Norwest Bank Worthington v. Ahlers

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 — 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, *200 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 *201 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 (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 *202 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 (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 (1913); Louisville Trust Co. v. Louisville, N. A. & C. R. Co., 174 U. S. 674, 684 (1899). The rule has since gained express statutory force, and was incorporated into Chapter 11 of the Bankruptcy Code adopted in 1978. See 11 U. S. C. § 1129(b)(2)(B)(ii) (1982 ed., Supp. IV). Under current law, no Chapter 11 reorganization plan can be confirmed over the creditors’ legitimate objections (absent certain conditions not relevant here) if it fails to comply with the absolute priority rule.

There is little doubt that a reorganization plan in which respondents retain an equity interest in the farm is contrary to the absolute priority rule. 2 The Court of Appeals did not *203 suggest otherwise in ruling for respondents, but found that such a plan could be confirmed over petitioners’ objections because of an “exception” or “modification” to -the absolute priority rule recognized in this Court’s cases.

The Court of Appeals relied on the following dicta in Case v. Los Angeles Lumber Products Co., supra, at 121-122:

“It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. . . .

“[W]e believe that to accord ‘the creditor of his full right of priority against the corporate assets’ where the debtor is insolvent, the stockholder’s participation must be based on a contribution in money or money’s worth, reasonably equivalent in view of all the circumstances to the participation of the stockholder.”

The Court of Appeals found this language applicable to this case, concluding that respondents’ future contributions of “labor, experience, and expertise” in running the farm — because they have “value” and are “measurable” — are “money or money’s worth” within the meaning of Los Angeles Lumber. 794 F. 2d, at 402. We disagree. 3

*204 Los Angeles Lumber itself rejected an analogous proposition, finding that the promise of the existing shareholders to pledge their “financial standing and influence in the community” and their “continuity of management” to the reorganized enterprise was “[in]adequate consideration” that could not possibly be deemed “money’s worth.” 308 U. S., at 122. No doubt, the efforts promised by the Los Angeles Lumber equity holders — like those of respondents — had “value” and would have been of some benefit to any reorganized enterprise. But ultimately, as the Court said in Los Angeles Lumber, “[t]hey reflect merely vague hopes or possibilities.” Id., at 122-123. The same is true of respondents’ pledge of future labor and management skills.

Viewed from the time of approval of the plan, respondents’ promise of future services is intangible, inalienable, and, in all likelihood, unenforceable. It “has no place in the asset column of the balance sheet of the new [entity].” Los Angeles Lumber, 308 U. S., at 122-123. Unlike “money or money’s worth,” a promise of future services cannot be exchanged in any market for something of value to the creditors today. In fact, no decision of this Court or any Court of Appeals, other than the decision below, has ever found a promise to contribute future labor, management, or expertise sufficient to qualify for the Los Angeles Lumber exception to the absolute priority rule. 4 In short, there is no *205 way to distinguish between the promises respondents proffer here and those of the shareholders in Los Angeles Lumber; neither is an adequate contribution to escape the absolute priority rule.

Respondents suggest that, even if their proposed contributions to the reorganized farm do not fit within the Los Angeles Lumber dicta, they do satisfy some broader exception to the absolute priority rule. Brief for Respondents 23-24. But no such broader exception exists. Even if Congress meant to retain the Los Angeles Lumber exception to the absolute priority rule when it codified the rule in Chapter 11 — a proposition that can be debated, see n. 3, supra — it is clear that Congress had no intention to expand that exception any further. When considering adoption of the current Code, Congress received a proposal by the Bankruptcy Commission to modify the absolute priority rule to permit equity holders to participate in a reorganized enterprise based on their contribution of “continued management. . . essential to the business” or other participation beyond “money or money’s worth.” See H. R. Doc. No. 93-137, pt. 1, pp. 258-259 (1973). This proposal — quite similar to the Court of Appeals’ holding in this case — prompted adverse reactions from numerous sources. 5 Congress ultimately rejected the proposed liberalization of *206 the absolute priority rule and adopted the codification of the rule now found in 11 U. S. C. § 1129(b)(2)(B)(ii) (1982. ed. and Supp. IV). “This [section] codifies the absolute priority rule from the dissenting class on down.” See H. R. Rep. No. 95-595, p. 413 (1977). We think the statutory language and the legislative history of § 1129(b) clearly bar any expansion of any exception to the absolute priority rule beyond that recognized in our cases at the time Congress enacted the 1978 Bankruptcy Code.

In sum, we find no support in the Code or our previous decisions for the Court of Appeals’ application of the absolute priority rule in this case. We conclude that the rule applies here, and respondents’ promise of future labor warrants no exception to its operation.

i — I I — I I — I

Respondents advance two additional arguments seeking to obviate the conclusion mandated by the absolute priority rule.

A

Respondents first advance a variety of “equitable arguments” which, they say, prevent the result we reach today. Respondents contend that the nature of bankruptcy proceedings — namely, their status as proceedings in “equity” — prevents petitioners from inequitably voting in the class of unsecured creditors, and requires that a “fair and equitable” reorganization plan in the best interests of all creditors and debtors be confirmed. See Brief for Respondents 14-16, 23-24. Similarly, the Court of Appeals found it significant that — in its view — respondents’ wholly unsecured creditors (as opposed to petitioners, who have partially secured claims) would fare better under the proposed reorganization plan than if the farm was liquidated. 794 F. 2d, at 402.

The short answer to these arguments is that whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code. The Code provides that undersecured creditors can *207 vote in the class of unsecured creditors, 11 U. S. C. § 506(a), the Code provides that a “fair and equitable” reorganization plan is one which complies with the absolute priority rule, 11 U. S. C. § 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV), and the Code provides that it is up to the creditors — and not the courts — to accept or reject a reorganization plan which fails to provide them adequate protection or fails to honor the absolute priority rule, 11 U. S. C. § 1126 (1982 ed. and Supp. IV).

The Court of Appeals may well have believed that petitioners or other unsecured creditors would be better off if respondents’ reorganization plan was confirmed. But that determination is for the creditors to make in the manner specified by the Code. 11 U. S. C. § 1126(c). Here, the principal creditors entitled to vote in the class of unsecured creditors (i. e., petitioners) objected to the proposed reorganization. This was their prerogative under the Code, and courts applying the Code must effectuate their decision.

B

Respondents further argue that the absolute priority rule has no application in this case, where the property which the junior interest holders wish to retain has no value'to the senior unsecured creditors. In such a case, respondents argue, “the creditors are deprived of nothing if such a so-called ‘interest’ continues in the possession of the reorganized debtor.” Brief for Respondents 19. Here, respondents contend, because the farm has no “going concern” value (apart from their own labor on it), any equity interest they retain in a reorganization of the farm is worthless, and therefore is not “property” under 11 U. S. C. § 1129(b)(2)(B)(ii) (1982 ed. and Supp. IV).

We join with the consensus of authority which has rejected this “no value” theory. 6 Even where debts far exceed the *208 current value of assets, a debtor who retains his equity interest in the enterprise retains “property.” Whether the value is “present or prospective, for dividends or only for purposes of control” a retained equity interest is a property interest to “which the creditors [are] entitled . . . before the stockholders [can] retain it for any purpose whatever.” Northern Pacific R. Co. v. Boyd, 228 U. S., at 508. Indeed, even in a sole proprietorship, where “going concern” value may be minimal, there may still be some value in the control of the enterprise; obviously, also at issue is the interest in potential future profits of a now-insolvent business. See SEC v. Canandaigua Enterprises Corp., 339 F. 2d 14, 21 (CA2 1964) (Friendly, J.). And while the Code itself does not define what “property” means as the term is used in § 1129(b), the relevant legislative history suggests that Congress’ meaning was quite broad. “ ‘[P]roperty’ includes both tangible and intangible property.” See H. R. Rep. No. 95-595, at 413.

Moreover, respondents’ “no value” theory is particularly inapposite in this case. This argument appears not to have been presented to the Eighth Circuit, which implicitly concluded — to the contrary of respondents’ position here — that the equity interest respondents desire to retain has some value. See 794 F. 2d, at 402-403. Even cursory consideration reveals that the respondents’ retained interest under the plan might be “valuable” for one of several reasons. For example, the Court of Appeals provided that respondents would be entitled to a share of any profits earned by the sale of secured property during the reorganization period, id., at

*209 403, and n. 18 —an interest which can hardly be considered “worthless.” And there is great common sense in petitioners’ contention that “obviously, there is some going concern value here, or the parties would not have been litigating over it for the last three years.” Tr. of Oral Arg. 15-16.

Consequently, we think that the interest respondents would retain under any reorganization must be considered “property” under § 1129(b)(2)(B)(ii), and therefore can only be retained pursuant to a plan accepted by their creditors or formulated in compliance with the absolute priority rule. Since neither is true in this case, the Court of Appeals’ judgment for respondents cannot stand.

> I — I

In rejecting respondents’ position, we do not take lightly the concerns which militated the Eighth Circuit towards its result. As a Bankruptcy Judge commented on the Court of Appeals’ decision in this case:

“We understand the motivation behind the majority opinion in Ahlers. Farm bankruptcies are in a state of crisis and we, too, sympathize with the plight of the American farmer. Nevertheless, the solution proposed by the Ahlers majority is contrary to the Bankruptcy Code and a long line of case law.” In re Stegall, 64 B. R. 296, 300 (Bkrtcy. Ct. CD Ill. 1986).

Family farms hold a special place in our Nation’s history and folklore. Respondents and amici paint a grim picture of the problems facing farm families today, and present an eloquent appeal for action on their behalf. 7 Yet relief from current farm woes cannot come from a misconstruction of the applicable bankruptcy laws, but rather, only from action by Congress. 8

*210 The error of the Court of Appeals’ approach is further revealed by an examination of a measure Congress has recently enacted to cope with these very same concerns, the Family Farmers Bankruptcy Act of 1986, Pub. L. 99-554, §255, 100 Stat. 3105-3114. The Act creates a new Chapter 12 bankruptcy proceeding, under which family farmers can retain an equity interest in their farms while making loan repayments under a reorganization plan. See 11 U. S. C. § 1201 et seq. (1982 ed., Supp. IV). 9

The legislative history of the Act makes it clear that one of Congress’ principal concerns in adopting Chapter 12 was the difficulties farmers encountered in seeking to reorganize under Chapter 11. 10 And yet, as respondents concede,- the Court of Appeals’ decision here creates a method of proceeding under Chapter 11 which is far more advantageous to farmers than is Chapter 12. See Brief for Respondents 6-9; Tr. of Oral Arg. 23-25. Thus, given respondents’ reading of Chapter 11, Congress enacted a relief provision in Chapter 12 *211 which is less favorable to its intended beneficiaries than is current law. But in-adopting Chapter 12, Congress thought it was doing just the opposite. 11 “[W]here, as here, Congress adopts a new law . . . [it] normally can be presumed to have had knowledge of the interpretation given to the [old] law.” Lorillard v. Pons, 434 U. S. 575, 581 (1978). We think Congress’ understanding of Chapter 11 and its absolute priority rule — and not respondents’ — is the correct one. We do not believe that Congress created, in Chapter 12, an option for farm reorganizations less accessible to most farmers than current Chapter 11 proceedings.

V

In sum, because we find the decision below to be contrary to the Bankruptcy Code and this Court’s previous cases, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Justice Kennedy took no part in the consideration or decision of this case.