Also known as: absolute priority rules · APR
Written by attorneys · grounded in primary & secondary sources — see below
A bankruptcy doctrine requiring that a reorganization plan pay a dissenting class of unsecured creditors in full before any junior class of claimants may receive or retain value under the plan.
Alpine Mining proposes a Chapter 11 plan that leaves its shareholders with ownership while an impaired unsecured creditor class receives only partial payment. The dissenting creditors object. The court refuses confirmation because the plan violates the absolute priority rule by allowing junior interests to retain value without full payment to the senior class.
Alliance Holdings files for Chapter 11 and its equity holders offer fresh capital in exchange for continued ownership. An unsecured creditor class dissents and remains unpaid in full. The court confirms the plan after finding the new-value exception satisfies the absolute priority rule.
Azure Solutions elects Subchapter V treatment in its Chapter 11 case. Its owners propose to retain equity while paying unsecured creditors only a portion of their claims through projected disposable income. The court confirms the plan because the absolute priority rule does not apply under the Subchapter V cramdown standard.
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Avalon Pharmaceuticals submits a plan that distributes value to equity before satisfying the claims of its impaired unsecured bondholders. The bondholders object. The court denies confirmation, holding that the absolute priority rule bars junior classes from receiving anything until senior dissenting creditors are paid in full.
Adam Anderson, owner of a debtor corporation, seeks to keep his stock under a proposed reorganization plan. An unsecured trade creditor class votes against the plan and will not be paid in full. The court withholds confirmation because the absolute priority rule prevents equity retention over the objection of the impaired creditor class.
Andre Antoine proposes to retain his farm by promising future services rather than cash or new capital. Dissenting unsecured creditors object that they will not receive full payment. The court denies confirmation, ruling that the absolute priority rule is not satisfied by a mere promise of future labor.
The plan must pay the dissenting unsecured class in full before any junior class receives or retains value. This requirement appears in section 1129(b)(2)(2)(B)(ii) and prevents equity holders from keeping ownership unless senior impaired classes are fully compensated.
No. Subchapter V replaces the absolute priority rule with a projected disposable income test for cramdown. Owners may retain their interests even if an impaired unsecured class is not paid in full, provided the plan commits three to five years of disposable income to creditors.
Yes. Many jurisdictions recognize a new-value exception. A partner or shareholder may retain an interest by contributing fresh capital that is reasonably equivalent to the interest received, even if dissenting unsecured creditors are not paid in full.
The absolute priority rule applies only in cramdown when a class rejects the plan and bars junior classes from receiving value until the rejecting class is paid in full. The best-interests test applies in every case and ensures each individual creditor receives at least as much as in a Chapter 7 liquidation.
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