At the end of the summer, Delaware U.S. District Judge Richard G. Andrews issued an opinion in the case of Hargreaves v. Nuverra Environmental Solutions, which can have a profound benefit to unsecured trade creditors in bankruptcy cases where there is substantial leveraged secured debt and the value of the borrower’s assets is less than the amount of the secured debt. Heretofore, these creditors could expect no distributions from the bankruptcy case. Andrews’ opinion is one of the first opinions to uphold what is known as horizontal gifting in a Chapter 11 plan. Exploring this concept and opportunity for unsecured trade creditors is important in assessing that group’s rights and remedies in a bankruptcy case.

Under the provisions of the Bankruptcy Code, a Chapter 11 reorganization plan must comply with what is known as the absolute priority rule. Simply stated, the rule prohibits a distribution to a lower in status class of creditors or equity holders if a higher in status class has not either been paid in full or consents to the distribution to the more junior class. If a Chapter 11 plan as proposed by a bankruptcy debtor violates the absolute priority rule, if there is an objection by a creditor or group of creditors that is more senior in priority, the bankruptcy judge cannot confirm the plan.

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