Almost 15 years ago, the Supreme Court addressed the absolute priority rule in chapter 11 cases. The Court’s decision left chapter 11 debtors to wonder about the existence of the “new value” exception to the absolute priority rule, and left existing equity to plot their strategies for retaining ownership of and control over a debtor on the most advantageous terms. The United States Court of Appeals for the Seventh Circuit recently dealt a setback to equity holders who seek to retain their interests without creating an opportunity for others to bid for the equity in a reorganized debtor. While the Seventh Circuit clearly expressed its conclusion that the plan in question did not comport with the requirements of the Bankruptcy Code, the court did not provide any clear guidance about how the bankruptcy court should have fashioned the competitive bidding that was found to be lacking. Nevertheless, the Seventh Circuit’s opinion should be carefully considered by any parties involved in a contested confirmation involving cramdown of unsecured claims.
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