Magazine article Business Credit

NACM Goes to the Supreme Court-An Attorney's Perspective

Magazine article Business Credit

NACM Goes to the Supreme Court-An Attorney's Perspective

Article excerpt

AS SOME READERS MAY BE AWARE, EARLIER THIS YEAR NACM was given the opportunity to participate as an amicus curiae in a U.S. Supreme Court case involving a critical bankruptcy issue (Bank of America v. 302 North LaSalle Street Partnership). An amicus curiae is a "friend of the court" and is limited to those persons or entities where the parties and the court feel that the amicus has an important vested interest. NACM was asked to consider participating due to the fact that there was no other group that could represent the interest of unsecured trade credit at the Supreme Court. The National Government Affairs Committee reviewed the issues presented and recommended to the NACM Board that the brief be filed.

The case involves what is known as the new value exception to the absolute priority rule. In plain English, it means that stockholders or partners of a business may put in new equity as part of a Chapter 11 plan in order to permit them to keep the business and to keep it operating. Were it not for the new value exception as adopted by some courts, secured lenders could be in a position to force liquidation and the cessation of business by the debtor to the detriment of all trade creditors. The case of 203 North LaSalle appears to be the test case as to whether the new value exception will be permitted.

NACM was most fortunate in that it was able to enlist the participation of Professor Elizabeth Warren of the Harvard Law School to join with NACM's counsel in preparing the brief. The brief (which is available on NACM's web site) apprised the court of NACM's position that unsecured trade credit needs to have the ability of the Bankruptcy Court to confirm a plan over a lender's objection with new value, so that there may be a distribution to unsecured trade creditors, while the business continues. While it may seem strange that NACM would be filing a brief in support of a debtor, here, the interests of the debtor and trade creditors were identical. In fact, under the plan approved by the Bankruptcy Court, the debtor paid unsecured trade creditors 100 percent, but without interest, from the new value equity infusion.

The Supreme Court, which only agrees to hear fewer than 150 cases a year out of the more than 4,000 requests, obviously felt that this issue was of major significance. When the Supreme Court agrees to hear a bankruptcy case, there are usually repercussions for all classes of creditors. It is necessary that the rights of unsecured trade creditors are protected by bringing their possession to the attention of the Supreme Court.

The Supreme Court set oral argument for Monday, November 2, 1998. John Carberry, Joshua Cohen and myself, on behalf of our law firm of Cummings & Lockwood, attended the Supreme Court session, as we had written the brief along with Professor Warren. Attending for NACM were Chairman Lloyd Riffer, II, CCE, President Paul J. Mignini Jr., CAE and Government Affairs Committee Chairman Jim Sczudlo, CCE. Because the issue was of such major significance, it was felt that NACM's presence would help the members further understand the unique workings of the Supreme Court when presented with a bankruptcy related issue.

From the beginning of the presentation, it was obvious that most of the Justices were well prepared, although several acknowledged their lack of sophistication in bankruptcy matters. Some of the questions that they asked and points that they made follow. …

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