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U.S. Supreme Court

Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988)

Norwest Bank Worthington v. Ahlers

No. 86-958

Argued January 12, 1988

Decided March 7, 1988

485 U.S. 197


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 infeasible 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, 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. 485 U. S. 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's dicta exists. The statutory language and § 1129(b)'s legislative history bar any expansion of any exception to the absolute priority chanrobles.com-red

Page 485 U. S. 198

rule beyond that recognized in this Court's cases at the time Congress enacted the 1978 Bankruptcy Code. Pp. 485 U. S. 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. 485 U. S. 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. 485 U. S. 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. 485 U. S. 209-211.

794 F.2d 388, 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. chanrobles.com-red

Page 485 U. S. 199


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