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payments required for the ongoing business, not payment of secured claims. Justice Douglas' opinion in Case v. Los Angeles Lumber explained that the new capital could be used for the business or to pay dissenting creditors.442 Another court held that use of new contributions to repair debtor's principal asset was an inappropriate shift of risk to secured creditors,443 ignoring the benefit to the creditors of enhancing or maintaining collateral value.
If the new value is used solely to pay creditor claims, the objecting creditors may offer to make the payment as a means of demonstrating the capital from equity is not necessary.444
Judge Abram recently suggested that in a single asset real estate case, new value is substantial and necessary when it is used to pay down the undersecured claim to a reasonable loan-to-value ratio, and to pay the unsecured claims and to pay expenses of administration.445
It may be that the courts use the "necessary" requirement as a trump for the plan which uses new capital as an excuse for the retention of existing equity, rather than an integral element of a reorganization, or as a reaction to too-clever counsel.446 An example is the plan which offers the new value as a token payment to the dissenting class. When the
used for payment of class of creditors, infusion not necessary to continued operations of debtor, particularly where debtor had cash sufficient to pay the claims). See also Tucson Self-Storage, 166
B.R. at 899-900 (new value used to pay priorities and administrative creditors).
442 308 U.S. at 121 n.15, 60 S. Ct. at 10 n.15 ("This new money was commonly necessary in equity reorganizations not only to provide new working capital but also to pay dissenting creditors. See Weiner, "Conflicting Functions of the Upset Price in a Corporate Reorganization," 27 COL. L. REV. 132.").
443 In re One Times Square Assocs. Ltd. Partnership, 159 B.R. 695, 708 (Bankr. S.D.N.Y. 1993), aff'd, 165 B.R. 773 (S.D.N.Y.), aff'd, 41 F.3d 1502 (2d Cir. 1994) (table), cert. denied, 1995 WL 67238 (1995).In In re Tallahassee Associates, L.P., 132 B.R. 712 (Bankr. W.D. Pa. 1991), the proposed contribution of up to $300,000 ($228,000 had been raised) was rejected. The court inconsistently decided that the new money was not necessary, because the property's cash flow would pay the secured claim; and it was not necessary to an effective reorganization, because needed structural repairs to the debtor's property were unfunded. Also, amortization of the secured claim would build up equity in the property which would increase the value of the interest obtained by the partners. Compare a priming lien under § 364(d) which may be used to obtain funds to enhance the value of the secured creditor's collateral. See In re 495 Central Park Avenue Corp., 136 B.R. 626 (Bankr. S.D.N.Y. 1992) (loan from existing equity to prime lender to enable debtor to enter into new lease of property).
444 Compare In re Greystone III Joint Venture, 127 B.R. 138, 143 (W.D. Tex. 1990) (bankruptcy court need not find existing owners were the only available source of new capital), aff'd, 127 B.R. 138
(W.D. Ted. 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).
445 In re Baxter & Baxter, Inc., 172 B.R. 198, 202 (Bankr. S.D.N.Y. 1994); see also Future Energy Corp., 83 B.R. at 499 (payment of administrative expenses allowable new value).
446 See Wynnefield Manor Associates, 163 B.R. at 58 (no justification of need for $25,000 new
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