CREDITOR DISPUTES IN BANKRUPTCY
CD: How frequently are you seeing creditor disputes, or ‘creditor-on-creditor violence’, surfacing during bankruptcy proceedings in the current market?
Vonnegut: Creditor disputes have long been common in any bankruptcy in which unsecured or undersecured creditors are facing low or zero recoveries, and the estate or those creditors are able to fund a fight over value allocation. In failed leveraged buyouts this can take the form of fraudulent transfer litigation, while in more vanilla bankruptcies it would centre around valuation and the scope of secured creditors’ collateral coverage. What is newer is the prevalence of bankruptcies that follow out-of-court liability management transactions that themselves were contested by creditors that chose not to participate or were excluded from those transactions and were disadvantaged by losing collateral or having their claims or liens subordinated to other creditors. What we are seeing now is the pre-bankruptcy disputes about the validity of these transactions morphing into attacks on participating creditors’ lien and claim positions during the bankruptcy that follows.
Kirpalani: I would not say that every Chapter 11 case includes ‘creditor-on-creditor violence’, but there has definitely been an uptick in the larger, more complex cases whereby creditors use their position in the capital structure to advance their recoveries by disadvantaging those further down the food chain. But while some lawyers see this as a negative, I see it as just the next version of what well-heeled creditors have always done – used their senior status to maximise their returns.
Oct-Dec 2023 issue
Davis Polk & Wardwell LLP
King & Spalding
Quinn Emanuel Urquhart & Sullivan, LLP
Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates