In a case in the Eastern District of Michigan a debtor proposed a Chapter 11 plan that purported to give the debtor’s equity holder a 100% interest in the reorganized debtor in exchange for waiving his prepetition claim for $1.35 million against the debtor. The debtor argued that it did not make sense to require anyone other than the equity holder to buy the new equity in the reorganized debtor because the equity holder was personally essential to the continuing operation, viability, and value of the debtor. The debtor asked the court to accept a plan that gave the equity holder the exclusive opportunity to contribute value for an ownership interest in the reorganized debtor. The court rejected the debtor’s plan, holding that it violated the absolute priority rule and could not be crammed down over the objection of creditors that would receive less than a 100% payout on their claims. The court reasoned that the debtor’s argument did not permit the court to allow the equity holder to have the exclusive opportunity to buy the equity of the reorganized debtor, so the debtor’s plan could not be confirmed.
Plan Violated Absolute Priority Rule by Giving Debtor’s Equity Holder Exclusive Opportunity