Magazine article American Banker

B of A Bankruptcy Priority Case Argued before Supreme Court

Magazine article American Banker

B of A Bankruptcy Priority Case Argued before Supreme Court

Article excerpt


The Supreme Court held arguments Monday in the only banking case on its agenda this term, probing whether senior creditors or shareholders of insolvent companies have an upper hand in bankruptcies.

The case, Bank of America v. 203 N. LaSalle Street Partnership, resulted from the failure of the real estate partnership to repay a $93 million loan on a commercial property. The loan was secured by the property - 15 floors of a downtown Chicago office building - which covered only $54.5 million of the loan.

Despite the bank's objections, a bankruptcy court judge let the owners keep the building because the partnership had invested $6.1 million in new capital under a Chapter 11 reorganization. A divided federal appeals court upheld that decision. Bank of America appealed to the Supreme Court.

The case will turn on the justices' interpretation of the so-called absolute priority rule in federal bankruptcy law, which prevents equity holders from retaining ownership if major unsecured creditors have not been fully repaid.

Richard M. Bendix Jr., a lawyer who represented the partnership, told the justices that lower court decisions were properly based on the so- called new value exception. Employed by an increasing number of courts, that exception lets equity holders retain a business if they add money to a venture to sustain it.

But Roy T. Englert Jr., an attorney representing Bank of America, and a Justice Department lawyer contended that the bankruptcy judge had violated the law by giving the partnership an exclusive crack at keeping the building. …

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