Glossary Terms

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Absolute Priority Rule


In general terms, the absolute priority rule of Section 1129(b) of the Bankruptcy Code provides that if a class of unsecured creditors rejects a debtor’s reorganization plan and is not paid in full, junior creditors and equity interest holders may not receive or retain any property under the plan. The rule thus implements the general state-law principle that […]

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Adequate Protection


Adequate protection is relief, described in Bankruptcy Code section 361, that a debtor provides to a secured creditor.  What is protected?  The value of the secured creditor’s lien during the bankruptcy case.  How is it protected?  By the debtor making periodic payments or interest payments to the secured creditor; by the debtor granting secured creditor […]

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Administrative Expense Claims


Section 507 of the Code grants a higher priority of payment to “administrative expenses” than it does to any unsecured claims (leaving aside certain domestic support obligations).  Thus, administrative expenses must be paid in full before any unsecured claims get paid at all.  A chapter 11 plan may not be confirmed unless it proposes to […]

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Assignment for the Benefit of Creditors


An assignment for the benefit of creditors (“ABC”) is a state-law means of business liquidation that, where it makes sense to pursue, usually takes less time and expense than a bankruptcy case.  ABCs are available in many, but not all, states.  They can involve judges or not, and can be set by statute or common […]

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Automatic Stay


Upon the filing of a chapter 7 or a chapter 11 petition, a bankruptcy case starts.  With that start, a stop (or “stay”) is automatically imposed on creditor actions to collect debts from debtor or to control its property or operations – except within the bankruptcy case.  The foreclosure action, the collection calls, the post-judgment […]

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Bankruptcy Code


Article 1 of the U.S. Constitution empowers Congress to make bankruptcy law.  Congress exercised that power to enact new bankruptcy laws in 1800, 1841, 1867, and 1898.  Congress replaced the then-current law via the Bankruptcy Reform Act of 1978, including the Bankruptcy Code, which is codified as title 11 of the U.S. Code.  The Bankruptcy […]

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Bankruptcy Examiner


A bankruptcy examiner is a professional appointed by the court in certain cases to investigate certain aspects of the debtor or proceedings and report an analysis with such findings to the court.

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Bar Date


In the non-Match.com context of a bankruptcy case, this refers to the date (set by the court) on or before which a proof of claim must be filed.  Otherwise, the claim may be barred and the claimant entitled to no distribution from a plan or from the proceeds of the liquidation of debtor’s assets.  Again, […]

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Cash Collateral


Cash that is subject to a security interest.  To use such cash – almost always a pressing need – a debtor must get either consent from the secured lender or authorization from the bankruptcy court.  Consent comes at the cost of concessions required by the secured lender (such as enhanced reporting obligations and periodic cash […]

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Chapter 11 Trustee


A chapter 11 trustee represents a bankruptcy estate, exercising statutory powers predominantly for the benefit of unsecured creditors while under the direct supervision of a U.S. trustee. They are not appointed in all chapter 11 cases, but can operate the debtor’s business or bring actions against certain creditors or the debtor to recover property to […]

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Chapter 7 Trustee


Immediately upon a business entity’s filing of a petition under chapter 7 of the Bankruptcy Code, the business entity becomes a “debtor” and its property becomes a chapter 7 “estate” in the custody of a chapter 7 trustee.  The chapter 7 trustee is a lawyer or financial professional who has been selected on a rotating […]

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Committee


In large chapter 11 cases, the diffuse interests of a large number of creditors may be at stake.  Bankruptcy law addresses potential collective action problems (see the brilliant  Mancur Olsen, Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (1965)) by providing that the U.S. Trustee may appoint the membership of […]

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Contingent Value Rights


Contingent Value Rights are “an instrument committing an acquiror to pay additional consideration to a target company’s stockholders on the occurrence of specified payment triggers,” according to this article written by several attorneys at Wachtell, Lipton, Rosen & Katz.  First used in several high-profile transactions in the late 1980s, CVRs are now primarily used to “bridge valuation gaps relating to uncertain […]

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Controlled Group


Under ERISA and the Internal Revenue Code, two or more entities with a certain level of common ownership or affiliation are treated as a single entity for purposes of liability to a pension plan or a union plan, among certain other rules applicable to benefit plans.  The PBGC backs pension plans to a certain extent, […]

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Credit Bid


To purchase one’s collateral without cash.  The term “credit bid” is a colloquial term (it does not appear in the Bankruptcy Code) for a secured creditor’s right to bid at the sale of its collateral and then, at closing, to offset the purchase price by the value of its outstanding claim secured by the collateral […]

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DIP Loan


A line of credit or other credit provided to a DIP during a bankruptcy case, based upon meticulously-drafted DIP financing agreements that are reviewed by the bankruptcy court (and often the U.S. Trustee and any Committee) for, among other things, compliance with section 364 of the Bankruptcy Code.  Because the DIP needs the money – […]

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DIP or Debtor-in-Possession


Immediately upon a business entity’s filing of a petition under chapter 11 of the Bankruptcy Code, the business entity becomes a “debtor-in-possession” or “DIP” ( a type of “debtor” within the lingo of bankruptcy) and its property becomes a chapter 11 “estate” in the custody of the DIP.  No trustee is appointed unless a party […]

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EBITDA


EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.  Because it eliminates the effects of many financing and accounting decisions, EBITDA can be used to analyze and compare profitability between companies and industries.

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Executory Contract


An executory contract is any agreement for which the debtor and its counterparty have material  obligations remaining after the petition date. An “unexpired lease” is an executory contract.  Real estate leases, equipment leases, licenses of intellectual property, and employment agreements are common types of executory contracts. Non-debtor counterparties to executory contracts are obligated to continue […]

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Floating-Rate Note


Floating-rate notes, sometimes referred to as “floaters” or “FRNs” most often pay interest quarterly, and at a spread priced to the LIBOR rate. This type of coupon is popular amid an environment of rising interest rates, such as 2004 and 2005.

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Forbearance Agreement


In a forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, while the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults.  A […]

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Going Concern Note


A “Going Concern Note/Warning/Statement” is a disclosure, generally made by a publicly traded company in their required SEC reporting, advising the public that the company’s prospects to continue operating for the foreseeable future (i.e., to remain as a “going concern”) are impaired. Such a statement, setting forth the reasons for the apprehension, are mandated by […]

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Involuntary Bankruptcy


A bankruptcy case may be filed against a debtor under chapter 7 or 11 of the Bankruptcy Code.  The debtor may challenge the filing and the petitioning creditor(s) may have to post a bond to cover the debtor’s potential damages.  If the debtor’s challenge succeeds, that petitioning creditor(s) may be liable for consequential or even […]

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Ipso Facto Clause


The term “ipso facto” means “by the fact itself” in Latin. In the bankruptcy context, an ipso facto clause in a contract provides that the contract is terminated (or modified) merely by the fact itself that the other party filed a bankruptcy case.  Section 365(e)(1) provides that ipso facto clauses in executory contracts (i.e., contracts […]

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Loan Amendment Agreement


A loan amendment agreement changes the terms of the original loan agreements and eliminates or prevents an incipient default.  Suppose that the borrower fails to repay the entire principal due on the maturity date of a loan.  In response, the lender could agree simply to give the borrower more time to repay the loan — […]

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Make-Whole Premiums


Make-whole call premiums are prevalent in high-yield debt instruments. The feature allows an issuer to avoid entirely the call structure issue by defining a premium to market value that will be offered to bondholders to retire the debt early. The lump sum payment will be composed of the following: the earliest call price and the net […]

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Payment-in-Kind Notes


Some notes allow for a coupon to pay “in-kind,” or with additional bonds rather than cash. Like zero-coupon bonds, these securities, sometimes referred to as “PIK” notes, give the issuer breathing room for cash outlay. PIKs allow a company to borrow more money without immediate cash flow worries. Therefore, PIKs are viewed as more highly speculative debt […]

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PBGC


PBGC stands for the Pension Benefit Guaranty Corporation, which is a federal agency, established as a not-for-profit corporation, and is charged with administering certain pension plans and union plans under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA). The PBGC essentially insures and guarantees benefits under certain pension plans up to […]

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Preference


Anathema to trade creditors. Under section 547(b) of the Bankruptcy Code, a DIP or a trustee may sue a recipient of certain payments it received from the debtor immediately before the beginning of the bankruptcy case, in order to avoid and recover those payments, which would then (in most cases) be distributed to unsecured creditors of the […]

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Professional Fee Carve-Out


Professional advisors to a bankrupt company (or debtor) face a risk that they will not be paid their fees and expenses because the debtor estate’s only assets will be encumbered by a secured creditor’s (or DIP lender’s) first-priority lien. To deal with this risk, professionals frequently negotiate a “carve-out” to provide for the “super-priority” treatment of their allowed fees. The carve-out is […]

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Proof of Claim


Before the bankruptcy case, the creditor had a debt to collect, lawsuit, potential lawsuit, grievance, gripe about slow payment, mounting costs caused by debtor’s conduct or failure to act, or (and?) some other right to payment or other legal or equitable remedy that gives rise to a right to payment.  The bankruptcy case begins, and […]

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Real Estate Investment Trust (REIT)


This is a security which trades like stocks or bonds on various exchanges and which constitutes an interest in real estate. REITs can either represent a “direct” investment in the form of an Equity REIT, in which the interest holders have equity ownership in the property and thus collect dividends from rent collected on the […]

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Roll-Up Financing


A “roll-up” refers to a debtor-in-possession (or DIP) financing facility that is provided by the debtor’s prepetition (pre-bankruptcy) lenders and effectively pays off (or “rolls-up”) the prepetition secured debt. The roll-up can take place in a single stage or the debtor, as postpetition funding is obtained, applies an equivalent amount of proceeds first to the repayment of the prepetition […]

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Section 341 Meeting


A potentially great information source for creditors, and possibly a chance for a DIP to re-assure creditors.  Within a reasonable time after a bankruptcy case starts (including both chapter 7 and chapter 11 cases), the U.S. Trustee convenes a meeting of creditors and equity holders under section 341 of the Bankruptcy Code.  A representative of […]

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Section 363 Sale


A sale conducted per section 363(b)(1) of the Bankruptcy Code outside of the ordinary course of the business of the debtor, and not under any plan of reorganization.  By a section 363 sale, a debtor (as DIP or via a chapter 7 trustee) may sell substantially all of its assets, or any part of its […]

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Section 503(b)(9) Claims


Section 503(b)(9) was added to the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), which took effect in October 2005.  Section 503(b)(9) grants vendors an administrative priority claim for “the value of any goods received by the debtor within 20 days before” the date the bankruptcy petition […]

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Stalking Horse Bid


A stalking-horse bid is an initial bid on a bankrupt company’s assets from an interested buyer chosen by the bankrupt company to participate in a section 363 sale or a sale conducted under a plan of reorganization. The stalking horse bidder often executes a contract wherein it commits to purchasing a defined set of assets […]

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Strong-Arm Powers


Where a creditor has an unperfected lien (or an unrecorded mortgage) on a bankruptcy debtor’s property, the Bankruptcy Code empowers a trustee (or DIP, or entity that succeeds to the rights of a trustee or DIP) to avoid and preserve the lien for the benefit of the debtor’s bankruptcy estate.  The trustee exercises this power […]

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Supersedeas Bond


A supersedeas bond is best remembered by its nickname, “the defendant’s appeal bond.” They are a type of surety bond that a losing defendant is generally required to post if it wants to delay paying a judgement until after it receives a ruling on its appeal. See Fed. R. Civ. P. 62(d); and Fed. R. App. P. 8(b).

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The WARN Act


The federal Worker Adjustment and Retraining Notification Act (WARN) provides the basis for claims against an entity that closes a plant or business or lays off lots of workers.  The WARN  Act requires most employers with 100 or more employees to notify affected employees (and managers, salaried workers, plus certain state and union officials) 60 […]

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Trade Reporting and Compliance Engine® (TRACE®)


The Trade Reporting and Compliance Engine is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules. NASD introduced […]

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U.S. Trustee


The Office of the U.S. Trustee is a division of the Department of Justice.  The U.S. Trustee for any given “region” is the head of the Office of the U.S. Trustee (the UST) for that region.  The U.S. Trustee is authorized to appoint and supervise chapter 7 panel trustees, appoint the membership of official committees in […]

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Unexpired Lease


The term “unexpired lease” refers to a lease of personal or real property that has not expired as of the filing of a bankruptcy case.  If a lease is an “unexpired lease,” the chapter 11 debtor party is empowered by the Bankruptcy Code to assume (and possibly assign) or reject the lease.  The debtor-tenant under […]

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