Chapter 11 Reorganization and the Fair and Equitable Standard: How the Absolute Priority Rule Applies to All Nonprofit Entities

Authors

Pamela Foohey

Document Type

Article

Abstract

(Excerpt)

The remainder of this Article proceeds in two stages. First, Parts II, III, and IV provide the background necessary to develop the theory. Part II chronicles the development of the fair and equitable standard and the absolute priority rule. This history is important to understanding the interconnectedness of the rule with the standard. Part III details the key functions of the absolute priority rule and the rule’s application to for-profit entities, with an emphasis on concerns regarding its compatibility with close corporations. This review highlights how courts’ current application of the absolute priority rule to nonprofits contravenes the rule’s purposes and deviates from the rule’s application to functionally similar for-profit entities, thereby creating situations in which plans that courts otherwise may reject are confirmed simply because the reorganizing entities are nonprofits. Next, before the Article sets forth a theory that reconciles this deviation, Part IV overviews the limited body of case law analyzing the rule’s operation in nonprofit bankruptcies. This overview provides one of the first compilations of cases dealing with nonprofit bankruptcies and begins to create a history of nonprofit reorganization.

The last three parts of the Article develop a theory of how the absolute priority rule, by way of its core tenets, applies to all nonprofit entities through the fair and equitable standard. Combining the insights of Parts II and III with current case law, Part V first sets forth the theory and then provides examples of the theory’s application. Part VI suggests criticisms of the theory and, responding to those criticisms, explores the implications of applying Chapter 11 to nonprofits. Finally, Part VII offers concluding thoughts about the expanded utility of the absolute priority rule.