In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, the United States Court of Appeals for the Seventh Circuit held that a debtor-licensor’s rejection of an executory trademark license does not terminate the licensee’s right to use the trademark. The decision creates a circuit-level split that may invite Supreme Court review. However, no final resolution is likely soon. The Supreme Court declined to hear the case, denying a petition for a writ of certiorari in December of 2012.

In a recent decision, In re Castleton Plaza, LP, 2013 WL 537269 *1 (Feb. 14, 2013), the Seventh Circuit held that the absolute priority rule – which requires that creditors be paid in full before equity holders receive anything on account of their equity interests under a plan of reorganization – applies equally to the “insiders” of a debtor.

In Chapter 11 bankruptcy cases, the absolute priority rule requires a debtor’s creditors be paid in full before equity investors receive any value. However, existing equity investors occasionally seek to invest new money in the plan of reorganization process and argue that such investment justifies retention of equity in the reorganized company; equity which otherwise would pass to impaired creditors.

The U.S. Court of Appeals for the Seventh Circuit, on Feb. 14, 2013, held that an insider of a Chapter 11 partnership debtor cannot avoid the “competition rule” in a new-value reorganization plan. The debtor’s equity owner arranged for his wife, also an “insider,” to contribute new value to obtain the equity of the reorganized debtor. In re Castleton Plaza, LP, — F.3d –––, 2013 WL 537269 at *1 (7^th Cir., Feb. 14, 2013).

In In the Matter of Castleton Plaza, LP,¹ the Court of Appeals for the Seventh Circuit held that a new value plan that leaves creditor claims unpaid must be subjected to a market test if the new value is contributed by an insider. The decision by the Seventh Circuit expanded the competition requirement to insiders whether or not the insider is a holder of a claim or interest against the debtor.

On February 14, 2013, the United States Court of Appeals for the Seventh Circuit in In re Castleton Plaza, LP,¹ became the first court of appeals to consider whether a competitive auction is required when a debtor’s plan of reorganization provides an “insider” that does not hold an equity interest in the debtor with an exclusive option to purchase equity in exchange for new value since the Supreme Court’s landmark decision in 203 N. LaSalle² more than a decade ago.

Can an equity investor who directs an insider to contribute "new value" to a debtor under a plan of reorganization, so as to retain his interest in the company, avoid an express market test for that new equity? The answer to that question is a resounding "no," according to Chief Judge Easterbrook of the Seventh Circuit Court of Appeals in In re Castleton Plaza, LP, Case No. 12 Civ. 2639, 2013 WL 537269 (7th Cir. Feb. 14, 2013).

In a decision issued yesterday, the 7th Circuit Court of Appeals held that insiders can't be given a special opportunity to invest in a bankrupt debtor under the guise of contributing "new value" unless the debtor makes the same investment opportunity available to other potential investors.

The 7th Circuit has again left a disappointed creditor with no recourse because of the creditor's failure to do basic investigation or take steps to protect itself. (On Command Video Corporation vs. Samuel J. Roti, Nos. 12-1351 and 12-1430, January 14, 2013). This case follows other cases in which the 7th Circuit has shown itself decidedly unfriendly to creditors who sought compensation through the courts in failed business ventures but could have, but failed, to prevent their unfortunate situation.

On February 4th, the United States Court of Appeals for the Seventh Circuit affirmed the dismissal of claims brought by plaintiffs, who controlled a mutual bank before it collapsed, against the FDIC as both regulator and as receiver. The Administrative Procedures Act (the "APA") claim against the FDIC as regulator, which seeks money damages and an order directing the FDIC to treat $23.6 million in subordinated debt as bank deposits, is a claim for substitute relief barred by the APA.