Congress' intent with respect to the new value exception.
Despite all of the differences between the Act and the Code, the primary rationale for the new value exception has not been eliminated by any statutory alteration to the confirmation process. The new value exception is based on "practical necessit[y]", on the recognition that new money frequently could not be obtained for the reorganized debtor in the absence of that doctrine. See Mason v. Paradise Irrigation Dist., 326 U.S. 536, 542, 66 S.Ct. 290, 292 (1946); Kansas City Terminal Ry. Co. v. Central Union Trust Co., 271 U.S. 445, 455, 46 S.Ct. 549, 551 (1926). That practical necessity remains just as pertinent under the Code. Where the main justification for a long-term judicially sanctioned practice has not dissipated, either through a change in conditions or by way of legislative amendment, there is simply no reason to disregard the practice absent a clear legislative intent to abolish it. Bancorp's structural-change arguments simply do not convince us that pre-Code practice should be ignored in this case.
The New Value Exception is Consistent with the Underlying Policies of Chapter 11.
In interpreting statutory language we are not confined to the specific provision at issue but may look to the structure of the law as a whole and to its object and policy. Patterson v. Shumate, ___ U.S. ___, ___-___, 112 S.Ct. 2242, 2246-47, 119 L.Ed.2d 519 (1992); Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353 (1986). Chapter 11 has two major objectives 1) to permit successful rehabilitation of debtors (NLRB v. Bildisco and Bildisco, 465 U.S. 513, 527, 104 S.Ct. 1188, 1196, 79 L.Ed.2d 482 (1984)); and 2) to maximize the value of the estate (Toibb v. Radloff, ___ U.S. ___, ___, 111 S.Ct. 2197, 2201, 115 L.Ed.2d 145 (1991)). The new value exception, properly applied, serves both goals. By permitting prior stockholders to contribute new money in exchange for participation in the reorganized company, the debtor is given an additional source of capital. The new contribution increases the amount available for the estate to use both in its reorganization and in funding the plan and paying creditors. Without the inducement of participation in the reorganized
"`Prior owners are a source of capital different in kind from new investors in that they have an ongoing role in the reorganization and a prior investment in the company.'" Prudential Ins. Co. v. F.A.B. Indus. (In re F.A.B. Indus.), 147 B.R. 763, 769 n. 13 (C.D.Cal.1992) (quoting Nimmer, supra note 23, at 1050), appeal docketed, No. 93-55055 (9th Cir. Jan. 13, 1993). Moreover, in many situations the new value exception allows control and management of the company to remain with the original owners, who arguably can best reestablish a profitable business. Old owners may have valuable expertise and experience that outside investors lack. Snyder v. Farm Credit Bank of St. Louis (In re Snyder), 967 F.2d 1126, 1130 (7th Cir.1992). Some studies demonstrate that reorganizations have been more successful when former management was allowed to use its expertise in running the business. Harvey Miller, Commentary on Absolute Priority, 1991 Annual Survey of American Law 49, 50.
It has been argued that the new value exception allows old equity to repurchase the business at a bargain price, while superior creditors go unpaid, and that this result is contrary to the Chapter 11 policy of protecting creditor interests. See, e.g., A.V.B.I., 143 B.R. at 747. We believe that this argument is incorrect in two respects. First, while the protection of creditors' interests is an important purpose under Chapter 11,
Second, we believe that if the new value exception's requirements are properly applied, creditors' interests will generally be benefited as well. The strictures of the new value doctrine provide creditors with significant safeguards against collusion between the proponent of the reorganization plan and the old equity owners.
As long as courts carefully apply the new value exception, it will not operate as a mechanism by which old equity can escape the requirements of the absolute priority rule. If a plan meets all the requirements of the new exception, it may be confirmed in a cramdown, assuming all other conditions for confirmation are present. Within the confines of the Code, bankruptcy courts are courts of equity. Ahlers, 485 U.S. at 206, 108 S.Ct. at 968. Properly applied, the new value exception allows bankruptcy courts to fulfill their assigned role of balancing the interests of debtors, creditors, old owners, and the public, guided by the overriding goal of ensuring the success of the reorganization. See Pioneer Inv. Serv. v. Brunswick Assoc., ___ U.S. ___, 113 S.Ct. 1489, 1495, 123 L.Ed.2d 74 (1993).
Thus, our conclusion that nothing in the Bankruptcy Code forbids the confirmation of plans that comply with the new value doctrine is entirely consistent with Congressional bankruptcy policy. Because our reading of the statute will not produce results demonstrably at odds with the intentions of its drafters, we must enforce the Code according to its terms. United States v. Ron Pair Enterp., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1988). Therefore, Bonner's Plan is not unconfirmable simply because it provides for a new value transaction.
THE NEW VALUE EXCEPTION AND THE BANCORP'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY
As noted above, the precise issue posed by Bancorp's motion for relief from stay is not whether Bonner's plan will ultimately be confirmed under section 1129 but whether there is a reasonable possibility that it can be confirmed within a reasonable time. That is all that Bonner need show to defeat Bancorp's section 362(d)(2) motion. United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 376, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988). It need not put forth evidence of the type it would be required to produce in a confirmation hearing. See John Hancock Mutual Life Ins. Co. v. Route 37 Business Park Assoc., 987 F.2d 154, 162 (3d Cir.1993).
Bancorp correctly argues that if Bonner's Plan cannot possibly satisfy all of the requirements of the new value exception it cannot be confirmed as a matter of law and relief from the stay must be granted. While it is true that in certain cases an appellate court can determine the feasibility of confirmation as a matter of law, see id., because of the lack of a sufficient factual record we cannot do so here. The bankruptcy court never held a hearing on the feasibility of the confirmation of Bonner's plan and the district court failed to reach the issue as well. On this record we cannot say as a matter of law that Bonner's proposed Plan cannot satisfy all of the requirements of the new value exception.
Viewed properly, "the new value exception" may be seen as a rule of construction, or a rule that serves to define the meaning of the absolute priority rule and determine when it has been satisfied. As such it is as pertinent today as it was under pre-Code bankruptcy practice. The arguments that
Nothing in the text of the Code prohibits the confirmation of plans that properly employ the new value doctrine. Nor does the legislative history demonstrate that Congress intended to abrogate this judicially created, pre-Code legal principle. Therefore, we conclude that the new value "exception", with its stringent requirements, survives. We recognize that, if applied carelessly, the doctrine has the potential to subvert the interests of creditors and allow debtors and old equity to abuse the reorganization process. The proper answer to these concerns is vigilance on the part of bankruptcy courts in ensuring that all of the requirements of the new value exception are met in every case. Here, it is unclear whether Bonner's plan can meet all of the requirements of the doctrine and achieve confirmation. Nevertheless, it may well be within the realm of potentially confirmable plans and thereby survive Bancorp's motion for relief from the automatic stay. The bankruptcy court must make that determination initially.
The judgment of the district court is
A Theory of Absolute Priority at 39. Accord Raymond T. Nimmer, Negotiating Bankruptcy Reorganization Plans: Absolute Priority and New Value Contributions, 36 Emory L.J. 1009, 1051 (1987); Bruce A. Markell, Owners, Auctions and Absolute Priority in Bankruptcy Reorganizations, 44 Stan.L.Rev. 69, 96-102 (1991).