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Keywords

litigationequityappealbankruptcychapter 11 bankruptcyobjection
litigationequityappealbankruptcychapter 11 bankruptcyobjection

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In re Armstrong World Industries, Inc., 432 F.3d 507, 55 Collier Bankr.Cas.2d 789, 45 Bankr.Ct.Dec. 222, Bankr. L. Rep. P 80,434

Facts

AWI, facing asbestos litigation liabilities, filed for Chapter 11 bankruptcy in December 2000. The Bankruptcy Court appointed committees to represent unsecured creditors and approved a Fourth Amended Plan of Reorganization in May 2003. The plan proposed to distribute warrants to equity interest holders, which led to objections from the unsecured creditors, particularly the Official Committee of Unsecured Creditors (UCC), who later filed a conditional objection based on the potential violation of the absolute priority rule. The Bankruptcy Court recommended confirmation of the plan, but the District Court ultimately denied it, leading to AWI's appeal.

AWI, facing asbestos litigation liabilities, filed for Chapter 11 bankruptcy in December 2000. The Bankruptcy Court appointed committees to represent unsecured creditors and approved a Fourth Amended Plan of Reorganization in May 2003.

Issue

Did the proposed reorganization plan violate the absolute priority rule as codified in 11 U.S.C. § 1129(b)(2)(B)?

Did the proposed reorganization plan violate the absolute priority rule as codified in 11 U.S.C. § 1129(b)(2)(B)?

Rule

The absolute priority rule requires that a reorganization plan must not allow junior claimants to receive or retain property under the plan on account of their junior claims or interests if a dissenting class of creditors has not been paid in full.

The absolute priority rule requires that a reorganization plan must not allow junior claimants to receive or retain property under the plan on account of their junior claims or interests if a dissenting class of creditors has not been paid in full.

Analysis

The court analyzed the plan's provision that distributed warrants to equity interest holders and determined that it violated the absolute priority rule. The court found that the plan allowed Class 12 (equity interest holders) to receive property (warrants) over the objection of Class 6 (unsecured creditors), which was contrary to the statutory requirements. The court rejected AWI's arguments for a flexible interpretation of the rule and found that the legislative history supported a strict application of the absolute priority rule.

The court analyzed the plan's provision that distributed warrants to equity interest holders and determined that it violated the absolute priority rule.

Conclusion

The Court of Appeals affirmed the District Court's decision, concluding that the plan could not be confirmed due to its violation of the absolute priority rule.

The Court of Appeals affirmed the District Court's decision, concluding that the plan could not be confirmed due to its violation of the absolute priority rule.

Who won?

The prevailing party was the UCC, as the court upheld their objections to the plan's confirmation based on the violation of the absolute priority rule.

The prevailing party was the UCC, as the court upheld their objections to the plan's confirmation based on the violation of the absolute priority rule.

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