Editors’ Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it.
Last month we explained what a professional fee carve-out is. That caused a few readers to email and ask: how does a fee carve-out relate to a carve-out for unsecured creditors?
In addition to a professional fee-carve out, official committees of unsecured creditors are sometimes able to negotiate for a carve-out for its constituents. There are not many published decisions that address this issue directly but, as explained in more detail by Alan Lepene, Andrew Turscak, Jr., and James Henderson here, some courts consider a carve out for unsecured creditors to be a price of admission to chapter 11, particularly where the pre-bankruptcy secured lender is the sole beneficiary of the bankruptcy process, even if the only benefit to the secured creditor is a minimization of its losses. For example, in In re Encore Healthcare Associates, 312 B.R. 52, as the authors explain, the court, denied a motion to sell of the debtor’s assets because, in part, no sale proceeds were being made available to the general unsecured creditors.
Note: This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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