through the increase of his family’s
wealth and his continued receipt
of a salary as the debtor’s CEO. Id.
Accordingly, the court ruled that “[t]he
absolute-priority rule therefore applies
despite the fact that [the wife] had not
invested directly in [the debtor and]
[t]his reinforces our conclusion that
competition is essential.” Id. at 8.
Notably, the court’s application of
the competition rule did not depend
on the debtor’s proposing the plan
during its exclusivity period or on the
identity of the plan proponent. On the
contrary, the court ruled that it was
appropriate to use the rule to “prevent
the funneling of value from lenders to
insiders, no matter who proposes the
plan or when,” stating that “an impaired
lender who objects to any plan that
leaves insiders holding equity is entitled
to the benefit of competition.” Id.
Michael Klein is an associate in the Bankruptcy &
Restructuring Group at Cooley LLP in New York.
His practice focuses on litigation and transactional
work, including the representation of debtors,
creditors’ committees in Chapter 11, and secured
creditors. He has authored numerous articles in the
Journal of Corporate Renewal and is a member of
the Editorial Advisory Board. Klein has a law degree
from the University of Pennsylvania Law School
and a bachelor’s degree from Cornell University.
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.
The court’s ruling in Castleton is
noteworthy because it reinforces the
competition rule by clarifying that all
plans, even new-value plans proposed
by relatives or other insiders of a debtor,
must be market-tested at an auction
before they can be approved. This
holding is a boon to secured lenders,
This empowerment of secured creditors
through application of the absolute
priority rule continues a recent trend,
as the Castleton decision comes on
the heels of the Supreme Court’s
ruling in RadLAX Gateway Hotel, LLC
v. Amalgamated Bank, 132 S.Ct. 2065
(2012) and the 2d U.S. Circuit Court of
Appeals’ ruling in In re DBSD North
America, Inc., 634 F.3d 79 (2d Cir. 2011).
credit bidding their claim in connection
with a sale process conducted pursuant
to a plan of reorganization. In DBSD, the
2d Circuit ruled that so-called gifting
plans violate the absolute priority rule
to the extent they allow the debtor’s
prepetition owners to receive an
interest in the post-effective date entity
without paying all creditors in full.
The court said in RadLAX that secured
creditors may not be precluded from
These decisions underscore the
continued preeminence of the
absolute priority rule in the face of
increasingly creative deal structures
designed by various parties in
interest with the sole purpose of
circumventing its strict application. J
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