Recent Court Decisions Hold That The Absolute Priority Rule Still Protects Creditors Of Individual Chapter 11 Debtors


As the economic recovery continues to wind along through the up and down financial cycles that have been the hallmark of the last four years, there can be little doubt that some individuals historically on the higher end of the economic spectrum have felt the impact of the crisis more than others. More than a few “high net worth individuals” have seen personal fortunes eroded to a degree that has caused them to consider what would have once been unthinkable — personal bankruptcy. However, many times, the bankruptcy relief utilized most often by individual debtors, Chapter 13, or Chapter 7, won’t be quite the right fit. The debt ceilings in Chapter 13 preclude some from filing. Means testing, limited exemptions, and the fact that Chapter 7 isafter all a liquidation proceeding create difficulty under that chapter. What’s a poor high net worth debtor to do?

For some the answer has been an individual chapter 11 case. Individual chapter 11 cases have historically not been the norm, because they required that the individual debtor comply with the same requirements to confirm a plan of reorganization that were applicable to corporations and businesses. To confirm a plan of reorganization, all classes of claims not paid in full in cash on the effective date of the plan have to agree to the alternative treatment the plan proposes. If they do not, the only way to confirm the plan over their dissent is through what is called “cram down” — the process of confirming a plan notwithstanding the dissent of an impaired class of creditors. In order to “cram down” a plan on unsecured creditors, the plan must comply with the so called “Absolute Priority Rule”.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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