The debtor-appellant, Robert L. Boyd, is the owner of the four-plex at issue in this litigation. He is a teacher by profession. The four-plex was used as rental property. In the late 1980's, the debtor's property became worth less than the liens against it. After numerous attempts at restructuring his debt, debtor sought relief under Chapter 11 of the Bankruptcy Code. Under a Chapter 11 bankruptcy, a debtor typically remains in possession of his property and attempts to reorganize his debt.

        Seattle Mortgage is the servicing agent for the Federal National Mortgage Association ("FNMA"). FNMA holds the beneficial interest in a deed of trust against the four-plex owned by debtor. FNMA/Seattle Mortgage is an undersecured creditor. The appraised value of the four-plex is $132,000 with a mortgage of $240,000.

        Debtor proposed a plan for reorganization in which he would remain in possession of the property, his debt would be written down to the value of the collateral, and debtor would also contribute $72,000 (in the form of $1,000 per month payments over the next 72 months) to his creditors. FNMA/Seattle Mortgage objected to this plan based on their assessment that debtor's cash - flow projection for the property was too optimistic. Instead, FNMA/Seattle Mortgage requested relief from the automatic stay and to be allowed to foreclose on the deed of trust.

        The court has before it debtor's appeal of the bankruptcy court's order granting FNMA/Seattle Mortgage relief from the automatic stay⁽¹⁾ and order denying confirmation of Debtor's reorganization plan for failure to comply with the absolute priority rule.⁽²⁾

        A bankruptcy court's conclusions of law are subject to de novo review. In re Commercial Western Finance Corp., 761 F.2d 1329, 1333 (9th Cir. 1985); Matter of Pizza of Hawaii, Inc., 761 F.2d 1374, 1377 (9th Cir. 1985). The appellate court reviews     2 ABR 409  a bankruptcy court's findings of fact by the clearly erroneous standard. Id. A decision to lift the automatic stay is reviewed for abuse of discretion on the part of the bankruptcy judge. In re MacDonald, 755 F.2d 715, 716 (9th Cit. 1985).

        The issues raised on appeal are: (1) whether there is a "new value" exception to the absolute priority rule, and (2) if so, does debtor's offer to make future cash payments qualify as "new value"?

        Under the Bankruptcy Code, the bankruptcy court can confirm a debtor's reorganization plan if it is accepted by the requisite number of creditors and it meets certain other specific requirements. 11 U.S.C. § 1129(a). That is not the case here, for FNMA/Seattle Mortgage would not accept debtor's plan. That does not end the matter. If the debtor can persuade the bankruptcy court that his plan is "fair and equitable", then debtor can "cramdown" his plan on dissenting creditors. 11 U.S.C. § 1129(b). A reorganization plan is "fair and equitable" if the dissenting class of creditors receive full compensation for allowed claims before any junior class receives anything. See 11 U.S.C. § 1129(b) (2) (B) (ii) and (C) (ii); Northwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988); Weintraub & Resnick, Bankruptcv Law Manual, 5¶ 8.23[4] (rev. ed. 1980). This is known as the absolute priority rule. The court concludes that debtor's plan violates this rule.

        Under debtor's proposed reorganization plan, he would receive a benefit before FNMA/Seattle Mortgage received its full compensation. To get around this, debtor argues that he qualifies for an exception to the absolute priority rule because he is willing to pay $1,000 per month for six years to the unsecured creditors. Debtor argues that because he is adding "new value", he should be allowed to remain in possession of the property, despite FNMA/Seattle Mortgage's priority over his equity interest. Debtor bases his argument on Case v. Los Angeles Lumber Co., 308 U.S. 106 (1939).

        Los Angeles Lumber was a pre-Bankruptcy Code case. This case involved a holding company whose primary asset was a shipbuilding company. Faced with insolvency, the company was reorganized. The new plan was approved by a majority of the creditors. However, some bondholders objected to the plan because the shareholders, a class junior to the bondholders, would receive 23% of the stock of the newly-formed company. The shareholders had offered to provide financial standing, influence in the community, and continuity of management in return for retaining their equity. The lower court found this to be new value. The Supreme Court rejected this proposal, finding that the experience and influence of the shareholders was not new value. This, however, only reversed the lower court's result. The rule regarding new value as an exception to the absolute priority rule survived. In what is often described as dicta, Justice Douglas wrote that for the new value exception to apply, the     2 ABR 411  participation must be "in money or in money's worth". Los Angeles Lumber, 308 U.S. at 122.

        Since Los Angeles Lumber, the courts have wrestled with the new value exception and reached varying results. It appeared some relief was on the way with the codification of bankruptcy law. However, the new value exception is not mentioned in the codification of the absolute priority rule. FNMA/Seattle Mortgage strongly argues that the statute should be taken at face value and, absent such mention, the new value exception did not survive the enactment of the Bankruptcy Code. Because of arguments like this, the Court revisited the issue in Northwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988).

        Ahlers reflects the conflicting tensions which serve as the foundation of Chapter 11 reorganization: protection of creditors' rights versus promotion of successful reorganization of the debtor. In Ahlers, the debtors were family farmers. The Eighth Circuit Court of Appeals had found that their promise of future labor, experience, and expertise represented "money or money's worth" and permitted confirmation of their reorganization plan over the objections of creditors, even though the plan violated the absolute priority rule. The Supreme Court reversed. The Court found that the Ahlers' promise of future services was "intangible, inalienable, and, in all likelihood, unenforceable". Ahlers, 485 U.S. at 204. "[A] promise of future services cannot be exchanged in the market for something of value to creditors today." Id.     2 ABR 412  (emphasis in the original). The Court noted that no court had found that a promise of future labor, management, or experience was sufficient to qualify as a new value exception to the absolute priority rule. Id. Thus, without expressly validating the existence of the new value exception, the Court did so by implication when they applied the exception. Id. at 206.

        The bankruptcy court in the present case rejected the debtor's arguments regarding the new value exception to the absolute priority rule. ⁽³⁾ However, in light of Ahlers, this court concludes that such an exception does exist. ⁽⁴⁾ The question remains whether debtor's promise to pay $1,000 per month for 72 months constitutes "new value". The court concludes that it does not.⁽⁵⁾

        Both Los Angeles Lumber and Ahlers involved future consideration, in the form of services, as the basis for the debtor's "new value". The same is essentially true in the present case.     2 ABR 413  Debtor is promising future money payments. Presumably these payments will come from his teaching salary. An unsecured promise to pay in the future is not something that can be "exchanged in any market for something of value to the creditors today." Ahlers, 485 U.S. at 204. With all due respect to the debtor's good intentions, a promise to make monthly payments of $1,000 for 72 months that is not secured by valuable collateral is not the equivalent of money in hand. It is money or money's worth that constitutes new value. If debtor's promise to pay were considered new value, the statutory absolute priority rule would be emasculated. Debtors could always evade the rule by promising some future contribution. Debtor's promise to pay is not new value.

        The bankruptcy court's orders granting FNMA/Seattle Mortgage relief from the automatic stay and denying confirmation of debtor's reorganization plan are affirmed.

        DATED at Anchorage, Alaska, this 5 day of June, 1992.

M Russell Holland
United States District Judge

N O T E S:

    2 ABR 408  1. Clerk's Docket No. 63.

    2 ABR 408  2. Clerk's Docket No. 61.

    2 ABR 412  3. See Order Denying Confirmation of Plan (Clerk's Docket No. 61).

    2 ABR 412  4. Other well-reasoned opinions have reached the opposite conclusion. See In re Greystone III Joint Venture, 948 F.2d 134 (5th Cir. 1991) (discussion of new value rule in the published opinion withdrawn per curiam, but reaffirmed in dissent by Circuit Judge Edith Jones). While discussing almost identical issues and arguments as presented in this case, a bankruptcy court in California concluded that the new value exception did not survive the enactment of the Bankruptcy Reform Act of 1978. In re Outlook/Century Ltd., 127 B.R. 650, 656 (N.D. Cal. 1991). But see In re Triple R Holdings, 134 B.R. 382, 383 (N.D. Cal. 1991), for a contrary result.

    2 ABR 412  5. The bankruptcy court did not made a factual finding on the issue of new value. Debtor argues that this matter must be remanded for such a factual finding. Since this court deals with the new value concept as a legal issue, fact-finding is unnecessary.