Toward a New Conceptualization of the Absolute Priority Rule and Its New Value Exception

Detroit College of Law, Vol. 1993, pp. 1445-1498, 1993

54 Pages Posted: 2 Jul 2015

See all articles by Edward S. Adams

Edward S. Adams

University of Minnesota - Twin Cities - School of Law

Date Written: 1993

Abstract

The absolute priority rule has provided protection for reorganization creditors since its inception nearly eighty years ago. Recently, however, debtors have relied on the judicially-developed new value exception to erode creditor protection under the absolute priority rule. Under this exception, junior claimants (usually the shareholders of a debtor corporation) maintain that they may retain a stake in the reorganized company without making full payment to nonconsenting creditor classes because they are contributing “new value” and thus are no longer merely junior claimants retaining their interest “on account of such junior claim,” This exception has become one of the great unresolved questions in the Bankruptcy Code: Can old shareholders of a firm retain their equity interest in the firm by making contributions equal to the value of that equity, when the creditors have neither been paid in full nor consented to the proposed plan?

To understand the operation of the new value exception and the absolute priority rule, Part I of this Article will explore the historical development of the absolute priority rule and the new value exception under the Bankruptcy Act as well as various arguments regarding whether the new value exception was included in the 1978 Bankruptcy Code. Next, Part II will consider the current application of the rule. Part III will confront the abuses that can occur under the rule. Finally, Part IV will suggest modifications to the rule that ensure that equity holders of a debtor corporation do, in fact, contribute the fair market price for the interests they are retaining.

Keywords: Bankruptcy, Absolute Priority Rule, New Value Exception

Suggested Citation

Adams, Edward S., Toward a New Conceptualization of the Absolute Priority Rule and Its New Value Exception (1993). Detroit College of Law, Vol. 1993, pp. 1445-1498, 1993. Available at SSRN: https://ssrn.com/abstract=2625315

Edward S. Adams (Contact Author)

University of Minnesota - Twin Cities - School of Law ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

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