New Value, Fresh Start

Abstract

In this article, the author enters into the debate about the desirability of the "new value" exception to Bankruptcy Law's absolute priority rule. After a description of the theory's origins, the author rejects the formal and textual argument that the exception did not survive the enactment of the Bankruptcy Code, as well as rejecting the arguments that the exception serves no useful function under the voting procedures of the Code, and that it wrongly confers a post-reorganization option-like value to equityholders on account of their pre-petition claims. The author proceeds to argue that the new value exception is necessary because fair new equity auctions would be rare in the reorganization context, because the quasi-option characteristics of the ability to file a reorganization plan using the new value exception provide socially desirable incentives to business owners, and because the new value exception is consistent with, and promotes, the fresh start policy. Moreover, providing the fresh start through the new value exception is preferable compared to its current provision through the rejection of injunctive obligations not to compete. The conclusion sketches the reorganization process toward which the law should move.