The Overstated Absolute Priority Rule

33 Pages Posted: 22 Mar 2015

See all articles by Stephen J. Lubben

Stephen J. Lubben

Seton Hall University - School of Law

Date Written: March 20, 2015

Abstract

The absolute priority rule describes the basic order of payment in bankruptcy. Secured creditors get paid first, unsecured creditors get paid next, and only then do shareholders get paid, if at all.

The rule has obtained a kind of unassailable, near scriptural status in the corporate reorganization literature.

But there is no absolute priority rule of the kind described in the literature under current law. It is not clear there ever has been such a rule. And even if there were, adopting such a rule would be inconsistent with chapter 11, or any other sensible system of reorganization.

In essence, the academic conception of the absolute priority rule in corporate reorganization is based on a world that does not exist. Reorganizing companies are dynamic things, whereas most of the literature assumes a frozen pool of assets, to which the court might oversee an orderly allocation of value.

Reorganization in reality is fundamentally inconsistent with heartfelt fondness for a strict absolute priority rule.

Keywords: Chapter 11, bankruptcy, financial distress, creditor protection, absolute priority rule

Suggested Citation

Lubben, Stephen J., The Overstated Absolute Priority Rule (March 20, 2015). Available at SSRN: https://ssrn.com/abstract=2581639 or http://dx.doi.org/10.2139/ssrn.2581639

Stephen J. Lubben (Contact Author)

Seton Hall University - School of Law ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-642-8857 (Phone)

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