Norwest Bank Worthington v. Ahlers, No. 86-958

• Court: United States Supreme Court
• Writing for the Court: WHITE, J., delivered the opinion of the Court, in which all other Members joined, except KENNEDY
• Citation: 108 S.Ct. 963,485 U.S. 197,99 L.Ed.2d 169
• Parties: NORWEST BANK WORTHINGTON, et al., Petitioners v. James R. AHLERS, et ux
• Docket Number: No. 86-958
• Decision Date: 07 March 1988

485 U.S. 197 108 S.Ct. 963 99 L.Ed.2d 169 NORWEST BANK WORTHINGTON, et al., Petitioners

v.

James R. AHLERS, et ux.

No. 86-958. Argued Jan. 12, 1988. Decided March 7, 1988. Syllabus

Respondents, who operate a family farm, obtained secured loans from petitioners. Following a 1984 default on the loan payments, one petitioner filed a state-court replevin action seeking possession of the farm equipment pledged as security, but respondents obtained an automatic stay of the action when they filed a petition for reorganization under Chapter 11 of the Bankruptcy Code (Code). On petitioners' motions for relief from the automatic stay, the District Court found respondents' reorganization plan to be unfeasible and affirmed the Bankruptcy Court's decision to grant petitioners relief. The Court of Appeals reversed, finding that respondents could file a feasible reorganization plan (as suggested by the court), and rejecting petitioners' contention that the Code's "absolute priority rule," 11 U.S.C. § 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV)—which provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under the plan—barred confirmation of any plan which allowed respondents to retain their equity interest in the farm, which was junior to creditors' unsecured claims. The court held that under Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110, the absolute priority rule did not bar respondents from retaining their equity interest if they contributed "money or money's worth" to the reorganized enterprise, and that their yearly contributions of "labor, experience, and expertise" would constitute such a contribution, therefore permitting confirmation of a reorganization plan over petitioners' objections.

Held: The absolute priority rule applies, and respondents' promise of future labor warrants no exception to its operation. Pp. 202-211.

(a) The dicta in Case v. Los Angeles Lumber Products Co., relied upon by the Court of Appeals, is not applicable here. Viewed from the time of the plan's approval, respondents' promise of future services was intangible, inalienable, and, in all likelihood, unenforceable. Unlike "money or money's worth," such promise cannot be exchanged in any market for something of value to the creditors today. No broader exception to the absolute priority rule than that suggested in Los Angeles Lumber § dicta exists. The statutory language and § 1129(b)'s legislative history bar any expansion of any exception to the absolute priority

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rule beyond that recognized in this Court's cases at the time Congress enacted the 1978 Bankruptcy Code. Pp. 202-206.

(b) The provisions of the Code do not support the contentions that the equitable nature of bankruptcy proceedings prevents petitioners from voting in the class of unsecured creditors, and requires confirmation of a "fair and equitable" reorganization plan in the best interests of all creditors and debtors; and that respondents' wholly unsecured creditors (as opposed to petitioners, who have undersecured claims) would fare better under the proposed reorganization plan than if the farm was liquidated. Whatever equitable powers remain in the bankruptcy courts must be exercised within the Code's confines. Pp. 206-207.

(c) There is no merit to respondents' argument that the absolute priority rule does not apply on the ground that, because the farm has no "going concern" value (apart from their own labor on it), any equity interest they retain in a reorganization is worthless to the senior unsecured creditors and therefore is not "property" under the rule. Even where debts far exceed the current value of assets, a debtor who retains his equity interest in the enterprise retains "property." The legislative history suggests that Congress' meaning of "property" was broad, including both tangible and intangible property. The interest respondents would retain under any reorganization must be considered "property," and therefore can only be retained pursuant to a plan accepted by their creditors or formulated in compliance with the absolute priority rule. Pp. 207-209.

(d) Relief from current problems facing farm families cannot come from a misconstruction of the bankruptcy laws, but rather only from action by Congress. Moreover, the Family Farmers Bankruptcy Act of 1986 creates a new Chapter 12 bankruptcy proceeding whereby family farmers can retain an equity interest in their farms while making loan repayments under a reorganization plan. To uphold the Court of Appeals' decision would create a method of proceeding under Chapter 11 which would be far more advantageous to farmers than is Chapter 12; this would be contrary to Congress' intent. Pp. 209-211.

794 F.2d 388 (CA8 1986), reversed and remanded.

WHITE, J., delivered the opinion of the Court, in which all other Members joined, except KENNEDY, J., who took no part in the consideration or decision of the case.

Gordon B. Conn, Jr., Minneapolis, Minn., for petitioners.

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William L. Needler, Chicago, Ill., for respondents.

Justice WHITE delivered the opinion of the Court.

In this case, the Court of Appeals found that respondents' promise of future "labor, experience, and expertise" permitted confirmation of their Chapter 11 reorganization plan over the objections of their creditors, even though the plan violated the "absolute priority rule" of the Bankruptcy Code. Because we find this conclusion at odds with the Code and our cases, we reverse.

I

Respondents operate a failing family farm in Nobles County, Minnesota. Between 1965 and 1984 they obtained loans from petitioners, securing the loans with their farmland, machinery, crops, livestock, and farm proceeds. In November 1984, respondents defaulted on their loan payments to petitioner Norwest Bank Worthington; at the time,

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the aggregate loan balance owed the petitioners exceeded $1 million.

Following the default, Norwest filed a replevin action in Minnesota state court seeking possession of the farm equipment respondents had pledged as security. However, two weeks later respondents obtained an automatic stay of the replevin proceedings, when they filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. See 11 U.S.C. § 362(a) (1982 ed. and Supp. IV).

Petitioners filed motions in the Bankruptcy Court for relief from the automatic stay. 11 U.S.C. § 362(d) (1982 ed., Supp. IV). After decisions by the Bankruptcy and the District Courts, these motions were ultimately considered by the Court of Appeals, which prohibited petitioners from repossessing any equipment, pending a determination by the District Court of the probability of success of a reorganization plan to be filed by respondents. App. to Pet. for Cert. A-76—A-77. On remand, the District Court found respondents' reorganization plan to be "utter[ly] unfeasibl[e]." Id., at A-86. It therefore affirmed the Bankruptcy Court's initial decision to grant petitioners relief from the automatic stay.

On appeal, the Court of Appeals reversed. It found that respondents could file a feasible reorganization plan. 794 F.2d 388, 399 (CA8 1986). Consequently, the Court of Appeals remanded the case with instructions that the Bankruptcy Court entertain and confirm a reorganization plan which comported with an outline suggested in a lengthy appendix to the Eighth Circuit's opinion. Id., at 408-414.

In reaching this conclusion, the Court of Appeals rejected petitioners' contention that, because of the "absolute priority rule" in the Bankruptcy Code, 11 U.S.C. § 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV), their legitimate objections to any reorganization plan which allowed respondents to retain an interest in the farm property was sufficient to bar confirmation

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of such a plan.¹ Petitioners contended that the absolute priority rule prohibited respondents from retaining their equity interest in the farm, which is junior to the creditors' unsecured claims. But the Court of Appeals, relying on this Court's decision in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), held that the absolute priority rule did not bar respondents from retaining their equity interest in the farm if they contributed "money or money's worth" to the reorganized enterprise. It further concluded that respondents' "yearly contributions of labor, experience, and expertise" would constitute a contribution of "money or money's worth," and therefore would permit confirmation of a reorganization plan over petitioners' objections. 794 F.2d, at 402-403. Judge John Gibson, in dissent, criticized the majority's application of the absolute priority rule and its read-

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ing of Los Angeles Lumber as "unprecedented, illogical, and unfair." 794 F.2d, at 406. He concluded that the absolute priority rule barred respondents' retention of an equity interest in the farm over petitioners' legitimate objections.

After the Eighth Circuit—sharply divided—denied rehearing en banc, id., at 414-415, petitioners sought review by this Court. We granted certiorari to consider the Court of Appeals' application of the absolute priority rule, 483 U.S. 1004, 107 S.Ct. 3227, 97 L.Ed.2d 733 (1987), and now reverse.

II

As the Court of Appeals stated, the absolute priority rule "provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property [under a reorganization] plan." 794 F.2d, at 401. The rule had its genesis in judicial construction of the undefined requirement of the early bankruptcy statute that reorganization plans be "fair and equitable." See Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 504-505, 33 S.Ct. 554, 560, 57 L.Ed. 931 (1913); Louisville Trust Co. v. Louisville, N.A. & C.R. Co., 174 U.S. 674, 684, 19 S.Ct. 827, 830, 43 L.Ed. 1130 (1899)...