Absolute Priority Rule: How Absolute is Absolute?

Description

In In re Castleton Plaza, the 7th Circuit held that an equity investor could not skirt the absolute priority rule by directing new value be contributed by a non-equity holder insider.  This is a key development for secured lenders and creditors and owners in SARE cases where new-value plans are common.

Castleton Plaza also clarifies a question left open by the U.S. Supreme Court’s decision in Bank of America v. 203 North LaSalle Street Partnership: whether LaSalle's directive that a new-value plan be market-tested requires an auction.  Castleton makes clear that competitive bidding is required, at least in those instances where the new investment is offered by an insider of the old equity investor.

Castleton follows the trend in the 2nd and 3rd Circuits, which have reaffirmed the absolute-priority rule in the context of so-called “gifting plans.” These cases indicate courts will enforce the substance of the rule over attempts to evade it through insider equity purchases or “gifts” from secured lenders.

Listen as our authoritative panel of bankruptcy practitioners discusses the scope of the absolute priority rule and case law developments since 203 North LaSalle, with particular focus on the recent 7th Circuit Castleton Plaza ruling.  The panel will also discuss the impact of the ruling on other issues related to the absolute priority rule, including competitive bidding and gifting strategies.