There are two conditions for a cramdown under 11 U.S.C.S. § 1129(a). First, all requirements of § 1129(a) must be met, save for the plan's acceptance by each impaired class of claims or interests. Second, the objection of an impaired creditor class may be overridden only if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired and has not accepted the plan. As to a dissenting class of impaired unsecured creditors, such a plan may be found to be "fair and equitable" only if the allowed value of the claim is to be paid in full.
A loan by petitioner Bank of America National Trust and Savings Association (Bank) to respondent 203 North LaSalle Street Partnership (Debtor) was secured by a mortgage on the Debtor's interest in a Chicago office building, the value of which was less than the balance due the Bank. After the Debtor defaulted and the Bank began state-court foreclosure, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Debtor proposed a reorganization plan under which, inter alia, certain of its former partners would contribute new capital in exchange for the Debtor's entire ownership of the reorganized entity. That condition was an exclusive eligibility provision: the old equity holders were the only ones who could contribute new capital. The Bank objected and, as sole member of an impaired class of creditors, thereby blocked confirmation of the plan on a consensual basis. The Debtor, however, resorted to the alternate, judicial "cramdown" process for imposing a plan on a dissenting class. Under this "absolute priority rule," the Bank argued, the plan could not be confirmed as a cramdown because the Debtor's old equity holders would receive property even though the Bank's unsecured deficiency claim would not be paid in full. The Bankruptcy Court approved the plan nonetheless, and the District Court and the Court of Appeals affirmed. The Court of Appeals posited that when an old equity holder retains an equity interest in the reorganized debtor by meeting the corollary's requirements, he is not receiving or retaining that interest "on account of" his prior equitable ownership, but, rather, "on account of" a new, substantial, necessary, and fair infusion of capital.
Can the debtor’s pre-bankruptcy equity holders contribute new capital and receive new ownership interests in the reorganized entity, despite the objection of a senior class of impaired creditors?
The Court held that debtor's pre-bankruptcy equity holders may not, over the objection of a senior class of impaired creditors, contribute new capital and receive ownership interests in the reorganized entity, when that opportunity is given exclusively to the old equity holders under a plan adopted without consideration of alternatives. The old equity holders are disqualified from participating in such a "new value" transaction by § 1129(b)(2)(B)(ii), which in these circumstances bars a junior interest holder's receipt of any property on account of his prior interest.