A Debtor company in Chapter 11 will want to retain its property. If it does not pay all of its creditors 100% of their claim, the company could face an objection based upon the Absolute Priority Rule.
The Absolute Priority Rule
Under 11 U.S.C. ? 1129(b)(2)(C), if a class of claims (normally the ownership structure of the company) retains an interest in property while a senior class (creditors) is not paid in full, the Plan should not be confirmed. This rule is referred to as the Absolute Priority Rule. The class that is not paid in full may object to confirmation of the Plan based upon this failure to pay the full claims. As stated above, the Absolute Priority Rule is codified in the Bankrutpcy Code and a Court should not confirm a Plan that does not comply with the rule.
New Value Contribution
Because of the Absolute Priority Rule, Chapter 11 Debtors that do not pay all creditors would have great difficulty confirming Chapter 11 Plans. However, the Courts have recognized this issue and created a method for Debtors to work around this Rule. Debtors can confirm a Plan over a Absolute Priority Rule objection by proposing a new value contribution to the Debtor's property. The Court's have described this new value as "money or money's worth." Caselaw is full of methods Debtors have used to satisfy this contribution ranging from physical improvements to the property to an injection of capital.
How much New Value Contribution is necessary and when?
While the Courts have created this exception, they have not created a uniform standard for its applicability. The basic theme for new value contribution is timing and value. The sooner the contribution is made, and the larger the contribution (in relation to the discharged debt), the more likely the Court is to overrule the Absolute Priority Rule objetction. This is a case by case analysis.
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