Michael Harary

Document Type

Research Memorandum

Publication Date




Bankruptcy reorganization plans can pose a challenge for old equity shareholders wanting to retain their interests in a reorganized entity, Under the Bankruptcy Code these plans give most creditors a higher priority to receive equity in the reorganized company before shareholders. However, shareholders have different options that can aid them in retaining interests in the company; one such option is the contribution of new value that is subject to market evaluation.

Recently, in H.G. Roebuck & Son, Inc. v. Alter Communications, Inc., (“Roebuck”), the United States District Court for the District of Maryland reversed the bankruptcy court’s decision to grant the debtor the exclusive right to file a reorganization plan. The court held that the plan violated the absolute priority rule by proposing that the debtor retain equity in the reorganized entity by contributing new value that was not sufficiently tested in the market over more senior creditors. Under the plan, most claims were to be paid in full, except for certain general unsecured claims, including H.G. Roebuck’s, which was to be paid something less than 16%. In addition the shareholders were to contribute $34,859 dollars in “new value” to the reorganized company and retain their equity interests. The shareholders argued that injecting this new value satisfied the new value exception and thus allowed for confirmation. The court reasoned that the debtor did not satisfy the “new value” exception because they failed to subject their new value contribution to proper market valuation, to ensure it was a proper exchange, and was therefore only retaining interest “on account of” old equity, a violation under the Bankruptcy Code.

Part I will discuss the relevant statutes and cases regarding the absolute priority doctrine, focusing on the new value exception. Part II will discuss market valuation in detail. Part III will discuss practical implications and advice for shareholders wanting to retain their interests in the reorganized entity. Part IV will conclude and offer an outlook for future cases.


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