The U.S. Court of Appeals for the Tenth Circuit recently joined the Fourth Circuit and 17 other courts in holding that the absolute priority rule applies to individual Chapter 11 debtors. The Ninth Circuit and a minority of bankruptcy courts find the absolute priority rule inapplicable to individuals.
The absolute priority rule bars an individual Chapter 11 debtor from retaining any interest in property when a dissenting class of senior creditors with impaired claims has not been paid in full. This rule insists that a creditor’s claim have an absolute priority over an equity holder’s claim whereby equity holders are compensated only after the claims of the creditors are settled.
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