## Facts

- Castleton Plaza, LP owned a shopping center and defaulted on a secured note of about $10 million held by its sole secured lender, EL–SNPR Notes Holdings, LLC.
- Castleton filed for Chapter 11 and proposed a plan that crammed down EL–SNPR by paying $300,000, restructuring the remaining secured debt to about $8.2 million, extending it 30 years at 6.25% interest, and removing lender protections (including rent lockboxes and lease-approval rights).
- The plan treated the balance as unsecured and proposed paying unsecured creditors 15%.
- Castleton’s principal equity owner, George Broadbent, controlled nearly all debtor equity; his wife, Mary Clare Broadbent, was designated to receive 100% of the reorganized equity in exchange for a cash contribution (raised from $75,000 to $375,000).
- EL–SNPR objected, offered to contribute $600,000 and pay all creditors in full, and sought an order requiring an auction or other competitive process for the new equity.
- The bankruptcy court denied the request for competition and confirmed the plan; a direct appeal proceeded to the Seventh Circuit.

## Issues

1. Whether a Chapter 11 plan that gives new equity to an insider (the debtor principal’s spouse) in exchange for “new value,” while an objecting creditor is not paid in full, must be exposed to competitive bidding under the absolute priority rule and *203 North LaSalle*.
2. Whether using an insider to fund the contribution and take the equity can avoid the competitive-process requirement applicable to old-equity new-value plans.

## Decision

- The Seventh Circuit reversed the confirmation order and remanded.
- The court held that the *203 North LaSalle* competitive-bidding requirement applies when equity is distributed to an insider in exchange for a new capital contribution and an objecting senior creditor is not paid in full.
- The debtor could not avoid competition by channeling the new value through an insider rather than the former equity holder.
- The court required a market test (such as an auction or equivalent competitive process) so other investors, including creditors, could bid for the equity.

## Legal Principles

- Under the absolute priority rule, creditors must be paid in full before equity holders may receive or retain value in a cramdown plan. 11 U.S.C. § 1129(b)(2)(B)(ii).
- When a plan proposes to distribute equity based on a “new value” contribution while a senior class objects and is not paid in full, the plan must allow competition to determine whether the contribution reflects market value.
- The competitive-process requirement cannot be evaded by assigning the opportunity to purchase equity to an “insider” under 11 U.S.C. § 101(31) instead of to existing equity.
- A competitive process may permit secured creditors to bid using the value of their claims, helping prevent undervaluation of equity and dilution of creditor recoveries.

## Conclusion

The Seventh Circuit held that a Chapter 11 plan leaving an objecting creditor unpaid cannot grant equity to an insider for a new-value contribution without a competitive process; insider funding and ownership do not avoid the market-test requirement, so the confirmation was reversed and remanded for proceedings requiring competition.


In re Castleton Plaza, LP, 707 F.3d 821 (7th Cir. 2013)