What is the Absolute Priority Rule in Chapter 11 Bankruptcy?

For any business or individual planning for a Chapter 11 bankruptcy filing, it is important to know about the “absolute priority rule” and its role in this type of bankruptcy case. The absolute priority rule concerns the order and manner in which creditors must be repaid in the proposed repayment plan. Although it initially came about through case law, the absolute priority rule is now codified in part in the US Bankruptcy Code under section 1129(b)(2). A West Palm Beach business bankruptcy lawyer at our firm can tell you more about how this works and can begin working with you today on plans for your Chapter 11 bankruptcy filing.

Understanding the Absolute Priority Rule

Under section 1129(b)(2) of the US Bankruptcy Code, a Chapter 11 reorganization plan must be “fair and equitable” to each class of creditors in order for it to be confirmed by the bankruptcy court. What does “fair and equitable” mean under these circumstances? It means that higher priority creditor claims (or claims held by creditors in senior classes) must be paid fully before lower priority creditor claims (or claims held by creditors in junior classes) can be paid.

There are specific requirements for secured creditors, and then for priority and nonpriority unsecured creditors. In short, creditors with the highest priority in terms of their class get paid first and fully, followed by remaining creditors in order of priority or class. Generally, secured creditors get paid fully before unsecured creditors, and then priority unsecured creditors (such as for family support or unpaid taxes owed) will be paid before nonpriority unsecured creditors (such as creditors seeking money for unpaid medical debt or credit card debt).

Exceptions to the Rule 

The absolute priority rule usually applies, but there are a couple of exceptions to consider.

There is a voting exception, which allows senior class or higher priority creditors to vote to accept a repayment plan with terms that would have lower priority creditors being repaid before the higher priority creditors are repaid in full. There is also something known as a “new value” exception, which allows certain equity holders to keep an interest if they debtor if they contribute to the debtor’s reorganization. These exceptions can be complicated, and bankruptcy courts have different interpretations about the application of the new value exception. Accordingly, it is important to seek legal advice about your repayment plan before assuming an exception might apply.

Contact Our West Palm Beach Bankruptcy Attorneys Today 

Is your business considering a reorganization bankruptcy filing? If so, it is essential to have experienced legal counsel to assist your business throughout the process. One of the experienced West Palm Beach bankruptcy lawyers at Kelley, Fulton, Kaplan & Eller can speak with you today about Chapter 11 bankruptcy and other potential reorganization bankruptcy options for your company such as Subchapter V or Chapter 12 bankruptcy, and we can begin working with your business on its bankruptcy filing today. Contact us for more information and to learn more about how we assist businesses in a wide range of bankruptcy matters in South Florida.

Source:

law.cornell.edu/uscode/text/11/1129