Index: app/models/issue.rb
===================================================================
--- app/models/issue.rb	(revision 15058)
+++ app/models/issue.rb	(working copy)
@@ -1451,9 +1451,11 @@
   def recalculate_attributes_for(issue_id)
     if issue_id && p = Issue.find_by_id(issue_id)
       if p.priority_derived?
-        # priority = highest priority of children
-        if priority_position = p.children.joins(:priority).maximum("#{IssuePriority.table_name}.position")
+        # priority = highest priority of open children
+        if priority_position = p.children.open.joins(:priority).maximum("#{IssuePriority.table_name}.position")
           p.priority = IssuePriority.find_by_position(priority_position)
+        else
+          p.priority = IssuePriority.default
         end
       end
 
Index: test/unit/issue_subtasking_test.rb
===================================================================
--- test/unit/issue_subtasking_test.rb	(revision 15058)
+++ test/unit/issue_subtasking_test.rb	(working copy)
@@ -78,7 +78,7 @@
     end
   end
 
-  def test_parent_priority_should_be_the_highest_child_priority
+  def test_parent_priority_should_be_the_highest_open_child_priority
     with_settings :parent_issue_priority => 'derived' do
       parent = Issue.generate!(:priority => IssuePriority.find_by_name('Normal'))
       # Create children
@@ -88,14 +88,23 @@
       assert_equal 'Immediate', child1.reload.priority.name
       assert_equal 'Immediate', parent.reload.priority.name
       child3 = parent.generate_child!(:priority => IssuePriority.find_by_name('Low'))
+      child4 = parent.generate_child!(:priority => IssuePriority.find_by_name('Urgent'))
       assert_equal 'Immediate', parent.reload.priority.name
       # Destroy a child
       child1.destroy
+      assert_equal 'Urgent', parent.reload.priority.name
+      # Close a child
+      child4.status = IssueStatus.where(:is_closed => true).first
+      child4.save!
       assert_equal 'Low', parent.reload.priority.name
       # Update a child
       child3.reload.priority = IssuePriority.find_by_name('Normal')
       child3.save!
       assert_equal 'Normal', parent.reload.priority.name
+      # Reopen a child
+      child4.status = IssueStatus.where(:is_closed => false).first
+      child4.save!
+      assert_equal 'Urgent', parent.reload.priority.name
     end
   end