Insiders, too, must compete for the new value corollary to the absolute priority rule

Recently, the 7th Circuit extended the holding in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), to situations where “a plan of reorganization gives an insider an option to purchase equity in exchange for new value.”   In re Castleton Plaza, LP, 707 F.3d 821, 822 (7th Cir. 2013).  In 203 North LaSalle, the Supreme Court held that competitive bidding is necessary before old equity can retain its interest on account of a new investment.  203 North LaSalle, 203 F.3d at 458.  The Castleton court took 203 North LaSalle a step further, holding that plans giving insiders “preferential access to investment opportunities in the reorganized debtor should be subject to the same opportunity for competition as plans in which existing claim-holders put up the new money.”  Castleton, 707 F.3d at 823.  As the Castleton court noted, the 7th Circuit is now the only circuit to pass on the issue.  But given the Court’s reasoning in 203 North LaSalle, it is likely that more courts would follow the 7th Circuit’s holding in Castleton and require competitive bidding when plans provide for an insider to make a new investment and obtain equity in the reorganized debtor.

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