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interests test is satisfied by providing them more than liquidation value. This can occur with a nonprofit corporation or a municipality in a chapter 9 case, which incorporates the same absolute priority rule. This raises the question of whether those in control of a nonprofit entity or a municipality should be deemed an equity class even though they cannot profit from the status as can shareholders or partners of for-profit entities.
In Wabash, the Seventh Circuit held that the cooperative members who controlled the debtor, a utility cooperative, did not qualify as equity interests because they could never profit from their status. That conclusion may have been somewhat facile. While it is true coop members cannot legally profit from the distribution of dividends, they could profit in another sense, by utilizing assets at a cost below their true acquisition cost, and below the debt service they would have to pay if all unsecured debt were paid in full. That was not the case in Wabash because (1) the nuclear power plant had been abandoned and was not providing the debtor any value, and (2) utilities are regulated and the utility commission had already denied the coop's petition to raise rates to cover the cost of its abandoned nuclear power plant. But that may not be the case with other kinds of entities that could similarly rely on such non-equity status to retain control of a debtor and its assets while not paying objecting creditors in full, such as municipalities and nonprofit corporations.
The Ninth Circuit held, however, that a parent union did not have any equity interest in a local union for absolute priority purposes, because the debtor's ability to collect dues from members did not arise from the affiliation with the parent.
The municipality example is well illustrated by a recent chapter 9 plan in which payments to creditors were to be derived from tax assessments. The unsecured creditors' committee objected that the debtor should be required to raise taxes to pay its debts in full. Nonetheless, the court followed Wabash that there was no equity class because the "residents of the District have no ownership interest in the debtor akin to that of shareholders of a corporation." While the residents of the hospital district obviously cannot earn dividends, the opinion ignores the fact that in another sense they earn financial benefits from the use of a hospital whose debts they are not required to pay. The analysis also fails to address the
