The rule generally provides that a plan
cannot be approved if the holder of a
claim or interest that is junior to the
claims of an impaired class that is
not to be paid in full would receive or
retain any property under the plan.
The appeals court reversed this decision
based on the so-called competition
rule first articulated by the U.S. Supreme
Court in Bank of America Nat’l Trust and
Savings Ass’n v. 203 N. LaSalle Street
P’ship, 526 U.S. 434 (1999). In LaSalle, the
court held that current equity holders
of a debtor cannot, over the objections
of impaired senior creditors, exclusively
be given the opportunity to contribute
new capital and receive ownership
interests in a reorganized entity. Other
offers must also be considered.
This holding is a boon to secured
lenders, who now have another
tool in their arsenal to maximize
returns when faced with new-value
plans that threaten to understate
the value of their collateral.
an unpaid senior creditor class’s
objections.” LaSalle, 526 U.S. at 456.
The court found that plans providing
junior interest holders with exclusive
opportunities free from competition
and without benefit of market
valuation fall within the prohibition of
Section 1129(b)( 2)(B)(ii) and therefore
violate the absolute priority rule.
as a new-value plan bestowing
equity on the original investor.
In so ruling, the Supreme Court
noted that “the exclusiveness of the
opportunity, with its protection against
market scrutiny of the purchase
price by means of competing bids
or even competing plan proposals,
renders an equity holder’s right a
property interest” that is “subject to
The appeals court noted in Castleton
that, although LaSalle did not interpret
Section 1129(b)( 2)(B), the competition
rule was meant to curtail evasion of
the absolute priority rule. The appellate
court said that a new-value plan that
bestowed equity on an investor’s
spouse can be just as effective at
evading the absolute priority rule
The court also observed that for many
purposes in bankruptcy law, such as
preference recoveries, an insider is
treated the same as an equity investor.
The court added that it therefore followed
that “plans giving insiders preferential
access to investment opportunities
in the reorganized debtor should be
subject to the same opportunity for
competition as plans in which existing
claim-holders put up the new money.”
LaSalle, 2013 U.S. App. LEXIS at 6.
The court also noted various ways
in which the Castleton equity holder
himself would receive value from
the equity to be issued to his wife
11th Annual TMA Mid-Atlantic
June 12-13, 2013
Revel Resort & Casino
Atlantic City, New Jersey
Hosted by the Chesapeake, New Jersey, and Philadelphia TMA Chapters, the
regional symposium takes place at a new venue, the Revel Resort & Casino.
Save the date for this can’t miss event. Registration will be open soon.
Visit the TMA Events Calendar at turnaround.org to learn more.