Absolute Priority Rule: 5 Ways Small Business Owners Keep Equity Anyway

The absolute priority rule has fewer exits than owners hope and more than their creditors would like to concede. Its text sits in section 1129(b)(2)(B), and it applies at one moment only: when a class of unsecured creditors has voted no and the plan's proponent asks the court to confirm anyway. At that moment the plan must either pay the dissenting class in full or ensure that no one junior to it, the owner included, "will receive or retain under the plan on account of such junior claim or interest any property."

Five routes lead around that sentence, or through it. None of them is free. Each one charges the owner in a different currency, and the currencies are not interchangeable.

1. Pay the Dissenting Class in Full, Measured on the Effective Date

The first alternative in the statute is the obvious one, and it is harder than it reads. Section 1129(b)(2)(B)(i) requires that each holder in the class receive property "of a value, as of the effective date of the plan, equal to the allowed amount of such claim." The phrase that matters is "as of the effective date." A promise of future dollars is worth less than the same dollars paid today.

Suppose the unsecured class holds $600,000 in allowed claims, and the plan promises $600,000 in equal payments over five years with no interest. The nominal total matches. The value on the effective date does not, because a dollar received in year five is worth less than a dollar received at confirmation, and the plan must add enough interest to close that gap before it can be called payment in full. An owner who can do that keeps the company without further argument.

Few distressed companies can. That is why the other four routes exist.

2. Win the Vote, Because the Rule Only Guards a Class That Voted No

Cramdown under section 1129(b) is needed only when a class has rejected. A class of unsecured claims accepts when creditors holding at least two-thirds of the dollars and more than half of the claims that cast ballots say yes, and an accepting class cannot invoke the absolute priority rule at all. An owner can keep equity under a plan that pays general unsecured creditors thirty cents, or ten, if the class accepts it.

The individual creditor is not left without protection. Section 1129(a)(7) guarantees each holder in an impaired class, including one who voted no inside an accepting class, at least what it would have received in a Chapter 7 liquidation. And section 1129(a)(10) still demands acceptance by one or more impaired classes, with insiders left out of the count. The consensual route is a negotiation, conducted under the shadow of the rule rather than its enforcement, and what the owner pays for acceptance is whatever the class demands to vote yes.

3. Contribute New Value, and Let Someone Else Bid Against It

In 1939, in Case v. Los Angeles Lumber Products Co., the Supreme Court suggested that old owners might participate in a reorganized company if they contributed "money or money's worth." The suggestion became the new value doctrine, and its scope has been argued about ever since.

In 1988 the Court narrowed it from one direction. The family farmers in Norwest Bank Worthington v. Ahlers proposed to keep their farm by contributing their future "labor, experience, and expertise." The Court held that the absolute priority rule applied and that a promise of future labor "warrants no exception to its operation," because future services were "intangible, inalienable, and, in all likelihood, unenforceable," and could not "be exchanged in any market for something of value to the creditors today." The farmers also argued that their equity was worthless to creditors and so was not property the rule could reach (an argument that tends to be made by the only people who want the worthless thing), and the Court rejected that as well.

In May 1999 the Court narrowed it from another. The debtor in Bank of America v. 203 North LaSalle Street Partnership owned a Chicago office building worth less than its mortgage. Its plan let certain former partners contribute new capital in exchange for all of the equity in the reorganized entity, and only they could make that contribution. The bank, the sole member of an impaired class, voted no. The Court held that prebankruptcy equity holders may not, over a senior class's objection, contribute new capital and receive ownership "when that opportunity is given exclusively to the old equity holders under a plan adopted without consideration of alternatives." The exclusivity itself was the property received "on account of" the old interest. The Court observed that "the best way to determine value is exposure to a market."

But the Court did not say the new value exception exists.

It said, in terms, that it was not deciding the question, and it held only that if the exception exists, an exclusive opportunity shielded from competition cannot satisfy it. An owner who wants to keep the company this way must bring cash or its real equivalent, not sweat, and must accept that someone else may be permitted to offer more for the same shares or propose a competing plan. Whether a small company's equity will attract any competing bidder at all is a question the opinion leaves where it found it. The market test may produce no market. The owner still has to submit to it.

4. Elect Subchapter V, Where the Rule Does Not Apply

Section 1181(a) lists section 1129(b) among the provisions that "do not apply" in a Subchapter V case, and the absolute priority rule goes with it. Section 1191(b) substitutes its own test for confirming over a dissenting class, and section 1191(c) defines fair and equitable without reference to priority: the plan must commit the debtor's entire projected disposable income for three years, or up to five if the court so fixes, and the debtor must be able to make the payments, or show a reasonable likelihood of doing so with appropriate remedies, which may include liquidating nonexempt assets, if it does not. Disposable income, under section 1191(d), excludes what the business needs for its continuation, preservation, and operation, and that phrase invites argument, because an owner's view of what the business needs and a creditor's view seldom coincide. The owner keeps the shares. What the owner surrenders is three to five years of the company's surplus, which may be worth more than the shares ever were.

Eligibility is the limit. The Subchapter V debt ceiling has been $3,424,000 in qualifying debts since April 1, 2025, and legislation to raise it was pending in Congress, not yet law, when this was checked in September 2026.

5. File as an Individual, Under an Exception the Statute Writes In

Section 1129(b)(2)(B)(ii) ends with a clause most summaries omit: "in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115." A sole proprietor is an individual. An LLC or corporation is not, and its owner cannot borrow the clause.

The individual pays in another currency. Under section 1129(a)(15), if an unsecured creditor objects, the plan must pay the claim in full or distribute property worth at least five years of the debtor's projected disposable income. How far the individual exception reaches is a question to put to counsel in the circuit where the case will be filed.

Before Anyone Invokes the Rule

Each of these routes begins after a petition has been filed. Some owners test whether their creditors will accept less before any court counts a ballot. Delancey Street examines merchant cash advance and business debt at no cost and in confidence for that purpose. It does not file bankruptcy cases or give legal advice; not a law firm, it involves independently licensed counsel when the matter becomes legal. A company whose owner can keep the business only through cramdown, Subchapter V, or a new value plan is a company for bankruptcy counsel, and a settlement conversation will not substitute for that.

The rule protects an order of speaking. Owners speak last, and in five narrow circumstances they are still heard.