The absolute priority rule is a judicially-created doctrine that, “provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under a reorganization plan.” The rule was codified in Sec. 1129(b)(2)(B)(ii) with the enactment of the Bankruptcy Code in 1978.   

            In a case of first impression before the 9th Circuit, Zachary v. California Bank & Trust, No. 13-16402, 2016 (9th Cir. Jan. 28, 2016), the Court held that the Absolute Priority Rule applies in all chapter 11 cases, even if the debtor is an individual. Through this opinion, the 9th Circuit has now expressly overruled In re Friedman, 466 B.R. 471 (B.A.P. 9th Cir. 2012), that Congress intended abrogation of the absolute priority rule by the BAPCPA amendments to the Bankrupty Code in 2005.   The absolute priority rule applies to any property owned by the debtor at the commencement of the bankruptcy case.             

            The courts have established an exception to the absolute priority rule known as the new value exception (also called the new value doctrine or the new value corollary). The new value doctrine opens the door for plan proponents to overcome the absolute priority rule by requiring equity holders to make a substantial and essential contribution in exchange for their continued ownership of the debtor.  To be substantial, most courts require that the contribution (i.e., new value) be: (1) a present contribution; (2) freely tradable in the market; and (3) money or money’s worth.  To be essential, the case law generally mandates that this new contribution be directly related to the success of the reorganization plan.   

            When the Supreme Court decided Bank of America National Trust and Savings Assn. V. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the decision focused on the importance of exposing valuable property to a free market of potential bidders, a “market test.”  The new value doctrine is a long-recognized corollary to the absolute priority rule, one that is very much alive after LaSalle.  The lesson learned from the cases is that a new value plan cannot be confirmed if the old equity holders are the only ones given an opportunity to bid on the debtor’s ownership interests.  It is likely that new value contributions that are substantial and essential to the debtor’s reorganization efforts will continue to provide a basis for confirming plans that would otherwise violate the absolute priority rule. 

            Several bankruptcy court cases, decided both before and after the 203 North La Salle Street decision have discussed the need for an auction in cases involving new value plans. None of those cases discuss the procedures to be used in conducting such an auction.  There are two ways to meet the market test as described in LaSalle.  1) opportunity to file competing plans, and 2) some form of auction.  This blogger contends that an auction in an individual case is an impossibility.  For help with Bankruptcy see Deborah K. Vincent at


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