Seventh Circuit Extends New Value Plan Protections to Insider Context


By Trevor Hoffmann and John D. Beck

The absolute priority rule ordinarily prevents a Chapter 11 debtor from distributing any money or property to junior creditors and old equity investors unless all senior creditors have first been paid in full. See 11 U.S.C. § 1129(b)(2)(B)(ii). Nevertheless, old equity investors may attempt to receive new equity in the reorganized debtor in consideration for providing new (post-bankruptcy) investments in the debtor. Such "new value" plans are sometimes permitted on the theory that the investors are receiving a distribution from the debtor in exchange for their new contribution, not on account of their old equity interests, and thus there is no violation of the absolute priority rule. The Supreme Court in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434, 119 S.Ct. 1411 (1999), held that any new value plan must be market tested to ensure that the plan provides the best recovery to all creditors and does not unfairly advantage existing equity holders. Courts have usually interpreted the market test requirement to mandate a competitive bankruptcy auction or the termination of the debtor’s exclusivity period to file and solicit acceptance of a reorganization plan so that the would-be plan sponsors and parties-in-interest may file their own competing plans.

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