FOR EXPERT COMMENT:
Sept. 29, 1998
Contact: Mary Jo Banken, Operations Manager, (573) 882-6211
[email protected]
On Nov. 2, 1998, the U.S. Supreme Court will hear a landmark bankruptcy case that may change the way small businesses recover after filing bankruptcy. To explain this complex case to the public, a University of Missouri-Columbia law school professor has established a web site for educators, students, the media, business owners and a general audience to use as a resource to help them comprehend the 203 N. LaSalle St. case.
Robert M. Lawless is an associate professor at MU's School of Law where he teaches Business Organizations, Mergers & Acquisitions , Business Bankruptcy, Legislation, and Estates & Trusts I. His research interests include business insolvency and financial distress
as well as corporate law generally. He has published extensively in the bankruptcy field and has presented papers on the subject at national conferences.
"In Bank of America v. 203 N. LaSalle St., the court will decide whether the fresh capital doctrine remains a viable method to reorganize a chapter 11 debtor," said Lawless. "Stated generally, the fresh capital doctrine gives the owners of a bankrupt small business an opportunity to hold on to the business after bankruptcy, and an opportunity to take a break and get back on its feet. By its terms, the fresh capital doctrine applies only to bankruptcies under chapter 11 of the bankruptcy code. It is possible that the Supreme Court will declare that the fresh capital doctrine is not a part of U.S. bankruptcy laws.
"To understand the fresh capital doctrine and the 203 N. LaSalle St. Case, it is necessary to know a little about U.S. bankruptcy law. A chapter 11 case is resolved through a bankruptcy court's approval of a reorganization plan, which specifies how much and in what amounts the bankrupt company will repay its creditors. Usually, some creditors will not be repaid the full amount of their debt, because a company that can repay its creditors all of the money owed does not file bankruptcy. To decide how much creditors get paid, U.S. bankruptcy law uses the absolute priority rule which stipulates that senior claimants must be paid in full before junior claimants can receive anything.
"The fresh capital doctrine operates as an exception to the absolute priority rule. If the owners of a bankrupt business contribute substantial new money using their personal assets to the business, they are allowed to retain their ownership of the business while paying creditors the amount they normally pay in a chapter 11 bankruptcy.
"The Supreme Court likely will decide the case based on its reading of complex language in the federal bankruptcy law."
Lawless' web site, which explains the case in detail, may be accessed at http://www.law.missouri.edu/lawless/bus_bkr/freshcap.htm, or you may reach him at (573) 882-1109.
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