Bank of America National Trust & Savings Ass'n v. 203 North LaSalle Street Partnership

Background

A bank held the main loan on a partnership that owned 15 floors of an office building in Chicago. After the partnership defaulted, it filed for Chapter 11 bankruptcy and proposed a plan that would pay the bank over many years, discharge most of the bank’s unsecured deficiency for a small fraction of its value, pay trade creditors in full, and give the former partners the chance to contribute $6.125 million over five years in exchange for full ownership. The plan made that chance exclusive to the old partners, and the bank objected.

Reasoning

The Court addressed whether old owners may, over the objection of unpaid senior creditors, provide new capital and receive ownership when only they get that opportunity. The justices did not decide whether the law generally allows a “new value” exception. Instead, they held that this particular plan failed the statute because the exclusive opportunity to buy post-bankruptcy equity functioned as property given “on account of” the partners’ prior interest. The majority explained that an owner-only, noncompetitive right to obtain equity looks like a favor to insiders and cannot be accepted when senior creditors are not paid in full.

Real world impact

The ruling affects reorganizations where prior owners try to preserve ownership by offering new capital without market testing or competing bids. It means bankruptcy courts must be wary of plans that grant exclusive, insider-only chances to acquire reorganized equity. The Court reversed and sent the case back for further proceedings.

Dissents or concurrances

A concurring opinion agreed the plan fails but favored a narrower textual approach; a dissent argued that fair new capital paid at market should be allowed to preserve ownership.