Moreover, the acquiescence effect moves the junior claimants' payoff closer to what it deserves under the absolute priority rule as well.
It is not our claim that the acquiescence effect will always lead to exact implementation of the absolute priority rule whenever substantial junior ownership of stock increases the expected value of the reorganized firm.
My essay assumed that courts would correctly apply the absolute priority rule
(and that parties would know the law).
Recent studies have shown that adherence to the absolute priority rule (APR) seldom occurs in corporate bankruptcies.
Roenfeldt, "Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance (December 1990), pp.
The absolute priority rule (hereafter APR) states that a bankrupt firm's value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors, and junior creditors are paid in full before common shareholders.
Roenfeldt, 1990, "Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance (December), 1457-1469.
According to the absolute priority rule
under Chapter 7 liquidation, junior debtholders are paid some amount upon default only if senior bondholders have received full payment.
216) This arrangement therefore violated the absolute priority rule
13) This contrast raises the question of how to apply the absolute priority rule
to Plans in which the pre-petition interest holders of a nonprofit (usually its directors or members) retain control of, and thus an interest in, the reorganized, post-petition debtor.
The absolute priority rule
provides for the retention in bankruptcy of the priority of claims established outside of bankruptcy.
important and straightforward: Applying the absolute priority rule