Absolute Priority Rule

The Hammer of the (Unsecured Creditor) Gods.

This rule requires that the bankruptcy plan, with respect to each class of unsecured claims that rejects the plan, provide either (1) for payment in full of that class or (2) that classes junior to the rejecting unsecured class will not receive or retain any property (including equity interests in the debtor) under the plan. Generally, a class of unsecured creditors can block a plan that allows the debtor’s existing equity holders to retain any property under the plan (including an interest in the reorganized debtor) “on account of” their pre-bankruptcy equity interests unless the plan provides for full payment of unsecured creditors. The rule is an especially powerful weapon in the hands of an undersecured lender because its deficiency claim is likely to dominate the unsecured creditor class in most single asset real estate bankruptcies.

Courts are split regarding the extent to which the absolute priority rule continues to apply in the Chapter 11 cases of individuals after the enactment of BAPCPA.

Bankruptcy Code § 1129(b)(2)(B). See also Gerrymandering, LaSalle Auction Plan, LaSalle, New Value Plan, Non-Impairment Plan, One-Impaired-Class-Must-Accept-The-Plan Rule.

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