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Abstract

The new value exception to the Chapter 11 absolute priority rule provides a narrow avenue for equity holders to retain an equity interest in a reorganized company over the objections of senior creditors and interest holders. With the increasing number of Chapter 11 reorganization filings by private equity owned companies, private equity firms may be interested in exploring ways to retain their equity ownership in the debtor company. This Note explores the unique implications a private equity firm may encounter when attempting to utilize the new value exception as a last resort to maintain ownership in a debtor company. Part II of this Note briefly explains how the absolute priority rule functions. Furthermore, this section discusses the case law development of the new value exception. Part III then analyzes the particular challenges and considerations a private equity firm may face when attempting to meet each of the new value exception requirements. Ultimately, this section demonstrates that private equity firms hold a unique position among debtor-reorganized companies, which may aid them in obtaining new equity ownership through the new value exception. Part IV therefore concludes that private equity firms may be able to take advantage of this exception, but they must tread cautiously in light of an absence of case law guidance and the ambiguous legislation surrounding the new value exception.

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