EMERGING PATTERNS IN DEVIATIONS FROM ABSOLUTE PRIORITY RULES IN BANKRUPTCY

Abstract

This paper documents emerging patterns in deviations from absolute priority (DAPs) in Chapter 11 bankruptcies. Priority rules are violated in at least two-thirds of all cases, with equityholders benefiting in most situations of violation. However, DAPs have been decreasing over time, with the index of deviations from absolute priority rules more than halving over a 12-year period. This fact is best explained by the reduced bargaining power of the debtor, smaller complexity of the cases, and choice of bankruptcy venue. Interestingly, both unsecured creditors and equityholders now benefit from DAPs to the detriment of secured creditors.