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The Evolution of New Value Plans
Although many circuit courts of appeal have recognized the existence of a new value exception to the absolute priority rule, the Supreme Court has yet to issue a ruling that expressly adopts this exception, which is also known as the “new value corollary.” These circumstances have led many to question whether the new value corollary would survive Supreme Court review. A recent decision by the Seventh Circuit Court of Appeals, In re Castleton Plaza, LP, 707 F.3d 821 (7th Cir. 2013) has put into question the application of the corollary in future Chapter 11 cases.
New Value Corollary
The new value corollary provides that an equity owner of a debtor may purchase the new equity of the reorganized debtor if: 1) the equity owner contributes new capital in money or money's worth; 2) the new capital is reasonably equivalent to the property's value; and 3) the new capital is necessary for a successful reorganization. Bank of America v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 442 (1999). The new value corollary is a common law exception to the absolute priority rule, 11 U.S.C. ' 1129(b)(2)(B)(ii). The absolute priority rule prohibits junior creditors, such as equity holders, from receiving or retaining any property on account of their junior claims unless all senior creditors, such as unsecured creditors, are paid in full. The new value corollary was developed in case law to allow old equity owners to infuse needed new capital into a reorganized debtor and, in exchange, receive the new equity in the reorganized debtor. In theory, old equity was not receiving or retaining any property on account of its junior claims ' rather, old equity was receiving the new equity on account of this cash infusion.
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