Chapter 11 of the U.S. Bankruptcy Code is a reorganization chapter. It is intended to help distressed businesses manage their financial obligations while continuing their operations. Congress has found utility in giving distressed businesses an opportunity for a fresh financial start, provided they comply with the Code. Given that a debtor’s creditors often receive less than full recovery in a chapter 11 case, several of the Code’s requirements speak to protecting the interests of, and maximizing value for, creditors. Value maximization does not necessarily trump the virtues of reorganization in chapter 11, but both goals must be carefully balanced and served.

The case before the Court involved a relatively productive business debtor that sought relief primarily from one large prepetition obligation. This kind of fact pattern does not preclude the debtor’s reorganization under chapter 11 but it does require the Court to closely scrutinize the terms of the plan and the value being offered to creditors. Specifically, the key question in this case is whether the debtor’s principal is contributing sufficient new value to the debtor’s reorganization efforts to retain his 100% ownership interest in the debtor. This analysis is complicated by the fact that some of the proposed new value is not a fresh capital contribution; unsecured creditors are estimated to recover only about 27% of their claims under the plan; and the plan term is only 60 months. Although a 60-month plan term is common in certain kinds of bankruptcy cases, it is not the general standard in traditional entity chapter 11 cases and limits the value available for distribution to creditors in this case. 

The Court notes that the new value exception to the absolute priority rule, which is at issue in this case, is an important doctrine that can help debtors utilize chapter 11’s tools and facilitate successful reorganizations. It is not, however, a means for prepetition equity to shelter future value from creditors or otherwise extinguish creditors’ claims without appropriate distributions. 

The Court cannot condone the windfall to the debtor’s prepetition equity proposed in this case. Had the debtor’s plan offered a significant new value contribution or larger returns to creditors, perhaps the analysis would have been different. As it stands, the debtor has failed to meet its burden on confirmation. 

The competing plan filed in this case likewise suffers from several deficiencies. Even if that plan had received support from creditors other than the plan proponent, the plan proponent did not meet its burden of proof. The record contains inadequate evidence that the competing plan proposes a workable scheme of reorganization or is otherwise feasible. The Court therefore declines to confirm either of the plans submitted for confirmation.