Bankruptcy Gifting

Welcome to the 54th Pari Passu newsletter.

Last week, we dived in-depth into one of the most exciting restructuring cases of this year. Today, we are going to learn about a conceptual topic: bankruptcy gifting.

Read until the end if you are interested in a Christmas gift from me.

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Overview

In the Chapter 11 process, history has shown that creditors are willing to attempt a variety of solutions and read between the lines of bankruptcy law to achieve any recovery. In their endeavors, creditors may need help with the absolute priority rule, which delineates the recovery process in bankruptcy and liquidation scenarios. The bankruptcy distribution scheme differs in Chapter 11 and Chapter 7 cases. Under Chapter 11, the plan of reorganization determines the treatment of secured and unsecured creditors. In a Chapter 7 case, distribution is defined strictly by the absolute priority rule; If claimants in a higher class do not receive a full recovery, junior claimants are owed nothing. To solve the recovery disputes and the issues associated with valuations, creditors may utilize 'bankruptcy gifts.' These gifts can be broken into two categories: gift carve-outs in section 363 sales and gifting in chapter 11 plans.

Gift Carve-outs in Section 363 Sales

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