The Absolute Priority Rule, as outlined in Section 1129(b)(2) of the Bankruptcy Code, plays a crucial role in Chapter 11 bankruptcy cases. It stipulates that claims of a higher priority must be paid in full before lower priority claims can receive any recovery. This rule also requires that all creditors must be paid in full before equity interest holders can retain any interest in the debtor or receive any distribution under the plan. The priority of a creditor’s claim, therefore, determines the extent to which they can expect to be paid under a confirmed Chapter 11 plan.

There are exceptions to this rule, such as the Voting Exception and the New Value Doctrine. The Voting Exception allows a Chapter 11 plan to provide some recovery to a lower class of claim without paying a higher-ranking claim if the class of higher priority claims votes to accept the plan and consents to such treatment. The New Value Doctrine allows a debtor’s equity holders to retain some ownership of the debtor following a reorganization if they contribute “new value” to the reorganization.

Understanding the Absolute Priority Rule and its exceptions can help creditors manage their expectations for recovery in a Chapter 11 reorganization. Read the full article here.