The words “absolute priority” are nowhere to be found in the Bankruptcy Code. “Absolute priority” is merely the way we characterize a number of provisions that, in the vast majority of cases, ensures that a fully secured creditor is paid in full before anyone junior to her receives anything. But the statutory language and the case law interpreting it sometimes produce results in tension with the idea of absolute priority broadly construed. These apparent exceptions to absolute priority may not arise often, but they can arise and, as recent developments illustrate, they can arise in important cases. This paper reviews a number of them. The trouble stems from the need to accommodate both the idea that nonbankruptcy priority rights should be respected and the idea that a reorganizing debtor needs to have flexibility to reshape the capital structure, including secured claims. Hence, the drafters provided several different avenues for the plan proponent to choose among. Again, as a general matter, these different avenues all seem to require that the senior secured creditor is either paid in full or become the owner of the business, but each occasionally produces results that are at odds with our intuitive understanding of “absolute priority.” One of the most important of these in recent years has been the practice of “reinstatement,” and I turn to it first.
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