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So Long as It’s Your Own Money — Third Circuit Allows Secured Creditors to Gift Value to Junior Creditors to Resolve Sale Objection Even When More Senior Creditors Receive Nothing

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September 24, 2015

Client Alert
In a decision that may ease the resolution of future bankruptcy proceedings, the Third Circuit Court of Appeals affirmed a Delaware bankruptcy court’s approval of a sale of substantially all of a debtors’ assets that was predicated on a settlement in which the secured creditors gifted funds to general unsecured creditors, while bypassing creditors holding more senior claims. Despite the obvious tension with the “absolute priority rule” that is at the core of the Bankruptcy Code’s distribution scheme, the Court held that because the funds came directly from the secured creditors without ever becoming estate property, the absolute priority rule could not be invoked to block the payment.

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