Burgeoning "New Value" Competitive Bidding Requirement

A debtor that owned a shopping center proposed a plan of reorganization that gave the spouse of the debtor's owner 100% of the equity of the reorganized debtor in return for a cash investment, but without any competitive bidding.  The bankruptcy court had no objection to this result, but the 7^th Circuit disagreed.

As the 7^th Circuit noted, under Section 1129(b)(2)(B)(ii) of the Bankruptcy Code (also known as the absolute priority rule) in order for a plan to be confirmed over the objection of creditors, the holder of a junior claim or interest is not permitted to receive any property under the plan "on account of such junior claim or interest."  To get around this requirement, a debtor's equity holders have sometimes proposed to contribute "new value," and then argued that they are obtaining equity in the debtor based on the new value rather than on account of their junior equity interests.