7th Circuit Blocks Bid to
Skirt Absolute Priority Rule
BY MICHAEL KLEIN, ESQ., COOLEY LLP
In a recent ruling, the 7th U.S. Circuit Court of Appeals reaffirmed the importance of competition in
analyzing proposed new-value plans of
reorganization. In In re Castleton Plaza,
LP, 2013 U.S. App. LEXIS 3185 (7th Cir.
February 14, 2013), the appeals court
rebuffed an Indianapolis shopping
center’s attempt to exit bankruptcy
by transferring ownership of the
center to the wife of its current owner
without giving its mortgage lender
the opportunity to make an offer that
delivered more value to creditors.
Castleton Plaza LP houses, among other
businesses, Subway, Dollar Tree, Game
Time, and Jenny Craig locations. It filed
a Chapter 11 petition in February 2011 in
an effort to avoid a foreclosure lawsuit
commenced by a secured creditor that
was owed in excess of $10 million.
During the period in which the debtor
had the exclusive right to file and solicit
a bankruptcy reorganization plan,
Castleton filed a plan that proposed to
pay (i) $300,000 to the lender on the
effective date and convert the remainder
of its mortgage into a new 30-year note;
and (ii) 50 cents on the dollar to trade
creditors for their claims. Under the
proposed plan, all of the equity in the
reorganized entity was vested in the wife
of the Castleton’s current equity holder
in exchange for a $300,000 investment.
Castleton’s lender objected to the plan,
noting its willingness to pay twice what
had been offered for the equity in the
reorganized debtor and to satisfy all
prepetition general unsecured
claims in full. The
Bankruptcy Court denied the lender’s
objection, finding that there was no
requirement that Castleton’s proposed
plan be subjected to higher and better
offers, even though secured creditors
were not being paid in full. Although the
proposed new owner of the shopping
center was an insider, the Bankruptcy
Court said, she was a new owner that
was providing value for the equity.
The Bankruptcy Court concluded that
the absolute priority rule, codified in U.S.
Bankruptcy Code Section 1129(b)( 2)(B),
did not apply because the new proposed
owner was not the holder of a claim
or interest in the prepetition debtor.
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