Many years ago, one of the co-authors of this article attended a bankruptcy judges' conference and sat in on a session on bankruptcy appellate practice. The panelists — all highly respected circuit court jurists — reminded the audience of bankruptcy lawyers that only 5 percent of all appeals involved bankruptcy, and, unlike the bankruptcy lawyers in the audience, circuit court judges do not spend 100 percent of their time developing and advocating technical arguments under various provisions of the Bankruptcy Code. That being said, often a review of an appellate court opinion reminds us the issue presented for adjudication was not difficult to resolve. One such example is a decision issued by the U.S. Court of Appeals for the Seventh Circuit several months ago in a case styled In re Castleton Plaza LP, No. 12-2639 (7th Cir. February 14, 2013).
The court's opinion, authored by Chief Judge Frank H. Easterbrook, begins with a statement of one of the basic principles of bankruptcy law: "Creditors in bankruptcy are entitled to full payment before equity investors can receive anything. … This is the absolute priority rule." Further, in 1999, the U.S. Supreme Court, in Bank of America National Trust and Savings Association v.203 North LaSalle Street Partnership, 526 U.S. 434 (1999), held when the old equity proposes to contribute new value to retain the equity and control of the reorganized company, other potential investors should have the opportunity to bid. The issue presented in Castleton Plaza was whether the wife of the debtor's equity owner — an insider — could purchase the new equity (and control of the company) without competitive bidding over the objection of the creditor that held 99 percent of the debt of the debtor, something the existing equity holder himself would not be allowed to do. Although the answer seems obvious, no circuit court of appeals had reviewed this issue previously, and there was no clear direction under case decisions issued by the bankruptcy courts.
Owner's Wife to Receive Control Over Objections
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