## Facts

- A lender held a $93 million claim secured by a mortgage on a debtor partnership’s leasehold interest in a Chicago office building; the collateral value was less than the debt, leaving a secured portion and an unsecured deficiency.
- After default and initiation of foreclosure proceedings, the debtor filed a voluntary Chapter 11 petition.
- The debtor proposed a plan in which prepetition equity holders would contribute new capital and, in return, receive 100% of the equity in the reorganized entity.
- The plan reserved this equity-purchase opportunity exclusively for the old equity holders; no competing bids or alternative capital providers were permitted under the plan’s structure.
- The lender, as the sole member of an impaired class of unsecured creditors, rejected the plan, preventing consensual confirmation.
- The debtor sought nonconsensual confirmation under the Chapter 11 cramdown provision, requiring the plan to be “fair and equitable” to the dissenting class.

## Issues

1. Whether a cramdown plan may confirm over a dissenting impaired class of unsecured creditors when it grants only old equity holders the exclusive right to contribute new capital and receive ownership in the reorganized debtor.
2. Whether, for purposes of the absolute priority rule, old equity’s receipt of an exclusive equity-purchase opportunity constitutes receiving property “on account of” its prior interest.
3. Whether any “new value” concept can satisfy the absolute priority rule absent exposure of the equity opportunity to market competition.

## Decision

- The Supreme Court reversed the confirmation of the plan and remanded.
- The Court held that, over the objection of an impaired senior class of unsecured creditors, old equity may not receive ownership in the reorganized entity through an opportunity given exclusively to old equity and adopted without considering market alternatives.
- The exclusive right to obtain the new equity was treated as property received “on account of” the prior equity interest because it flowed from old equity’s prebankruptcy status.
- The Court did not decide whether the Bankruptcy Code recognizes a “new value” exception or corollary; even assuming some form might exist, this plan failed due to exclusivity and lack of market testing.

## Legal Principles

- Under Chapter 11 cramdown, a plan must be “fair and equitable” to a dissenting impaired class of unsecured creditors.
- The absolute priority rule bars junior claimants or interest holders from receiving or retaining property under a plan “on account of” their junior interests unless senior dissenting unsecured claims are satisfied as required by statute.
- “On account of” is read causally (“because of”); if a junior holder’s prior status is a reason it receives property or an exclusive opportunity, the rule is implicated.
- A plan that grants old equity an exclusive opportunity to obtain the reorganized equity, without market exposure or a competitive process, fails the absolute priority requirement when senior impaired unsecured creditors object.
- If old equity seeks to obtain new equity through a capital contribution in a cramdown, a process that permits competition (such as competing bids or plan alternatives) is ordinarily necessary to prevent undervaluation and improper diversion of value from dissenting creditors.

## Conclusion

The Court held that a Chapter 11 cramdown plan violates the absolute priority rule when it gives old equity the exclusive right to purchase all equity in the reorganized debtor through a new capital contribution without exposing that opportunity to market competition, and it reversed and remanded for further proceedings.


Bank of Am. Nat'l Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434 (1999)