A Chapter 11 plan where the debtor’s existing equity holders are permitted to acquire post-confirmation ownership of the reorganized debtor by purchasing the equity at an open auction at which creditors and others may bid.
The absolute priority rule prohibits equity holders from retaining their equity interests in the debtor “on account of” those interests if a class of unsecured creditors whose claims are impaired under the plan do not accept the plan. Under a LaSalle auction plan, the equity holders argue that they are not receiving equity interests in the reorganized debtor on account of their previous equity in the debtor, but are instead acquiring their interests by virtue of winning the auction. The LaSalle auction plan is so named because the United States Supreme Court in Bank of America Nation Trust and Savings Association v. 203 N. LaSalle Street Partnership, mentioned the auction strategy as possibly satisfying the absolute priority rule. The court in the LaSalle case, while hinting that the auction strategy might work if a plan were otherwise confirmable, did not actually decide whether an auction would satisfy the absolute priority rule because the plan in the LaSalle case did not provide for an auction.
Diabolical questions: May a secured lender credit bid at the auction? Is an open auction enough, or must parties in interest also be allowed to file competing plans? Must such a plan satisfy the old “new value” standards? Or did LaSalle effectively render “new value” plans obsolete?