In re Castleton Plaza, LP

Case no. 12-2639, 7th Circuit Court of Appeals (decided February 14, 2013)
On a direct appeal from the bankruptcy court, the 7th Circuit panel held that a new value plan in which new investment in the debtor is provided by a spouse that was not an equity investor in the bankrupt entity must still allow for competitive bidding. On an issue of first impression for the court, and following the Supreme Court's reasoning in Bank of America National Trust & Savings Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the panel held that a proposed investment of new money by an "insider" (as that term is defined and used in bankruptcy) that was not formerly equity is no different than a proposed investment by old equity: "A new-value plan bestowing equity on an investor's spouse can be just as effective at evading the absolute-priority rule as a new-value plan bestowing equity on the original investor."
Procedural context:
Certified on direct appeal pursuant to 28 U.S.C. Sec. 158(d)(2)(A) from the United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division. Case no. 11-01444-BHL-11 (Basil H. Lorch, III, presiding judge).
Debtor Castleton Plaza, a shopping center, was 100% owned by George Broadbent either directly or through entities he controlled. The Debtor proposed a new value plan which restructured the secured debt of the property's sole secured lender and proposed to pay general unsecured creditors 15 cents on the dollar. The source of the new equity investment ($75,000) was George Broadbent's wife, Mary Clare. Mary Clare was not an investor in the debtor, though she owned the management company that employed George to run the shopping center. The lender objected to the proposed plan. The debtor upped Mary Clare's proposed new value investment to $375,000. The court denied the lender's request that it open the bid up to competition, and confirmed the plan. The bankruptcy judge then certified the matter on appeal directly to the 7th Circuit.
Frank Easterbrook, Chief Judge; Joel Flaum, Circuit Judge; Ilana Rovner, Circuit Judge. Opinion by Judge Easterbrook.

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