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Code application of Case v. Los Angeles Lumber. Such comparisons offer the opportunity to make normative comparisons, but otherwise seem like a fruitless search for a bright line. Better evidence that a contribution is substantial might be that it is the type of contribution required by a lender in order to obtain adequate loan-to-value coverage, or represents a "fair bet" that the assets will be worth more than the court found them to be. Even better would be abandonment of the separate requirement that the contribution be substantial in favor of careful application of the "necessary for a successful reorganization" requirement.
The cases do little to explain the "necessity" requirement. A tautological requirement is that without the contribution, the reorganization will fail. Some courts believe that using the new capital to pay claims demonstrates the funds were not necessary for the reorganization. The court's reasoning appears to limit use of new value to make 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. Another court held that use of new contributions to repair debtor's principal asset was an inappropriate shift of risk to secured creditors, 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.
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.
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. An example is the plan which offers the new value as a token payment to the dissenting class. When the requirement is stated, it may be that the new value cannot be obtained from alternate sources, or that the plan will not succeed without the contribution. The cases rejecting cancellation of
