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90 Second Lesson: Secured Creditors and Toll Charges

 

90 Second Lesson

QUESTION:

An investment banker recently wrote in, saying this:  “I am currently helping a troubled company sell itself.  The proposed buyer wants to buy its assets through a 363 sale in Chapter 11 and is offering to pay the full amount the bank is owed on its secured debt. The bank is pushing back, trying to get the buyer to buy in an Article 9 sale.  I understand why the buyer’s motivation to do it in Chapter 11. But why does is the bank pushing back?”

ANSWER:

Like so many things, the answer is about money. The fact of the matter is that Chapter 11 is very expensive, and bankruptcy cases require lots of lawyers. Another major reason, especially where there will be enough money to pay a secured creditor in full but nothing left to pay unsecured creditors, is the “toll” that unsecured creditors will seek to impose. While not the view of all courts, most courts agree that a Chapter 11 case may not be administered exclusively for the benefit of the secured creditor and that the secured creditor must make some concession that is beneficial to the general unsecured creditors in order for the case to remain in Chapter 11. These are just a few examples of why secured creditors will often prefer to sell outside of bankruptcy.

[Editor’s Note for more information on secured creditors and bankruptcy please see Dealing With Distress For Fun & Profit – Installment #9 – Secured Creditors & Chapter 11.]

[Editors’ Note: This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to info@dailydac.comand we will try to answer it. 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.]

 

About The DailyDAC Editors

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 an similar topics.

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