{"id":32443,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/does-the-new-value-exception-still-exist.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"does-the-new-value-exception-still-exist","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/finance\/does-the-new-value-exception-still-exist.html","title":{"rendered":"Does The New Value Exception Still Exist"},"content":{"rendered":"
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The Bankruptcy Code maintains a delicate balance between a debtor's right to reorganize and the rights of creditors to be paid. The Code sets forth the "pecking order" of priority regarding how claims are to be paid. Secured claims are paid first, claims incurred during the course of the bankruptcy are paid next, pre-petition priority claims such as taxes, wages and consumer deposits are then paid before the claims of unsecured creditors are paid. At the bottom of the priority are the equity holders. This doctrine is known as the "absolute priority rule."<\/p>

However, in many bankruptcy cases, the absolute priority rule creates an anomalous result. If, under a plan, all of the unsecured creditors are not paid 100% of what they are owed, then the class of creditors subordinate to them (i.e., stockholders) cannot retain their shareholder interest. Thus, the court is called upon to confirm a plan of reorganization that provides for a payment of less than one hundred cents on the dollar to the unsecured creditor class, but then mandates that the equity holders' equity interest is wiped out. If this occurs, then who owns the reorganized company?<\/p>

To correct this anomaly, the courts have created a doctrine known as the "new value exception" to the absolute priority rule, which states that if the equity holders contribute new value in the form of cash or other property to help fund a plan of reorganization, the equity holders can either retain their equity interest or can exchange the new value for the issuance of new equity in the reorganized company.<\/p>

In a recent decision, In re Coltex Loop Central Three Partner L.P.<\/i>, the Second Circuit took the position that existing equity holders cannot take advantage of the new value exception. The Coltex<\/i> case was a single asset bankruptcy case where the secured creditor (which held a huge deficiency claim after a valuation of its collateral), objected to a plan which provided that the current equity holders would put in "new value" in exchange for the retention of their equity interest. The court concluded that the equity holders were not obtaining their new equity only as a result of their prior position as equity holder. That is, because the equity holders had not exposed the property to the marketplace to attract other equity holders, it was not the amount of the new value given, but rather the old equity owners' maintenance of control of the debtor company which gave them the opportunity to provide the new equity.<\/p>

Coltex<\/i> has been appealed to the United States Supreme Court where a determination is expected.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

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