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Bankruptcy — equity investors

United States Court of Appeals For the Seventh Circuit


Bankruptcy — equity investors

An equity investor cannot evade the competitive process by arranging for the new value to be contributed by (and the new equity to go to) an “insider,” as 11 U.S.C. 101(31) defines that term.

“The bankruptcy court thought competition unnecessary because Mary Clare Broadbent does not own an equity interest in Castleton, and §1129(b)(2)(B)(ii) deals only with “the holder of any claim” that is junior to the impaired creditor’s claim. Yet 203 North LaSalle did not interpret the language of §1129(b)(2)(B)(ii), which does not speak to new-value plans. The Court devised the competition requirement to curtail evasion of the absolute-priority rule. A new-value plan bestowing equity on an investor’s spouse can be just as effective at evading the absolute-priority rule as a new-value plan bestowing equity on the original investor. For many purposes in bankruptcy law, such as preference recoveries under 11 U.S.C. §547, an insider is treated the same as an equity investor. Family members of corporate managers are insiders under §101(31)(B)(vi). In 203 North LaSalle the Court remarked on the danger that diverting assets to insiders can pose to the absolute-priority rule. 526 U.S. at 444. It follows 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.”

Reversed and Remanded.

12-2639 In the Matter of Castleton Plaza, LP

Appeal from the United States Bankruptcy Court for the Southern District of Indiana, Lorch, Bankr. J., Easterbrook, J.

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