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paid in full.421 In the BAP's view, this was only a contribution of a loan which was likely to be repaid with interest.
The "substantiality" requirement stems from a concern that nominal contributions may not be used to shift the benefit of the possible appreciation in the debtor's assets from unsecured creditors to equity.422
The Seventh Circuit's dictum opinions originated a concept that "substantial" involves a relationship with the amount of debt in the case,423 a concept that many opinions have followed but others have properly rejected has having little or no theoretical basis or relationship to the origins or purposes of the new value corollary.424 In Ambanc, the Ninth Circuit rejected as de minimis "a proposed contribution of one-half of one percent of each of
421 Oxford Life Ins. Co. v. Tucson Self-Storage (In re Tucson Self-Storage, Inc.), 166 B.R. 892, 899 (Bankr. 9th Cir. 1994).
422
There must be a rigorous showing that the cash infusion is necessary under the circumstances and is substantial. Case v. Los Angeles Lumber Products Co., 308 U.S. at 121, 60 S. Ct. at 10. This is essential in order to assure that a debtor's equity holders will not eviscerate the absolute priority rule by means of gratuitous, token cash infusions proposed primarily to "buy" cheap financing. Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 570, 63
S. Ct. 727, 751-52, 87 L. Ed. 959 (1943); In re Greystone III Joint Venture, 127 B.R. 138, 142-43
(W.D. Tex. 1990), rev'd on other grounds, 948 F.2d 134 (5th Cir. 1991), cert. denied, 113 S. Ct. 72, 121 L. Ed. 2d 37 (1992). An example of attempted grotesque use of the exception is In re Perdido Motel Group, Inc., 101 B.R. 289 (Bankr. N.D. Ala. 1989), where the debtor proposed a plan providing for a new corporation, capitalized with $1,000, owned by the parents of the debtor's owners, to acquire the debtor's assets.
423 In Snyder, 967 F.2d at 1131, the panel explained:
The substantiality requirement is derived not from Los Angeles Lumber's third criterion, but from its first -- that an infusion of new capital must be necessary to the success of the undertaking. Contributions that are merely nominal, or "gratuitous, token cash infusions proposed primarily to 'buy' cheap financing," will not suffice. In re Greystone III Joint Venture, 102 B.R. 560, 575 (Bankr. W.D. Tex. 1989), aff'd 127 B.R. 138 (W.D. Tex. 1990), rev'd on other grounds, 948 F.2d 134 (5th Cir. 1991)[, cert. denied, 113 S. Ct. 72, 121 L. Ed. 2d 37 (1992)]; see also Stegall, 865 F.2d at 144.
Accord, In re Duval Manor Assocs., 191 B.R. 622 (Bankr. E.D. Pa. 1996)($100,000 satisfied substantiality).
424
In re Elmwood, 182 B.R. 845 (D. Nev. 1995)("no mathematical relationship defines when a cash infusion is substantial"); In re HRC Joint Venture, 1995 WL 584262 (Bankr. S.D. Ohio 1995)($1.3 million new value suffices, even though it is only 4.4% of the unsecured debt being discharged, a comparison the court finds "entirely gratuitous and irrelevant to the present discussion"); In re Trevarrow Lanes, Inc., 183 B.R. 475 (Bankr. E.D. Mich. 1995)(the "debt/contribution comparison" made in Snyder "serves no apparent purpose" and "is unsound."); Contra, In re Sea Garden Motel & Aparts., 195 B.R. 295 (D. N.J. 1996)(amount of new value must be compared to total prepetition
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