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an insider's claim as new value can be viewed as based on the lack of necessity, since mere improvement in the balance sheet normally will not materially aid the reorganization.
In Woodbrook, the plan jettisoned the new value and canceled existing equity if the court determined the plan did not satisfy the absolute priority rule, vesting ownership in the junior class of unsecured claims, which not coincidentally appeared to be controlled by insiders. Because the plan expressly provided for the optional abandonment of the new value, it was not "necessary" for the plan's implementation.
The courts have not defined "successful" in this context. Plans which are not generally "fair and equitable" or just in the court's view may be susceptible to an alternative determination that the new value will not be used to further a "successful" reorganization.
The value of the retained interest must be no more than the new value. Analysis of the historic precedents demonstrates the contribution should exceed the new capital being contributed. The nature of the interest retained must be determined in order to value that interest. The ownership right itself has value, even for an insolvent sole proprietorship, or an individual retaining exempt assets. Therefore, the plan proponent may not rest on the argument that any new value is more than the value of owning the insolvent debtor.
The requirement is difficult for individual debtors to meet. All property of the debtor is considered in determining the value of the retained interest. A promise to contribute the debtor's exempt property does not suffice, as the value of the exempt property is already included. A promise to contribute payments from post-petition earnings is neither present nor capable of being traded in the market. Without a gift, the debtor cannot satisfy the requirements of the courts for new value, which admittedly were created in the context of entities, not individual debtors.
Judge Easterbrook's hostile opinion in Snyder implicitly challenges low valuations of the interest retained, pointing out that an interest which the debtor wants to keep and the creditor wants terminated intuitively has more than minimal value. In a similar vein, a Massachusetts court uses the auction concept as a means of avoiding valuing the retained interest, requiring the debtor to allow the creditors an opportunity to bid on the equity with a requirement that it then consummate the plan.
