Protecting Bank Interests Under Subchapter V of Chapter 11
For banks and financial institutions, navigating bankruptcy proceedings is a critical part of managing credit risk — especially when dealing with small business borrowers. Subchapter V of Chapter 11, introduced under the Small Business Reorganization Act, offers a streamlined path for debtor reorganization but limits certain rights traditionally held by secured lenders. Understanding how these changes impact loan recovery strategies, collateral protection, and guarantor enforcement is essential for banks seeking to protect their interests in a post-default environment.
Frequently Asked Questions in Bankruptcy
What is a Subchapter V bankruptcy, and how do I protect my rights as a secured creditor?
Subchapter V is an alternate, debtor-friendly pathway for “small business debtors” in Chapter 11. The current debt limit for a small business debtor is $3,024,725 (down from a temporary increase to $7.5 million during the pandemic). Subchapter V is intended to offer a streamlined or fast-track process for small business debtors to get through the Chapter 11 process. Unfortunately, this result is accomplished through the loss of critical creditor protections that would exist in a normal Chapter 11 case, such as the absolute priority rule (requirement that the creditors be paid in full before equity can retain its interest) and the necessity of an accepting class in order to confirm a plan (a Subchapter V plan can be confirmed even if all creditors object).
With the loss of the more powerful creditor protections, how do you protect your rights when you are undersecured and the debtor proposes a plan that attempts to value your collateral and pay little to nothing on the unsecured portion?
The answer often lies in an overlooked section of the code: 1111(b). The Section 1111(b) election allows a lender to treat the entire amount of its allowed claim as secured. Once that election is made, the plan must pay the entire amount of the claim over the life of the plan, with that stream of payments having a present value of no less than the value of your collateral. So, for example, if you are owed $200,000 secured by a property worth only $100,000, then the plan must make payments to you over its life in an aggregate amount totaling at least $200,000 and with that stream of payments having a net present value of no less than $100,000. There are two important restrictions on the availability of the 1111(b) election. First, it is only available if the property is going to be retained by the debtor (as opposed to being sold). Second, the election is unavailable if the collateral is of “inconsequential value.” In our example, the collateral value of $100,000 would not be deemed to be inconsequential in relation to the total debt amount. However, if the collateral instead had a value of $10,000, that would likely be deemed inconsequential.
The entity that owns my collateral filed for bankruptcy. Can I still pursue the guarantors?
Generally speaking, yes. The automatic stay does not — on its own terms — extend to nondebtors. However, there are two exceptions to this rule:
If the debt is a consumer debt and the debtor filed for Chapter 12 or 13 bankruptcy relief, then there is a co-debtor stay that extends to co-obligors.
It is possible to seek an extension of the automatic stay to nondebtors in a Chapter 11 case (based upon the court’s inherent equitable powers). However, in order to do so, the debtor must take the affirmative action of filing a request for such relief and then demonstrating that “extraordinary circumstances” exist to warrant the extension of the automatic stay. Absent a positive ruling on such a request, you are free to pursue the nondebtor guarantors while the entity debtor is in Chapter 11.
As Subchapter V continues to shape the bankruptcy landscape for small businesses, banks must be prepared to adapt their credit recovery approach. From evaluating Section 1111(b) elections to pursuing guarantor claims outside the bankruptcy estate, financial institutions must act decisively to preserve value. By staying informed and strategically engaged, banks can maintain strong creditor positions even within this debtor-friendly framework.
Should Miller be Set Aside? Observations from a Recent U.S. Supreme Court Decision Regarding a Trustee’s Power to Set Aside Fraudulent Transfers
The U.S. Supreme Court recently decided United States v. Miller, which resolved a circuit split over whether a trustee could avoid federal tax payments under section 544(b) of the United States Bankruptcy Code.[1] In this case, a trustee utilized section 544(b) to claw back tax payments under Utah’s state fraudulent transfer statute. Ordinarily, an action under Utah law against the federal government would be barred by sovereign immunity; however, section 106(a) of Bankruptcy Code contains a waiver of sovereign immunity with respect to section 544(b). Despite this, the Supreme Court held that the sovereign immunity waiver under section 106(a) only applies to section 544 itself, and not to the state-law claims “nested” within the statute.
Background
The underlying facts of the case concerned a Utah-based transportation company, All Resort Group, which became insolvent in 2013 following financial struggles and the misappropriation of company funds by two of its shareholders. In 2014, these shareholders transferred $145,000 of company funds to the IRS to pay for their personal income tax obligations. In 2017, All Resort Group filed for bankruptcy. Shortly thereafter, the trustee sued the United States under section 544(b) seeking to avoid the 2014 tax payments as fraudulent transfers under Utah state law. The United States argued that sovereign immunity prevented the trustee’s cause of action under Utah law, while the trustee argued that section 106(a) waived the government’s sovereign immunity with respect to section 544(b). The parties cross-moved for summary judgment. The Bankruptcy Court for the District of Utah entered judgment for the trustee, holding that sovereign immunity did not preclude the trustee from suing because of the waiver under section 106(a). The District Court and the Tenth Circuit affirmed the Bankruptcy Court’s decision. This further entrenched a circuit split where the Fourth and Ninth Circuits had previously sided with a trustee, while the Seventh Circuit had sided with the government—and the Supreme Court granted certiorari.
Avoidance Powers
Under chapter 5 of the Bankruptcy Code, trustees have avoidance powers that permit a trustee to recover certain assets for the benefit of the bankruptcy estate. There is a strong policy justification for these avoidance powers, because they enable trustees to equalize distributions among creditors, and prevent debtors from offloading assets to preferred creditors on the eve of bankruptcy. Specifically, section 544(b) permits a trustee to “avoid any transfer of an interest of the debtor . . . that is voidable under applicable law by a creditor holding an unsecured claim.” 11 U.S.C. § 544(b)(1). State laws, like the Uniform Voidable Transfers Act and the Uniform Fraudulent Transfer Act, provide a common basis for a trustee to invoke section 544(b) and generally provide creditors with a cause of action to invalidate fraudulent transfers.
The Interplay between Sections 106 and 544
The crux of the dispute involved how broad section 106(a) of the Bankruptcy Code may be. The relevant portions of section 106(a) read: “sovereign immunity is abrogated as to a government unit to the extent set forth in this section with respect to . . . (1) section[] 544,” and “(5) [n]othing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.” The trustee argued that section 106 provided a broad waiver of sovereign immunity for both section 544(b) and the “applicable law” invoked by this section, whereas the government argued the waiver applied only to section 544(b) itself and did not extend to the “applicable law” nested within section 544(b). According to the majority, the government had the better reading.
The Supreme Court explained that section 544(b) requires a bankruptcy trustee to identify an actual creditor who could have set aside the transaction under applicable law. If there is no actual creditor who could have set aside the transaction, then the trustee is prohibited from avoiding the transaction. In this case, no actual creditor would be able to avoid the federal tax payment under Utah law (because of sovereign immunity), and therefore, section 106(a) cannot provide a backdoor into creating liability for the government. The Court explained that the legislative history bolsters this reading, quoting the relevant House and Senate Reports, which provide “the policy followed here is designed to achieve approximately the same result that would prevail outside of bankruptcy.” The Court cited other sovereign immunity precedents for the proposition that sovereign immunity waivers are typically jurisdictional in nature and concluded that construing section 106(a) as applying to and modifying the elements of section 544(b) would be a “highly unusual understanding of sovereign-immunity waivers.” The Court also explained that the text of section 106(a)—that it does not “create any substantive claim for relief or cause of action not otherwise existing”—plainly refutes the argument that section 106(a) extends to both section 544(b) and its elements (the underlying “applicable law”).
In sum, the Supreme Court held that while section 106(a) abrogates sovereign immunity for causes of action under section 544(b), it did not abrogate sovereign immunity under the state-law claim that supplied the “applicable law” under section 544(b).
The Dissent
In a short dissent, Justice Gorsuch reasoned that because the parties did not dispute that a fraudulent transfer claim existed under Utah law, the “applicable law” element of section 544(b) was satisfied, even though the defendant was the federal government. In Justice Gorsuch’s view, sovereign immunity would operate as an affirmative defense to such a suit, but that here, the waiver in section 106(a) prohibited the government from raising this defense. Justice Gorsuch reasoned that applying the section 106(a) waiver to the “applicable law” did not “modify the elements” of 544(b) and concluded that trustees should be permitted to avoid fraudulent transfers to the federal government.
Observations and Takeaways
The majority opinion drives the point home that the key analysis of section 544(b) is whether an actual creditor could prevail against a party outside of bankruptcy, despite the term “actual” not appearing in section 544(b)’s text. Here, since an actual creditor would not prevail against the federal government outside of bankruptcy because of sovereign immunity, the Trustee could not maintain a claim. This ruling will provide guidance to attorneys engaged in disputes even outside of the sovereign immunity context, as it reinforces that a trustee cannot succeed in bringing an avoidance action pursuant to state law if an existing creditor cannot prevail under that law.
Interestingly, the Supreme Court’s holding can be read to be in direct tension with the fundamental principle of bankruptcy that creditors in equal positions should be treated equally—meaning, in this context, that prepetition transfers to preferred creditors should be prohibited. Indeed, preventing these and making such transfers also available to other creditors is the entire purpose of a trustee’s avoidance powers.
[1] U.S. v. Miller, 604 U.S. ___ (2025).
Weekly Bankruptcy Alert May 27, 2025 (For the Week Ending May 25, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Broadway Realty I Co., LLC2(New York, NY)
Activities Related to Real Estate
Manhattan(NY)
$500,000,001to$1 Billion
$500,000,001to$1 Billion
5/21/15
Carbon Sequestration III, LLC(San Francisco, CA)
Other Financial Investment Activities
Wilmington(DE)
$10,000,001to$50 Million
$100,000,001to$500 Million
5/22/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Paravel Inc.(New York, NY)
Retail Trade
Wilmington(DE)
$1,000,001to$10 Million
$10,000,001to$50 Million
5/19/25
Northrop and Johnson Yacht Charters, Inc.(Portsmouth, RI)
Consumer Goods Rental
Providence(RI)
$0to$50,000
$500,001to$1 Million
5/21/25
Repapers Corporation(New York, NY)
Miscellaneous Durable Goods Merchant Wholesalers
Manhattan(NY)
$1,000,001to$10 Million
$10,000,001to$50 Million
5/21/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Lead case filed. Please contact Pierce Atwood for information about additional affiliate filings.
Sanctions Reporting Requirements for Insolvency Practitioners – Now in Effect! (UK)
On 14 November 2024, the UK government announced several changes to its existing sanctions regulations via the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2024. As of 14 May 2025, by expanding the definition of “relevant firms” subject to financial sanctions reporting, Insolvency Practitioners (“IPs”) are now legally required to adhere to reporting obligations in the UK. The Office of Financial Sanctions Implementation (“OFSI”) have published guidance (the “Guidance”) to support the affected sectors in navigating the new reporting requirements. This blog post will provide an overview of the new reporting requirements for IPs.
What are financial sanctions?
Financial sanctions are economic measures imposed by the government or international bodies to assist the UK in meeting its foreign policy and national security objectives. Sanctions can take various forms; OFSI examples include the freezing of financial assets, restrictions on “designated persons” and wider restrictions on investment and financial services. Financial sanctions apply to all persons within the territory and territorial sea of the UK and to all UK persons. Therefore, all individuals and legal entities who are within or undertake activities within the UK’s territory must comply with the UK financial sanctions that are in force.
A “relevant firm”?
Under financial sanctions regulations, certain types of business (known as “relevant firms”) are subject to sanctions reporting obligations. From 14 May 2025, changes to the definition of “relevant firms” means that IPs will now fall within its remit and must therefore comply with sanctions reporting obligations.
What do the reporting requirements cover?
IPs are now required to report to OFSI as soon as is practicable if they know or have reasonable cause to suspect that:
a person is a “designated person”; or
a person has committed a breach of financial sanctions regulations.
“Designated persons” are set out in the list of all asset freeze targets. If the designated person is a customer of the relevant firm, the IP must also provide OFSI with additional information setting out the nature and amount or quantity of any funds or economic resources held by them for the customer at the time when they first had the relevant knowledge or suspicion.
Under The Russia (Sanctions) (EU Exit) Regulations 2019, IPs are also required to inform OFSI as soon as is practicable if they know or have reasonable cause to suspect that they are holding funds or economic resources for a “prohibited person”, which includes the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation (or people who are controlled by or acting on behalf of these institutions).
What is covered by the new reporting regulations?
The Guidance notes that relevant firms are only required to report to OFSI if the information, knowledge or suspicion arose “in the course of carrying on its business” as an IP. The regulations rely on the definition of IP as set out in section 388 of the Insolvency Act 1986 indicating that, for example, acting as a liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement or a trustee in bankruptcy would all fall within the new regimes remit. The Guidance carves out “business that does not constitute insolvency practitioner business” and provides two examples of when sanctions reporting obligations would not apply: when acting as a receiver in the sale of a property or when conducting an independent business review.
What to include in a report to OFSI
When making a report to OFSI, an IP can use the Compliance Reporting Form found on the Reporting information to OFSI page of the government’s website. The completed form should be sent to [email protected]. The Guidance for IPs notes that the following should be included in a report:
Information or other matter on which the knowledge or suspicion is based;
Any information held about the person or the designated person by which they can be identified; and
If you know or have reasonable cause to suspect that a person is a designated person and that person is a “customer” of your relevant firm, you must also state the nature and amount or quantity of any funds or economic resources held by you for that “customer”.
Going forward
Although the need to report is only likely to impact a small number of appointments, it is important for IPs to ensure that the sanctions reporting requirements are fulfilled because non-compliance with the regime is a criminal offence. Enhanced due diligence checks are likely to be key and for most firms, their compliance teams will already have processes and procedures in place to address these changes.
Ellie Phillips also contributed to this article.
The Nuts and Bolts of a Federal Equity Receivership: Understanding the Order Appointing the Receiver
When a business or individual faces financial turmoil or regulatory scrutiny, a court may appoint a receiver to take control of assets and oversee the operations of the entity. This process is governed by the order appointing a receiver, a document issued by the court that outlines the receiver’s powers, duties, and responsibilities.
Federal Equity Receivership or State Court Receivership?
This article focuses on federal equity receiverships, which have more in common than differences from state receiverships.
The primary differences are in the legal authority under which the receivership is created, the scope of the court’s jurisdiction, and the typical use cases.
A federal equity receivership is established by a federal court under its equitable powers, usually in the context of an enforcement action brought by a federal agency — think SEC, FTC, or CFTC. These receiverships often arise from allegations of fraud or misconduct involving interstate commerce or securities violations. The federal court appoints a receiver to take control of the defendant’s assets, with broad authority to preserve, manage, and, if necessary, liquidate them to protect victims and creditors. Federal receiverships are also more likely to involve multiple jurisdictions, so the federal system’s nationwide reach gives the receiver broader power to marshal assets across state lines.
A state court receivership, by contrast, is governed by that particular state’s statutes and procedures, which vary widely. State court receiverships are more commonly used in matters like dissolutions of partnerships, foreclosures, family business disputes, or distressed real estate situations. While still powerful, a state court-appointed receiver typically has authority confined within the borders of that state, unless additional proceedings are initiated elsewhere to extend the receiver’s power. In short, a state receivership is more likely to involve traditional business disputes, while federal receiverships often involve regulatory oversight or white-collar enforcement.
To put it in cinematic terms: if state court receiverships are Matlock episodes — localized, a bit more predictable — then federal equity receiverships are like an episode of Billions—feds swooping in, asset freezes, and a lot of drama.
Understanding the terms, provisions, and implications of a receivership order is crucial for anyone involved in these cases.
This article dives into the key provisions of a receivership order (again, focusing on federal equity receivership orders), providing insights into the practical application of receivership law and offering guidance on managing these complex cases.
What Is a Receivership Order?
A receivership order is a legal document issued by a court in cases of insolvency, fraud, or regulatory enforcement. It grants a receiver the authority to take control of the defendant’s business or assets in order to manage them, prevent asset dissipation, and ultimately distribute the proceeds to creditors.
Receiverships can arise from regulatory actions, such as those initiated by the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), or from private actions brought by individuals or organizations seeking to recover assets from fraudulent or financially distressed parties. The order itself acts as the governing document for the case, outlining the receiver’s powers and defining their role in managing the estate.
Key Provisions of the Receivership Order
1. Asset Freeze
One of the most important provisions in a receivership order is the asset freeze. This provision prevents the defendant from transferring, dissipating, or hiding any assets once the receivership order is entered. An asset freeze is typically one of the first actions taken, often implemented on what is called ‘takedown day.’
An asset freeze is a crucial step in protecting creditors’ interests, as it ensures that the defendant’s assets are preserved during the receivership process. This provision is particularly vital in cases where there is a risk that the defendant may attempt to hide or liquidate assets in anticipation of the receiver’s appointment.
The injunctive relief provided by an asset freeze ensures that the receiver has the sole authority to control and dispose of assets, preventing any unauthorized actions by the defendant or others with access to the assets.
In some cases, an asset freeze may extend to include the assets of relief defendants, individuals or entities that have received assets from the primary defendant but have not provided reasonably equivalent value in return. This ensures that assets in the possession of third parties, which may have been improperly transferred, are also safeguarded.
2. General Powers and Duties of the Receiver
The general powers and duties of a receiver are outlined in the order and grant the receiver significant authority. The receiver is tasked with managing the assets and overseeing the business’s operations, if applicable. This can involve taking control of business operations, making decisions about the continuation or cessation of business activities, and determining the value and disposition of assets.
As Kelly Crawford, of Scheef and Stone, explains, the powers granted to a receiver are extensive, but not unlimited. The receiver is bound by the terms of the order and must operate within the scope of authority granted by the court. If the receiver needs to take actions outside of the specified powers, they must seek court approval.
Receivers have the authority to hire professionals such as accountants, attorneys, and consultants to assist in managing the estate. They may also be granted the power to make decisions on behalf of the business or individual, effectively stepping into the shoes of the defendant’s management team.
One key responsibility of a receiver is to prioritize the best interests of creditors. The receiver must maximize the value of the assets for distribution to creditors, whether through the continued operation of a business or the liquidation of assets.
3. Access to Books, Records, and Property
Receivership orders typically grant the receiver immediate access to the books and records of the defendant. This access is crucial for the receiver to assess the financial condition of the business or entity, trace any fraudulent transfers, and understand the full scope of the assets and liabilities involved.
In today’s digital age, electronic records play a central role in receivership cases. Melanie Damian of Damian Valori Culmo highlights that the order should allow the receiver to access not only physical records but also digital records, including email accounts, cloud storage, and other electronic data sources. This provision ensures that the receiver can fully assess the entity’s financial status and trace the flow of funds.
Additionally, the receiver is typically granted access to the defendant’s real and personal property, which includes everything from physical assets like real estate and equipment to intangible assets like intellectual property or digital currency. If necessary, the receiver may have the authority to change locks, seize property, or take other actions to secure the estate.
4. Stay of Litigation
Another important provision often included in a receivership order is a stay of litigation. This provision halts all ongoing litigation and prevents new lawsuits from being filed without the receiver’s approval. The stay ensures that no creditor or other party can take independent action that could undermine the receivership process.
This stay is similar to the automatic stay found in bankruptcy proceedings, which stops creditors from pursuing collection actions against a debtor once a bankruptcy petition is filed. The stay of litigation in a receivership is intended to preserve the assets and prevent any actions that could disrupt the receiver’s control over the estate.
In some cases, the receiver may have the exclusive right to file for bankruptcy on behalf of the estate. This provision is particularly important when there is a risk that the defendant may attempt to initiate bankruptcy proceedings in order to avoid the receivership.
Practical Steps for Receivers
Providing Notice and Communication
Once the order is in place, one of the receiver’s first tasks is to provide notice to relevant parties. This includes notifying creditors, landlords, banks, employees, and any other stakeholders who have a vested interest in the receivership’s outcome.
Melanie Damian emphasizes the importance of prompt communication. The receiver must notify parties such as landlords and financial institutions to ensure that they comply with the order, freeze relevant accounts, and redirect payments as necessary. For instance, if the business is involved in renting real property, the receiver must notify tenants to direct payments to the receiver’s control.
In addition to notifying third parties, the receiver should establish a receivership website to provide information to creditors and interested parties. This site can serve as a communication hub, ensuring that everyone has access to updates and relevant documents. Insurance is another critical consideration, and the receiver must immediately verify whether the business or entity holds adequate insurance for its assets.
Managing Non-Cooperative Defendants
In many cases, defendants may resist cooperating with the receiver. Kelly Crawford notes that the receiver must act within the authority granted by the court. If the defendant is uncooperative, the receiver has the power to seek court enforcement through motions for contempt.
The receiver may also face resistance in accessing records or physical property. To mitigate this, Greg Hays of Hays Financial Consulting suggests that the receiver should include language in the order that explicitly grants the receiver the authority to seize property, change locks, and prevent the destruction of records. Law enforcement assistance is often necessary to carry out these actions effectively, especially in high-stakes cases.
Managing the Assets: Liquidation and Recovery
Once the receiver has taken control of the assets, the next step is to assess their value and decide how to manage them. This may involve liquidation — selling off assets to convert them into cash. Receivers are typically granted the authority to sell real property, personal property, and intangible assets, often with court approval.
As Kelly Crawford explains, the receiver should establish procedures for selling assets that maximize their value. This may involve public auctions, private sales, or even online platforms such as eBay for smaller items. The receiver must also comply with statutory requirements for selling real property, which may include obtaining multiple appraisals and publishing notices of the sale.
In some cases, the receiver may uncover fraudulent transfers, where the defendant has moved assets to third parties in an attempt to shield them from creditors. In such cases, the receiver may pursue legal action to recover assets through actions like fraudulent conveyance claims or by seeking the imposition of a constructive trust on assets transferred improperly.
The Role of the Receiver
The receiver plays a pivotal role in managing a distressed estate, preserving assets, and ensuring that creditors receive fair treatment. The receivership order is the legal framework that governs the receiver’s actions, and understanding the provisions of this order is essential for legal and financial professionals involved in such cases.
By understanding the key provisions of a receivership order — such as the asset freeze, the general powers and duties, and the provisions for access to records and property — professionals can better navigate the complexities of receiverships and help their clients protect their interests.
To learn more about this topic view Orders Appointing Receivers: Following the Script and Playing the Part. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles on federal equity receiverships.
This article was originally published on here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Navigating Bankruptcy Claims Trading
Bankruptcy claims trading is an essential area of finance and law, where investors buy and sell the right to receive payments from a company undergoing bankruptcy. Understanding the intricacies of this market is crucial for legal professionals, accountants, and financial advisors who deal with distressed assets, whether for clients or as investors themselves. This article will explore the core concepts of bankruptcy claims trading, the risks involved, and the legal frameworks that govern this process.
What Is a Bankruptcy Claim?
At its core, a bankruptcy claim is the right to be paid as part of a bankruptcy case
Bankruptcy claims are classified based on priority. These categories include:
Secured Claims: Claims backed by collateral like a mortgage on property. These creditors have the first right to payment because they hold a security interest in the debtor’s assets.
Unsecured Claims: These claims are not tied to any specific asset, and they are paid after secured creditors. Examples include vendor debts or employee wages.
Equity Claims: These represent ownership interests in the company. These creditors (shareholders) are the last in line to be paid after all debts are settled.
A key distinction in claims is whether they are ‘allowed’ or ‘disallowed.’
An allowed claim is one that has been recognized by the bankruptcy court, and thus, is valid in the bankruptcy process.
A disallowed claim may be challenged by the debtor or other parties, often due to the claimant’s failure to provide sufficient evidence or because the claim is considered invalid.
Types of Claims Traded
The types of claims traded most often are general unsecured claims. These can include:
Vendor Claims: Claims filed by businesses that have provided goods or services to the debtor but have not been paid.
Customer Claims: Claims filed by individuals or businesses who are owed refunds or are involved in disputes over purchased goods or services.
Employee Claims: Claims from employees seeking unpaid wages or benefits.
While secured claims are typically handled by specialized brokers and are not as common in claims trading, they can still be part of large transactions, especially when a major corporation files for bankruptcy.
Who Buys and Sells Bankruptcy Claims?
Bankruptcy claims are often bought and sold by sophisticated investors, including hedge funds, distressed debt investors, and large financial institutions. The buying and selling of claims primarily occurs in the market for general unsecured claims, such as vendor debts, employee claims, and customer claims. These claims can be bought at a discount with the expectation that they will pay out a portion of the total claims pool.
David Karp, a partner at Schulte Roth & Zabel, highlights that although secured debt like bank loans or bonds often receives attention from specialized traders, most bankruptcy claims traded are general unsecured claims. These claims are typically valued by investors who view them as potential investments with the possibility of a high return if the bankruptcy estate is solvent or if the debtor’s assets are restructured successfully.
On the seller’s side, companies or individuals may choose to sell claims to raise immediate capital, especially when facing liquidity issues. Selling a claim allows the creditor to secure cash now, at a discounted price, without waiting for the lengthy bankruptcy process to unfold.
The Dynamics of Case Risk
One of the key risks associated with bankruptcy claims trading is case risk. Case risk refers to the overall risk that a bankruptcy proceeding might result in a low recovery for creditors. If the debtor’s assets are insufficient to cover the total claims, creditors may receive only a small fraction of what they are owed, or in some cases, nothing at all.
Stephen Rutenberg, a partner with Polsinelli, notes that when buying a claim, investors are more concerned with case risk than the specific details of any individual claim. Case risk involves assessing the financial health of the debtor and estimating how much creditors will receive during the bankruptcy process. In some cases, the debtor may not have sufficient assets to pay creditors at all, leading to a complete loss for the claimholder.
On the seller’s side, claim risk refers to the possibility that the debtor or other creditors may challenge the validity of a claim. This could happen if the claim is disputed or if it is considered to be part of a preference payment, which occurs when a debtor pays a creditor within a certain period before filing for bankruptcy. Those payments could be reversed in such cases, and the creditor would have to return the money.
Valuing Bankruptcy Claims
Valuing bankruptcy claims is a complex process that requires a deep understanding of the debtor’s financial situation and the legal landscape surrounding the bankruptcy case. The value of a claim depends on several factors, including the type of claim, the debtor’s assets, and the likelihood that the claim will be paid in full.
In general, claims with higher priority (like secured claims) are more likely to be paid in full, while unsecured claims may receive only a fraction of the value. For example, if a company has $10 million in assets but owes $15 million in liabilities, unsecured creditors may only receive a portion of their claim, if anything, depending on how the court divides the debtor’s assets among the creditors.
A fundamental concept in bankruptcy is the bar date, the deadline by which creditors must file their claims with the bankruptcy court. After the bar date, no additional claims will be accepted unless there is a valid reason for the delay.
Stephen Rutenberg highlights that bankruptcy claims’ value also fluctuates based on market conditions and the case’s specific circumstances. For example, creditors may receive full payment if a company’s reorganization plan is approved. However, if the company is liquidated, creditors may only recover a portion of their claims.
Additionally, claims can be complicated by subordination. Subordinated claims are treated as junior to other claims, meaning they are paid only after other creditors’ claims have been satisfied. Secured creditors will always be paid first, followed by unsecured creditors.
The Legal Framework: Assignments vs. Sales
The legal structure of a transaction when buying or selling a bankruptcy claim is crucial. In some cases, the transaction is structured as an assignment of the claim, while in other cases, it is a sale.
An assignment of a claim simply involves transferring the rights to the claim from one party to another. This type of transaction can sometimes involve fewer legal hurdles, but it does not necessarily transfer the risk associated with the claim.
In a sale of a claim, the seller agrees to transfer both the claim and the associated risk of collection to the buyer. According to Matt Christensen, managing partner of Johnson May, the distinction between a sale and an assignment is primarily a legal formality. From a bankruptcy court’s perspective, the risk associated with the claim remains the same regardless of whether it’s a sale or assignment. However, the transaction’s contractual provisions, such as representations, warranties, and indemnifications, can differ based on whether it is a sale or an assignment.
For example, in a sale, the seller may have to provide a warranty that the claim is legitimate or indemnify the buyer if the claim is later disputed. These legal provisions help shift the risk of claim disputes from the buyer to the seller.
Risk Allocation and Documentation
A point of contention in bankruptcy claims trading is risk allocation. As Rutenberg explains, most sellers in a claims transaction retain some degree of risk, even if the claim has been sold or assigned. This residual risk can arise from the potential for a claim objection or issues related to the claim’s validity.
Buyers and sellers often negotiate terms in sophisticated transactions to protect themselves from unforeseen liabilities. This is typically done through the inclusion of representations and warranties in the contract. These legal terms outline the seller’s responsibilities and ensure the buyer understands the risks.
Conclusion
Bankruptcy claims trading is a complex, high-risk area that requires a thorough understanding of bankruptcy law, financial analysis, and legal procedures. As a financial professional or legal advisor, understanding the dynamics of case risk, claim risk, and claim valuation is crucial to successfully navigating the market.
Whether as a buyer, seller, or legal advisor, seeking guidance from experienced counsel and performing detailed due diligence is vital to mitigating risk and ensuring the transaction aligns with your financial objectives.
To learn more about this topic view Advanced Bankruptcy Transactions / Bankruptcy Claims Trading. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading more on claims trading.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Asbestos Litigation Trust Funds Issue Notices of Destruction
Several asbestos litigation trust funds, including the W.R. Grace and Company Asbestos PI Trust; Babcock & Wilcox Company Asbestos Personal Injury Settlement Trust; Owens Corning/Fibreboard Asbestos Personal Injury Trust; Shook & Fletcher Asbestos Settlement Trust; and at least six others1, issued Notices of Destruction, advising the public that certain documents and data are scheduled to be destroyed on a rolling basis, a process that began April 15, 2025. While some notices have explained the nature of the data and documents to be destroyed, at least one of the trusts (Shook & Flecther) has admitted to not knowing what information is contained within the documents. The trusts assert that the destruction policies are being implemented to protect sensitive personal information of the claimants2. The trusts are permitting parties to download the data that has not yet been destroyed. Without backlash or repercussions to the trusts in these efforts to destroy information, we predict additional trusts will follow suit in announcing their respective intents to destroy data in the future.
Law firms have already begun submitting letters to these trusts, insisting that the proposed destruction seems “designed to avoid the production of data and documents responsive to future subpoenas” and calling for continued preservation3. After receiving notice from some of the trusts that these policies would not be reconsidered, counsel for Johnson & Johnson is among the parties that have also filed with the Chancery Court in Delaware4, seeking an injunction to the destruction5. The complaint asserts that the trusts’ actions “would permanently destroy evidence that is highly relevant to tens of thousands of known asbestos-related personal injury claims and other legal proceedings across the country” and that the trusts “concocted these new policies in violation of their obligation to preserve the highly relevant information to undermine legal precedent and numerous state trust transparency statutes.”
The trusts, borne from post-Chapter 11 bankruptcy proceedings, were established by companies to compensate victims of asbestos-related injuries6. Over $30 billion has been set aside by more than fifty trusts for this purpose7. Payouts from these asbestos trust funds range from four to seven figures, depending on many factors, including the type of exposure, the disease state, and the length of pain and suffering8. Persons alleging harm from exposure to asbestos may collect from multiple asbestos trusts.
Although compensation can be received faster through a trust payout, many victims choose also to file a lawsuit, where the payouts tend to be significantly greater9. Defense counsel in asbestos litigation matters, to the extent permitted by local court rules and statutes, rely on proofs of claims from these trusts during discovery to establish possible cross-claims or defenses that may be asserted at trial. The anticipated destruction of data and documents from the trusts will inhibit such ongoing (and future) discovery efforts as litigants may not have any other sources to obtain significant evidence necessary to establish these cross-claims and related defenses10.
On January 15, 2025, the following trusts submitted Notices of Destruction11:
W.R. Grace and Company Asbestos PI Trust for W.R. Grace and Company, a chemical company based out of Maryland;
Babcock & Wilcox Company Asbestos Personal Injury Settlement Trust for Babcock & Wilcox Company, a New Jersey-based energy technologies company; and
Owens Corning/Fibreboard Asbestos Personal Injury Trust for Pittsburgh Corning, a glass block manufacturer headquartered in Pennsylvania; and Owens Corning, the world’s largest fiberglass manufacturer, originally based in Ohio.
As of April 15, 2025, the W.R. Grace and Company, Babcock & Wilcox Company, Pittsburgh Corning, and Owens Corning (collectively referred to herein as the “April Notice Trusts”) began destroying data and documents related to claimants who (1) have been issued a payment at least ten years before the date of destruction, (2) have had their claim withdrawn by counsel, or (3) have had their claim deemed withdrawn by their respective April Notice Trust.
On March 3, 2025, Shook & Fletcher, an Alabama-based insulation manufacturer, also posted a Notice of Destruction of Documents12. Documents stored at a warehouse in Robbinsville, New Jersey, will be destroyed beginning July 7, 2025. This notice indicated that there are “minimal to no indices” of what documents are contained at the warehouse. The Shook & Fletcher Trust will only entertain requests for inspection of the documents by way of subpoena submitted before July 3, 2025.
Litigants should immediately begin to reach out to the respective point of contact, noting which plaintiffs’ information is sought. Requests for copies of the data and documents from the April Notice Trusts can be submitted directly by email at [email protected] and be limited to the listed categories of data. Requests for review of documents for the Shook & Fletcher Trust must be submitted in the form of a hand-delivered subpoena to the Wilmington Trust, and must include all information regarding the origin of the subpoena, including the name of the law firm, the point of contact at the law firm, and all relevant contact information of both. Questions concerning subpoenas are to be directed to Amy Behm at (513) 579-6944 or [email protected]. With all the trusts, any fees arising from requesting copies of or review of documents will be the requesting party’s responsibility.
[1] Asbestos Defendants Seek to Prevent Deletion of Claim Records, DOW JONES NEWS WIRES (originally published by WALL STREET JOURNAL) (Apr. 3, 2025); Ben Zigterman, J&J, Others Say Asbestos Trusts Can’t Purge Records, LAW360(Apr. 15, 2025 at 8:06 p.m.).
[2] Zigterman, Asbestos Trusts Can’t Purge Records, supra note 1.
[3] Asbestos Defendants Seek to Prevent Deletion of Claim Records, supra note 1.
[4] DBMP LLC v. Delaware Claims Processsing Facility LLC (2025-0404).
[5] Zigterman, Asbestos Trusts Can’t Purge Records, supra note 1.
[6] 11 U.S.C. § 524.
[7] Jennifer Lucarelli, Mesothelioma and Asbestos Trust Funds, MESOTHELIOMA.COM (last updated Mar. 27, 2025).
[8] Samuel Meirowitz, Mesothelioma and Asbestos Trust Funds, ASBESTOS.COM (last updated Mar. 4, 2025).
[9] What’s the Difference Between an Asbestos Lawsuit and a Trust Fund Claim?, FERRELL LAW GROUP (last visited Apr. 3, 2025).
[10] Zigterman, Asbestos Trusts Can’t Purge Records, supra note 1.
[11] Notice of Record Destruction Pursuant to Record Retention Policy, WRG Asbestos PI Trust (Jan. 15, 2025); Notice of Record Destruction Pursuant to Record Retention Policy, BABCOCK & WILCOX COMPANY ASBESTOS PERSONAL INJURY SETTLEMENT TRUST, (Jan. 15, 2025); Notice of Record Destruction Pursuant to Record Retention Policy, OWENS CORNING/FIBREBOARD ASBESTOS PERSONAL INJURY TRUST (Jan. 15, 2025).
[12] Shook & Fletcher Asbestos Settlement Trust Notice of Destruction of Documents (Mar. 3, 2025).
Weekly Bankruptcy Alert May 20, 2025 (For the Week Ending May 18, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
CHG US Holdings LLC2(Miami Beach, FL)
Restaurants and Other Eating Places
Wilmington(DE)
$50,001to$100,000
$10,000,001to$50 Million
5/12/25
Oracles Capital Inc.(Stuart, FL)
Not Disclosed
Wilmington(DE)
$1,000,001to$10 Million
$100,001to$500,000
5/12/25
Winthrop Street-Morra Solar, LLC(Rehoboth, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$1,000,001to$10 Million
5/18/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Harvest Direct, LLC(East Weymouth, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$1,000,001to$10 Million
5/14/25
Yale Entertainment, LLC(Rye, NY)
Not Disclosed
Manhattan(NY)
$10,000,001to$50 Million
$50,000,001to$100 Million
5/14/25
Cutrade, Inc.(Brockton, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$100,001to$500,000
5/16/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: PLANTA Bethesda LLC, PLANTA Brooklyn LLC, PLANTA SOHO LLC, PLANTA Nomad LLC, PLANTA DC LLC, PLANTA P Street LLC, PLANTA KROG LLC, PLANTA Denver LLC, PLANTA WEHO LLC, PLANTA West Palm Beach LLC, PLANTA Miami Beach LLC, PLANTA River North LLC, PLANTA CocoWalk GP, LLC, PLANTA FLL LLC, PLANTA Buckhead LLC, PLANTA Brentwood LLC and PLANTA Marina LLC.
What Startups Should Know About Early-Stage Equity Term Sheets
If your company is preparing to raise its first round of institutional capital, congratulations. That’s a major milestone. At this stage, it’s critical to ensure that both you and your prospective investors are aligned on the structure and terms of the investment. That’s where a term sheet comes in.
In this comprehensive guide, we’ll explore:
Why the name of the financing round (for example, “seed” vs. “Series A”) matters
Key differences between Seed and Series A financing
What is typically included in an early-stage equity financing term sheet
What founders should look out for when issuing preferred stock
Why the Name of the Round Matters
The name of your financing round is more than a formality, it sets expectations.
Seed Round: suggests your company is in the early stages of development, likely pre-revenue or just beginning to gain traction.
Series A Round: implies more maturity, such as a validated product, growing user base, and early revenue, indicating the company is ready to scale.
Investors often rely on these labels to assess your company’s progress, risk profile, and potential return. Choosing the right naming convention can help manage expectations and align your fundraising strategy with industry norms.
Seed vs. Series A Financing: Key Differences
A seed financing round typically follows friends-and-family or angel investments and represents the first institutional capital. Investors in these rounds may include angel investors, seed-stage venture firms, or angel groups. Key characteristics of a seed round include:
Smaller investment amounts (typically $500,000 to $2 million)
Simpler deal terms
Fewer governance rights and investor protections
Even if a seed round’s structure resembles a Series A, especially if you’re issuing equity rather than SAFEs or convertible notes, founders often prefer to use the “seed” label. Why? It allows the company to reserve the “Series A” designation for a future round, ideally at a higher valuation once the business has matured.
Series A Financing Overview
Series A financing generally follows a successful seed round and is triggered once a company has achieved meaningful traction, such as strong user growth, early revenue, or product-market fit. Series A rounds are typically:
Larger in size ($2 million to $15 million or more)
Led by institutional venture capital firms
Structured with more complex terms, such as:
Board representation
Liquidation preferences
Anti-dilution protections
At this stage, the company is transitioning from startup to scale-up.
What is Included in an Early-Stage Term Sheet?
While the specifics vary depending on investors and company leverage, most early-stage preferred stock term sheets include the following key provisions:
Price Per Share / Pre-Money Valuation
The term sheet will often include either a price per share or a pre-money valuation from which the price per share is calculated. While a higher valuation might seem ideal, it can also mean higher expectations, greater pressure to grow rapidly, and more difficult future funding rounds.
A higher valuation only benefits founders if it’s realistic and paired with founder-friendly terms. It’s essential to evaluate the entire term sheet, not just the headline valuation.
For more on this topic, check out our related advisory: Understanding Pre-Money vs. Post-Money Valuation.
Maximum Offering Amount
This is the total amount of capital the company aims to raise in the round. Along with the valuation, it helps investors calculate the ownership percentage they’ll receive if the round is fully subscribed. The number should balance capital needs, dilution tolerance, and investor interest.
Offering Period
The offering period defines the window in which shares may be sold, ensuring the financing doesn’t remain open indefinitely. This is important because the company’s valuation may change significantly over time.
Liquidation Preferences
In the event of a liquidity event such as a sale, IPO, or liquidation, preferred shareholders typically have two options:
Receive their original investment before common shareholders receive any proceeds; or
Convert their preferred shares to common stock and participate in the distribution on an as-converted basis.
In some cases, investors receive both: their initial investment plus a share in the remaining proceeds (“participating preferred” stock). While this was more common in earlier markets, non-participating preferred has become more standard in later-stage deals or more competitive fundraising environments.
Anti-Dilution Provisions
These provisions protect investors from dilution if the company raises capital in a down round, at a lower valuation than the previous round. Two common structures are:
Weighted Average: More founder-friendly; adjusts the conversion price proportionally.
Full Ratchet: More investor-protective; resets the conversion price to match the new round.
The terms used often reflects the company’s stage and the negotiating power of each party.
Board Representation
Investors often negotiate for the right to appoint one or more members to the company’s board of directors. It’s common for both preferred and common shareholders to appoint directors, with remaining board seats filled by mutual agreement.
Voting Rights
Term sheets typically specify how preferred shares vote, often alongside common shares on a one-vote-per-share basis. In certain cases, preferred holders may vote separately on key issues.
Some term sheets also include protective provisions that require majority approval from preferred shareholders or their board representatives. These provisions give preferred shareholders a type of veto power over certain company actions, such as issuing new equity, selling the company, or amending the certificate of incorporation.
Participation Rights
Preferred investors almost always receive a right of first refusal to purchase their pro-rata share in future fundraising rounds. This helps protect their ownership from dilution.
Other Common Term Sheet Provisions
Additional rights commonly found in term sheets include:
Drag-along and Tag-along Rights – Govern how shareholders participate in company sales
Registration Rights – Important in the context of a future IPO
Dividend Rights – Determine how and when dividends are paid to preferred holders
Conversion Rights – Allow preferred shares to convert to common stock at a preset ratio
A full explanation of these terms is beyond the scope of this guide, but founders should be aware of their presence and potential impact.
Term sheets often include a provision requiring the company to reimburse the lead investor’s legal fees, usually subject to a cap (e.g., $25,000 to $50,000). This is standard practice and should be factored into your fundraising budget.
Final Thoughts for Founders
Term sheets for preferred stock equity financings can vary significantly based on the company’s stage, investor preferences, and market conditions. However, the concepts outlined in this guide represent the core elements that startups are likely to encounter when negotiating early-stage investment deals.
What’s That? WhatsApp Creates Legally Binding Contract (UK)
As insolvency practitioners (IPs) it is not unusual to have to consider the terms of a particular contract, whether that is enforcing the terms of that for the insolvent entity or considering the rights of the third party as against the company, and in some cases, it is necessary for IPs to enter into a contract themsleves.
This blog from our colleagues in IP & Technology highlights how easy it can be to (inadvertently) create a legally binding contract – in this case by WhatsApp – standing as a reminder to IPs that exchanges of messages could be relevant when considering a third party contract, but also that care should be taken when exchanging messages so as not to create a binding contract when not intended.
Practice Statement: Restructuring Plans and Schemes – What Does this Mean for the Future? (UK)
We have seen an increasing number of contested restructuring plans (RPs) over the last quarter. With a notable shift of RPs into the litigation arena, and some gentle push back from the judiciary about timetabling and use of court time the judiciary has published a draft practice statement for consultation outlining new case management requirements for those proposing a plan.
Replies to the consultation must be submitted by 13 June, and although there is no official date for publication of the finalised statement, this is expected to be sometime in July.
The practice statement requires the parties to identify areas of contention and opposition early, seemingly seeking to streamline and reduce the number of issues that the court is required to deal with at sanction. In doing that there is a significant shift in process – requiring the plan company to issue a claim form before the court hearing is arranged and requiring the explanatory statement and all appendices to be prepared before the convening hearing.
The statement follows the direction of travel we have seen in recent cases, where the court has introduced case management processes – Madagascar Oil is a recent example where the court ordered a case management conference.
The statement is relevant not only to those proposing a plan, but also those who wish to object – requiring issues to be resolved in an efficient and orderly manner. Last minute opposition is unlikely to find much favour with the court moving forward.
Ultimately what the statement hopes to achieve is a more orderly approach to proceedings, but front loading much of the work comes with its own challenges – timing and costs being two.
Although this statement if not the final version, it is unlikely to change significantly between now and final publication, and in line with the approach we have seen the courts take recently it would be remiss not to apply the principles outlined in the statement now.
Application of the Insolvency Claw-Back Barrier under Article 16 of the EU Insolvency Regulation to Cross-Border Shareholder Loans
Article 7(m) of the EU Insolvency Regulation (2015/848) provides that the law of the EU Member State in which insolvency proceedings have been commenced in respect of a company determines whether certain acts carried out prior to the commencement of insolvency proceedings, (such as payments made by the company), are void, voidable or unenforceable and may therefore be clawed back by the insolvency administrator.
However, Article 16 of the same Regulation provides an exception to this. This applies where the relevant relationship under which the payment was made is subject to the law of another EU Member State and under the law of that other Member State the payment cannot be challenged – the claw back barrier provisions.
Application of the “claw back” barrier provisions in practice
The impact of the “claw back” barrier provisions under the EU Insolvency Regulation is currently being considered by the European Court of Justice (ECJ). In this case, an Austrian holding company had provided an Austrian law governed shareholder loan to its German subsidiary. Before insolvency proceedings were opened in Germany against the subsidiary, the Austrian parent received payments of interest and principal under that loan. The German insolvency administrator wishes to claw back these payments and wishes to treat the claims of the Austrian holding company as subordinated to all other creditors of the German subsidiary.
The German Federal Supreme Court (Bundesgerichtshof – “BGH”) in an interim decision dated 16 January 2025 put forward a number of questions for the ECJ to consider, the answers to which will be relevant to how Article 16 of the EU Insolvency Regulation is applied throughout the EU. Although the decision of the BGH relates to Article 13 of EU Insolvency Regulation (1346/2000), that provision is materially identical to Article 16 of the Regulation and thus any judgment of the ECJ is likely also to apply to Article 16.
The reason for the challenge is based on arguments that local laws and rules in the jurisdiction where the insolvent company has its centre of main interest and which are based on corporate law should take priority over Article 16.
Under German insolvency law, shareholder loans granted to a German company would in principle be subordinated in a German insolvency of the German company. Therefore, any payments (like payments of principal and interest) can more easily be challenged and clawed back in the insolvency than other third-party payments. The litigation in this case has arisen, because Austrian law rules differ from such German corporate law rules and therefore the holding company invoked Austrian law and Article 16 in the German proceedings.
Impact of the ECJs findings
The ruling of the ECJ will be significant in determining whether, and to what extent, the risk of claw-back (in the context of shareholder loans) can be mitigated by choosing the law of another EU Member State as the law governing the shareholder loan.