GLOSSARY OF COMMONLY USED BANKRUPTCY TERMS


APPENDIX A
GLOSSARY OF COMMONLY USED BANKRUPTCY TERMS ¹ *"2004" Exam* Under Bankruptcy Rule 2004, the examination of any entity under oath is permitted with court approval. It's like a deposition, but with a much broader scope—in fact, it's been called a "fishing expedition." The examination is usually conducted as an oral deposition, but the scope is broad and is not limited to a specific adversary proceeding. Unlike a deposition, a motion and order are required. The order also may provide that the person being examined produce documents. See Bankruptcy Rule 2004; Chapter Three, Life In A Fishbowl. "341" Meeting See *First Meeting Of Creditors, below. Abandonment* The process by which a *trustee* or *Debtor-In-Possession* designates property in which the estate has no interest. Abandonments must generally be applied for and noticed to creditors. The effect of an abandonment is to lift stays only against the estate's interest in property, and is not inconsistent with the debtor's retention of property under a reaffirmation agreement or redemption. See Bankruptcy Code § 554. *Absolute Priority Rule* The requirement that provides that in order to obtain confirmation of a *plan of reorganization* using the *cramdown* provisions of the Bankruptcy Code, generally speaking classes of unsecured creditors must either be paid in full (with interest), or agree as part of *class voting* to accept less than full payment or no junior classes of creditors or interests can receive or retain anything in the confirmed plan as a result of their junior claims or interests. Practically speaking, this means that *equityholders* in a company that is not paying its unsecured creditors in full, with interest, may not retain their interests in the *Reorganized Debtor* unless the unsecured creditors consent. See Bankruptcy Code § 1129(b); Chapter Five, Step Five: The Plan Confirmation Process. See, also *"New Value Exception,"* below.

¹Words used in *bold* in the definitions are defined themselves in this Glossary. Where applicable, reference is made to where in the text the defined term is discussed in more detail.

Glossary of Commonly Used Bankruptcy Terms

Abstention

The doctrine under which the District Court or Bankruptcy Court may decide not to hear a matter that it determines is more appropriately heard in another court, usually a state court or tax court. Abstention by the Bankruptcy Court is mandatory in "non-core" matters that involve only state law and that may be commenced quickly in another forum. Motions for abstention are filed in the Bankruptcy Court.

Ad Hoc Committee

An unofficial committee of creditors or equityholders. Such unofficial committees may participate in a case, and their professionals request to be paid fees as an Administrative And Priority Claim under the Substantial Contribution test. See Bankruptcy Code § 503(b); Chapter Two, The Players And Their Roles.

Adequate Assurance Of Future Performance

A requirement before a debtor may assume any executory contract or unexpired lease. Specifically, the debtor must show that not only will it cure defaults, but also that it will be able to perform its future obligations under the contract or lease after assumption. See Bankruptcy Code § 365; Chapter Four, Dealing With Executory Contracts And Unexpired Leases.

Adequate Protection

A concept developed to ensure that a creditor's interest in property is protected during the pendency of a bankruptcy. Examples include: (1) replacement liens; (2) cash payments; or (3) an "indubitable equivalent." An "equity cushion" may also be used as adequate protection. The concept is crucial in stay relief, cash collateral, and asset sale proceedings. See Bankruptcy Code § 361; Chapter Four, The Automatic Stay.

Administrative And Priority Claims

Those claims that are reasonable and necessary expenses of the estate postpetition, including postpetition wages, taxes, the DIP's and Creditors Committee's professionals' fees and costs, and the compensation/reimbursement for a Trustee, an Examiner, or Committee members. These claims must be paid before unsecured claims may be paid. See Bankruptcy Code §§ 503 and 507; Chapter Two, The "Administrative And Priority Claimants." See also Priority Claim.

Administrative Convenience Claim

A small claim in a Chapter 11 bankruptcy proceeding. Normally the Bankruptcy Code requires that all unsecured claims be placed together in one class in a plan of reorganization. The Bankruptcy Code makes an exception for administrative convenience claims. This is generally done in a plan where small claims (such as claims of $500 or less, or where creditors are willing to reduce their claims to $500) will be separately classified


Executive Guide to Corporate Bankruptcy

	in a plan, and will be paid a lump-sum cash payment shortly after plan confirmation. See Bankruptcy Code § 1122(b); see generally Chapter Five, The Plan Of Reorganization. *Adversary Proceeding* The type of action defined in Bankruptcy Rule 7001 that must be commenced by the filing of a complaint, requires a filing fee, and must be served with a summons. All normal discovery rules of the Federal Rules of Civil Procedure (as modified by the *Bankruptcy Rules) apply in adversary proceedings. "Affiliate Rule"* The rule that provides that when *venue* in a particular Bankruptcy Court is proper for one entity, other entities that are "affiliates" of the debtor may file in that jurisdiction even if venue would not be proper for those entities when considered by themselves. An example would be a California corporation that had a wholly owned subsidiary that was a Delaware corporation. Even if the Delaware subsidiary had no assets in Delaware, under current bankruptcy law it could file a bankruptcy petition in Delaware. Once that bankruptcy was filed, the California corporation, as an affiliate of the debtor, could also file in Delaware under the affiliate rule. See Bankruptcy Code § 101(2); 28 U.S.C. § 1408; Chapter Four, The Venue Game. *Allowed Claims* A *claim* that is either: (1) listed by the debtor in the *Schedules* as being undisputed; (2) filed in the form of a *Proof Of Claim* and to which no *Claims Objection* is filed; or (3) objected to and ultimately determined by the Bankruptcy Court to be due and owing by the debtor. See Bankruptcy Code § 502; Chapter Five, Who Is Entitled To Vote? Allowed Secured Claim Under bankruptcy law, a secured claim is "allowed" to the extent of the value of the *collateral* securing it. The balance is treated as an unsecured claim. For example, a bank with a $100,000 debt secured by assets with a fair market value of $50,000 at the time of the bankruptcy filing has an allowed secured claim of $50,000 and an *unsecured claim* of $50,000. See Bankruptcy Code § 506; Chapter Five, Who Is Entitled To Vote? Antecedent Debt A pre-existing debt or obligation. The phrase is used in connection with *Preferences. See* Bankruptcy Code § 547; Chapter Four, The Strong Arm" Powers. *Assume or Assumption* The process whereby a debtor elects to take on all of the responsibilities and benefits of an *executory contract* or *unexpired lease*. This would occur where the debtor is a party to an economically favorable lease or

Glossary of Commonly Used Bankruptcy Terms

contract and wishes to obtain the benefits of that contract. In order to do that, the debtor must also take all of the burdens of that contract. The debtor must cure defaults, and also provide adequate assurance of future performance. The Bankruptcy Court must approve any assumption of leases or executory contracts. Under bankruptcy law, certain types of contracts (such as prebankruptcy contracts to make loans to a debtor, or personal service type contracts) may not be assumed. See Bankruptcy Code § 365; Chapter Four, Dealing With Executory Contracts And Unexpired Leases. See also Reject or Rejection.

Automatic Stay

When the debtor files bankruptcy, creditors everywhere are automatically enjoined (or "stayed") from proceeding in any way to collect their debts from the debtor. The Bankruptcy Code modifies the stay in certain circumstances and awards damages for willful violations of the stay in certain situations. Moreover, the Bankruptcy Code prohibits acts to exercise control over property of the debtor. Certain actions (such as continuation of criminal matters or regulatory actions by governments) are not subject to the automatic stay. See Bankruptcy Code § 362; Chapter Four, The Automatic Stay.

Avoiding Powers

The debtor's rights to recover money, assets transferred (or the monetary value of such assets), or liens granted under the preference, fraudulent conveyance, postpetition transfer, and other "strong arm" provisions of the Bankruptcy Code. See Bankruptcy Code §§ 544, 547, 548, 549; Chapter Four, The "Strong Arm" Powers.

BAFJA

Bankruptcy Amendments and Federal Judgeship Act of 1984. This act added many new provisions to the Bankruptcy Code.

Ballot Report

The report compiled by the debtor and filed with the Bankruptcy Court detailing the plan ballots received either accepting or rejecting the plan of reorganization. The ballot report is necessary in order to determine if the plan is in a cramdown posture. See Chapter Five, Step Four: The Solicitation Process.

Bankruptcy

A federal system for collective creditor payment from the assets of the debtor that are not exempt. See Chapter One, Introduction.

Bankruptcy Appellate Panel (BAP)

The potential first level of appellate review in those circuits in which they exist. A BAP is comprised of seven bankruptcy judges who are appointed to serve by the Circuit Court of Appeals. A panel of three of these


Executive Guide to Corporate Bankruptcy

	judges sits as the first level of appellate review. A decision of the BAP is then appealed to the Circuit Court of Appeals. All appeals are automatically referred to the BAP, but any party may opt out of the BAP, whereupon the first appellate level will be the *District Court. See* 28 U.S.C. §158. *Bankruptcy Code* Provisions passed by Congress in 1978, found in Title 11 of the U.S. Code, which govern the bankruptcy system, its parties, and their rights and duties. The Bankruptcy Code has been amended numerous times since 1978. See Chapter Two, The "Bankruptcy Code." Bankruptcy Court The branch of the federal judicial system that administers bankruptcy law and presides over bankruptcy cases, presently subordinated to the federal *District Court. BAFJA* clearly designates the Bankruptcy Court as a unit of the District Court. See 28 U.S.C. § 151; Chapter Two, The Players And Their Roles. *Bankruptcy Court Jurisdiction* The authority of the *Bankruptcy Court* to decide controversies and disputes, as well as the ability to preside over bankruptcy proceedings. See 28 U.S.C. § 1334; Chapter Four, Bankruptcy Court Jurisdiction (And Limitations On That Jurisdiction). See also "Core" Matters, "Non-Core" Matters and "*Non-Core/Non-Related" Matters, below. Bankruptcy Rule 2004 Examination* See "2004" Exam, above. *Bankruptcy Rules* The federal rules of bankruptcy procedure that help implement the Bankruptcy Code. *Bar Date* A date set by the court in the *Bar Date Order* within which pleadings must be filed. The bar date typically refers to the last day to file a *Proof Of Claim. See* Chapter Five, Quantifying The Debts—The "Bar Date" Order. *Bar Date Order* The Order signed by the Bankruptcy Court setting the *Bar Date. The Bar Date Order will then be noticed to all creditors (either by mailing, by some sort of publication such as a newspaper notice, or even in exceptional cases television notice, or some combination of several methods) so that all parties with potential claims* against the debtor will know the deadline to file a *Proof of Claim. See* Chapter Five, Quantifying The Debts—The "Bar Date" Order.

Glossary of Commonly Used Bankruptcy Terms

"Best Interests of Creditors" Test

The requirement contained in the Bankruptcy Code that before the Bankruptcy Court may confirm a plan, to the extent that any individual holder of a claim has voted to reject the plan, the Bankruptcy Court must be shown that the rejecting creditor will receive at least as much under the plan as it would receive in a liquidation under Chapter 7. This is usually not too difficult to do. See Bankruptcy Code § 1129(a)(7); Chapter Five, Step Five: The Plan Confirmation Process.

Bona Fide Purchaser

Purchaser of property or interest in property who gives fair value and has no notice of adverse claims against the property. See Chapter Four, The "Strong Arm" Powers.

Business Judgment Rule

The rule of corporate law that provides that a Board of Directors will not be subject to attack for decisions made provided the decisions were made on a rational and reasonable business basis. In bankruptcy proceedings, the business judgment of the Debtor-In-Possession is afforded deference until such time as the parties bring matters to the attention of the Bankruptcy Court that show that the management of a troubled company is not acting in a businesslike and reasonable manner.

Business Reorganization

A Chapter 11 Proceeding filed by a business entity, although a business reorganization can also be filed by individuals. See Chapter Two, The Reorganization Process.

"Bust Up" Fees

An amount payable to a bidder that is the first bidder to come forward but is subsequently outbid at the Bankruptcy Court approval process with respect to a sale. Most sophisticated bidders will insist upon Bankruptcy Court approval, up front, of a "bust-up" fee (also called a "break-up" fee) because frequently in order to make an initial bid a bidder will have to do some due diligence since it may not be the ultimate purchaser, and it wants to be reimbursed for being a "stalking horse." Bust-up fees are generally tied to the amount of out-of-pocket expenses of the initial bidder, and are sometimes tied to a percentage of the amount of the transaction. Bankruptcy Courts vary widely in their willingness to approve bust-up fees. See Chapter Four, Sale Of Assets.

"Carveout"

A concession by a lender with a lien on cash collateral whereby certain ongoing expenses of a debtor are allowed to be paid from the cash receipts from the business subject to liens. Carveouts are usually put in cash collateral stipulations, and are most often used with respect to a se


Executive Guide to Corporate Bankruptcy

	cured lender agreeing that the professional fees of a debtor may be paid during the course of the case from the cash collateral. See Chapter Four, Financing The Preconfirmation Operations. *Cash Collateral* Collateral for a loan that is cash or a cash equivalent. Examples include accounts receivable, pledged accounts or certificates of deposit, assigned rents, or cash proceeds from the sale of collateral. The debtor is not allowed to use this type of collateral after filing bankruptcy, except by consent or an order of the Bankruptcy Court. The Bankruptcy Code specifically defines cash collateral as cash proceeds of a secured party's collateral whether the collateral was sold pre- or postpetition. See Bankruptcy Code § 363; Chapter Four, Financing The Preconfirmation Operations. *"Cause"* Relief from stay, dismissal, and other remedies under the Bankruptcy Code are available on a showing of cause, that is, any ground that justifies the relief sought. Cause in stay relief matters includes a lack of adequate protection, but may also include judicial findings of bad faith or other grounds. See Bankruptcy Code § 362(d)(1); Chapter Four, The Automatic Stay. *Channeling Injunctions* In cases where companies have substantial actual or potential mass tort liability, the Bankruptcy Code allows for the issuance of an injunction whereby all potential claimants have to look to a trust fund established under a plan of reorganization for recovery. An example would be where a company has substantial personal injury claims from environmental contamination. The debtor and/or the insurance company might fund a trust fund, and a plan of reorganization would provide that all claimants (who would need to file claims by a *Bar Date) would look only to the trust fund to be paid. This encourages an insurance company, for example, to fund insurance policy proceeds without worrying about repetitive lawsuits, and helps ensure that all claimants have access to insurance proceeds (not just the first ones to get judgments). Other uses of channeling injunctions include attempting to channel officers and director securities fraud liability into a trust fund (perhaps funded by a D&O insurance coverage and/or the officers and directors), or claims against general partners (which has been used in law firm bankruptcies). See* Bankruptcy Code § 524(g); Chapter Five, Step Six: "Going Effective." Chapter 7 Proceeding A type of bankruptcy in which the debtor's assets are liquidated by a court-appointed trustee; often referred to as a straight liquidation or straight bankruptcy. Corporations, partnerships, and individuals may file a Chapter 7 bankruptcy. The Bankruptcy Code provides remedies for "substantial

Glossary of Commonly Used Bankruptcy Terms

abuses" of Chapter 7. See Chapter Two, The "Bankruptcy Code."

Chapter 9 Proceeding

A type of bankruptcy in which a municipality or governmental unit, such as a water district, seeks relief under the Bankruptcy Code. See Chapter Two, The "Bankruptcy Code."

Chapter 11 Proceeding

A type of bankruptcy in which debtors attempt to prepare a plan of reorganization of their debts and assets that must be approved by the Bankruptcy Court. A trustee is not appointed unless the creditors so convince the court. Corporations, partnerships, and individuals may file a Chapter 11 bankruptcy. This chapter was primarily designed for business reorganizations. See Chapter Two, The "Bankruptcy Code."

Chapter 12 Proceeding

A form of relief added to the Code by the 1986 bankruptcy legislation. The proceeding provides a hybrid relief for family farmers, adopting protections, rights, and duties from Chapters 11 and 13. The family farmer requirements of Bankruptcy Code § 101(18) and regular income requirements of Bankruptcy Code § 101(19) must be satisfied. The aggregate debts must not exceed $1.5 million on the date of filing. See Chapter Two, The "Bankruptcy Code."

Chapter 13 Proceeding

A type of bankruptcy in which an individual with "regular income" proposes an arrangement of debts and assets (up to a three- to five-year period); previously called wage earner bankruptcies. Only an individual may file a Chapter 13, and he or she may not owe more than $250,000 in unsecured debts or more than $750,000 in secured debts. A standing trustee serves only as disbursing agent to collect part of the debtor's income and pay it out under the plan. The debt limits were substantially increased in the 1994 Bankruptcy Reform Act (from $100,000 and $350,000, respectively). See Chapter Two, The "Bankruptcy Code."

"Chapter 22s"

A slang term used for a repeat filing under Chapter 11. This is also known as a "serial filing." Some companies have to file successive Chapter 11 bankruptcy petitions because of an inability to perform under the terms of a confirmed plan, or a further downturn in the business of the Reorganized Debtor. See Chapter Five, Plan Defaults. See also Serial Filings.

"Chinese Walls"

A slang term for an information-blocking mechanism. It is used most frequently with respect to investment houses that have both direct claims


Executive Guide to Corporate Bankruptcy

	against a company and also hold the company's debt or equity securities for client portfolios. If a representative of that investment house is sitting on a *Creditor's Committee* and as a result of that position is receiving confidential and non-public information (usually pursuant to a *Confidentiality Agreement), a "Chinese Wall" mechanism is set up to preclude that individual from providing the non-public information to the trading arm of the institution. The phrase Chinese Wall is derived from the fact that the Great Wall of China is the only man-made structure that is visible on the earth from space. As such, the information-blocking mechanism is intended to be as apparent and impenetrable as the "Great Wall of China." Circuit Court Of Appeals* The federal appellate court that is the second level of appeal from Bankruptcy Court decisions. In non-bankruptcy federal courts, the Circuit Court of Appeals is the first level of appellate review (and the decisions of the Circuit Court are only appealable to the U.S. Supreme Court). In bankruptcy cases, the first level of appellate review is either the *District Court* or the *Bankruptcy Appellate Panel, so the Circuit Court of Appeals is really the second level of appellate review. As such, Circuit Court of Appeals decisions in bankruptcy cases take on a little more significance. The courts are called "circuit courts" because the judges on those courts, although they will be based in a particular city, will frequently hear arguments in other cities within the circuit (that is, the cities that are within their particular jurisdiction). Currently there are twelve federal circuits, each (except for the District of Columbia Circuit) encompassing numerous states. The judges are said to "ride the circuit." Claim* The broad definition of a claim in the Code includes any right to payment, even if the right is in dispute or not fixed in amount, and any right to an equitable remedy for breach of performance. See Bankruptcy Code §101(5). See Chapter Two, The "Pecking Order" — Payment Priorities In Reorganization Cases. See also Secured Creditor and *Unsecured Claim. Claims Objection* A dispute between the debtor and the holder of a *claim* whereby the debtor asserts that it does not owe the amount asserted by the creditor, it does not owe the creditor anything, it has certain *offsets, or otherwise objects to a lien* or *collateral* claimed by the creditor. The Bankruptcy Court will determine how much the creditor is owed, even if the creditor's claim is contingent or unliquidated. For plan confirmation purposes, sometimes the Bankruptcy Court will conduct a *temporary allowance* hearing to make an expedited decision on how much a creditor is owed for purposes of voting on a plan. See Bankruptcy Code § 502; Chapter Five, Step Four: The Solicitation Process.

Glossary of Commonly Used Bankruptcy Terms

Class Voting

The mechanism whereby creditors vote on a plan of reorganization. Under bankruptcy law, creditors with similar claims are put in the same class within a plan. For example, all unsecured creditors are generally put in the same class within a plan and treated the same way. Under bankruptcy law, a class is deemed to accept a plan if the class meets the one-half/two-thirds requirement for voting purposes. If this test is met, the creditors that voted against the plan will still be bound by the provisions of the plan because the creditors' class has voted to accept the plan. See Bankruptcy Code § 1126(c); Chapter Five, Step Four: The Solicitation Process.

COD Income

"Cancellation of debt" income. Under the tax laws, if creditors forgive a debt or if the debt is otherwise discharged, the taxpayer may recognize taxable income to the extent of some or all of the waived debt. This is known as "COD Income."

Collateral

The assets subject to a lien, which secure repayment of a debt. In business bankruptcies, typical assets serving as collateral are accounts receivable, contract rights, inventory, furniture, fixtures and equipment, general intangibles, and other real property and personal property. See Chapter Two, The "Pecking Order" — Payment Priorities In Reorganization Cases. See also Cash Collateral.

Complaint

The pleading required to commence an Adversary Proceeding, setting forth the claims against the defendants, the basis for the claims, and a request for relief in a brief fashion.

Confidentiality Agreements

An agreement between a company and a third party whereby confidential, non-public and/or proprietary information will be kept confidential by the person receiving it. In companies with publicly held debt or equity securities, any financial information other than what is put out in appropriate press releases and SEC filings is generally only provided pursuant to an appropriate confidentiality agreement. This prevents people from speculating on securities of a company based on inside information. Moreover, in the event that information is proprietary or trade secret in nature, a confidentiality agreement may also be given as part of due diligence for a prospective purchase or sale of assets of a company. Confidentiality agreements are standard for members of Creditors Committees and Equityholders Committees. See Chapter Three, Protecting The Franchise: Confidentiality Agreements And "Chinese Walls." See also "Chinese Walls," above.


Executive Guide to Corporate Bankruptcy

	*Confirmation* The process whereby a Bankruptcy Court approves a plan of reorganization. See Bankruptcy Code § 1129; Chapter Five, Step Five: The Plan Confirmation Process. See also "Cramdown," below. *Confirmation Hearing* The hearing before the Bankruptcy Court on whether the proposed plan of reorganization in a Chapter 11 case has been accepted by the necessary group or groups of creditors and also meets other statutory restrictions. See Chapter Five, Step Five: The Plan Confirmation Process. *Consensual Lien* A *Lien* created by agreement of the parties, usually by a security agreement on personal property, or a mortgage or deed of trust on real property. *Contested Matter* Essentially, any disputed matter other than an *Adversary Proceeding. Relief in a contested matter is sought by motion, generally with no filing fee, and no responses are required unless ordered by the court. Generally, the discovery rules of the Federal Rules of Civil Procedure (as modified by the Bankruptcy Rules) apply in contested matters. See* Bankruptcy Rule 9014. *Conversion* The process in which a debtor determines (or a creditor moves) to change the chapter under the Bankruptcy Code under which the debtor sought relief. Most commonly, conversion is from Chapter 11 to Chapter 7, after a plan proves to be infeasible. *"Core Business"* An analysis by either a troubled company or its financial advisors to determine whether a troubled business enterprise, once stabilized, has a viable business that produces (or is able to produce) meaningful *EBITDA* from which to pay creditors. There have been numerous instances where companies with huge gross revenues do not have any viable core business and produce minimal if any EBITDA even under stabilized circumstances. See Chapter Two, The "Proactive" Versus "Reactive Reorganization Cases. *"Core" Matters* Those matters before a Bankruptcy Court directly tied to the bankruptcy case and arising under the Bankruptcy Code. Core proceedings include estate administration matters, allowance or disallowance of claims, use and sale of property, obtaining credit by the debtor/estate, turnover matters, preference litigation, automatic stay litigation, fraudulent conveyance litigation, non-dischargeability litigation, plan confirmation, use of cash collateral litigation, lien validity litigation, and so forth. See 28 U.S.C. §157(b)(2)(A)-(O); Chapter Four, Bankruptcy Court Jurisdiction (And Limitations).

Glossary of Commonly Used Bankruptcy Terms

Cramdown

A slang term referring to the confirmation of a plan of reorganization in Chapter 11 over the objection of a creditor. See Bankruptcy Code § 1129(b); Chapter Five, Step Five: The Plan Confirmation Process.

Cramdown Posture

The situation when, as a result of the Ballot Report, the debtor must use the Cramdown provisions of the Bankruptcy Code to obtain confirmation of the plan of reorganization.

Credit Bid Rights

The right of a creditor with a perfected lien on collateral to bid in any sale of the collateral without using cash, but rather offsetting against the debt secured by the lien. For example, the creditor is owed $100.00, which debt is secured by a valid lien on a machine. If the debtor wishes to sell that machine for $80.00, the secured creditor can come to the auction sale and "credit bid" up to $100.00 of its debt. Unless another bidder bids more than that, the secured creditor will be the successful bidder and will not have to pay the debtor any cash. Rather, the secured creditor credits the debt. See Bankruptcy Code § 363(k); Chapter Four, Sale Of Assets.

Creditor

One who holds a claim against the debtor or a lien on property of the estate.

Creditors Committee

See Official Committee Of Unsecured Creditors.

Cure Of Defaults

Before a debtor may assume an executory contract or unexpired lease, as a condition to such an assumption the debtor must pay arrearages and other defaults under the contract or lease. This is known as a "cure of defaults." The cure of defaults is not always a lump-sum payment, but it is generally a fairly accelerated payment provision. Under bankruptcy law, the debtor does not need to cure non-monetary defaults such as financial covenant defaults. See Bankruptcy Code § 365; Chapter Four, Dealing With Executory Contracts And Unexpired Leases.

De Novo

A term meaning "anew," and referring to an appellate court's new look at a record on appeal without being bound by or giving deference to a lower court's prior findings or conclusions.

Deceleration

A debt that became fully due before its natural term may be extended, under certain circumstances, and a new payment schedule proposed.


Executive Guide to Corporate Bankruptcy

	*Debtor* An individual, partnership, or corporation who files a bankruptcy proceeding or has one filed involuntarily against him/her or it. See Chapter Two, The Players And Their Roles. *Debtor-In-Possession* The official title of the debtor after having filed a Chapter 11 proceeding, sometimes shortened to "DIP." The debtor-in-possession exercises all the power and rights of a trustee in bankruptcy and is similarly charged with all of the duties. For a corporation or business partnership, this means that current management will remain in control after filing Chapter 11. See Chapter Two, The Players And Their Roles. *Demand Registration Rights* These rights, often found in tandem with piggyback registration rights, are rights that a company grants to a shareholder who has acquired shares from the company in a private placement. In other words, the shareholder holds restricted securities and may not freely trade such shares without doing so pursuant to an effective registration statement. Demand registration rights enable the person who holds these rights to require the company to file a registration statement with the SEC so that such shareholder can freely sell his or her shares in the company. See Chapter Five, Understanding And Appreciating What The Constituents Want And Need. *Deposition* The procedure for taking oral examination of a witness provided for in the Federal Rules of Civil Procedure and applicable in adversary and contested matters. It differs from a *2004 Exam* in that no court order or motion is necessary to notice a deposition, but an adversary proceeding or contested matter must first be pending, and the scope of questioning is somewhat more limited. See also "2004" Exam, above. *DIP* See *Debtor-In-Possession, above. DIP Financing* "Debtor-In-Possession" financing. This is the ability of a *DIP* to obtain loans once a bankruptcy proceeding is commenced. Under the Bankruptcy Code the Bankruptcy Court can authorize *Super priority Financing* as an incentive for lenders to make loans to debtors in Chapter 11. See Bankruptcy Code § 364; Chapter Four, Financing The Preconfirmation Operations. *Discharge* The official order of the Bankruptcy Court that releases the debtor from unsecured debts incurred prior to bankruptcy and bars creditors from future



Glossary of Commonly Used Bankruptcy Terms
collection efforts on released debts. Secured debts are not discharged, except to the extent that the *collateral* is insufficient to cover the amount of the claim. See Bankruptcy Code § 1141; Chapter Five, Step Five: The Plan Confirmation Process. *Discharge Injunction* An *order* of the Bankruptcy Court, usually provided as part of a confirmed *plan of reorganization, which prohibits (or enjoins) any party with a claim dealt with in the confirmed plan from taking any action to collect on the claim other than as provided in the confirmed plan. See* Bankruptcy Code § 1141; Chapter Five, Step Six: "Going Effective." Disclosure Statement A document, similar to a stock prospectus, that is sent to the creditors explaining the background of the proposed Chapter 11 plan. The Disclosure Statement must be approved by the Bankruptcy Court and must be mailed to the creditors with the proposed plan. See Bankruptcy Code § 1125; Chapter Five, Step Three: The Disclosure Statement. *"Disinterested Person"* A term of art under the Bankruptcy Code, which provides that in order for a professional to be retained by the *estate, that person must not have any actual or potential conflicts of interests that would impair his or her objectivity in representing the estate. By definition, a "disinterested person" is a person that is not a creditor; an equityholder; an insider; an investment banker for any securities of the debtor; officer, director or employee of the debtor; or a person who has any other connections that would provide a materially adverse interest to the interests of the debtors. See* Bankruptcy Code § 101(14); Chapter Two, The Players And Their Roles. *Dismissal* The process by which a bankruptcy case or proceeding is terminated. Dismissal of a case terminates all stays and the existence of the estate. See Bankruptcy Code § 1112(e). *Distribution* The process under a *plan of reorganization* wherein proceeds of the estate are paid to various classes of claimants. See Chapter Five, Step Six: "Going Effective." District Court The Federal District Court that is directly over the Bankruptcy Court. All Bankruptcy Courts are deemed to be "units" of a District Court. As such, a Bankruptcy Court will be denominated as, for example, "The U.S. Bankruptcy Court for The Southern District Of New York." A District Court also acts as the appellate court for Bankruptcy Court decisions. See 28 U.S.C. § 151; Chapter Two, The Players And Their Roles.


Executive Guide to Corporate Bankruptcy

	*Docket* The summary of pending legal matters and their times, dates, and places. Law firms often maintain a docket as a calendar system. Court clerks maintain docket sheets as an index to a case file, and to indicate matters pending on the Bankruptcy Court's calendar. *"Doctrine Of Necessity"* The legal justification used by Bankruptcy Courts, which allows debtors, usually as part of *First Day Orders, to pay certain prebankruptcy claims that would otherwise not be able to be paid other than as part of plan confirmation. See* Chapter Four, First Day Orders. *Drag-Along Rights* These rights are basically the same as tag-along rights, only now the selling shareholder can require that the other shareholders sell their shares along with such shareholder (i.e., drag them along). Major shareholders in a company might require that the other shareholders agree to such a provision so they can effectively sell the other shareholders' interest in the company. An acquirer might not want to have minority shareholders to get in the way. Drag-along rights would most likely have some sort of fair market value requirement with respect to the proposed sale price, as well as the other protections that would ensure that those shareholders who are dragged along are treated "fairly." See Chapter Five, Understanding And Appreciating What The Constituents Want And Need. *EBITDA* Earnings Before Interest, Taxes, Depreciation, and Amortization. It generally refers to the operational cash flow of a business that's available to pay debt service to creditors. *"Effective Date"* The date when a debtor must perform under the terms of a confirmed *plan of reorganization. There are times when a plan will be confirmed, but before the Reorganized Debtor* must perform under that plan, certain events must occur. These conditions might include, for example, finalizing a working-capital line of credit, completion of some important litigation, or other such conditions. The "effective date" is not defined in the Bankruptcy Code, and is therefore usually specified under the terms of the plan of reorganization (along with any conditions that must be fulfilled before the debtor must perform under the plan). Once the Effective Date is reached, the plan has "gone effective" and the debtor must meet its obligations under that confirmed plan. See Chapter Five, Step Six: "Going Effective." Encumbrance See Lien, below.

Glossary of Commonly Used Bankruptcy Terms

Equity Cushion

A form of adequate protection wherein the value of property is compared to a claimant's lien interest; junior liens are not considered as deductions from value. See Bankruptcy Code § 361; Chapter Four, Relief From Stay And The Concept Of "Adequate Protection."

Equityholders

Holders of a company's stock, warrants, options, partnership interests, membership units, or any other indicia of a right to share in the profits of a company. See Chapter Two, The Players And Their Roles.

Equityholders Committees

See Official Committee of Equityholders, below.

Estate

Upon the filing of a bankruptcy petition, a new entity is created consisting of all of a debtor's legal and equitable rights in and to the debtor's property, which entity is termed the bankruptcy estate. In the Chapter 11 case the representative of the estate is the Debtor-In-Possession. See Bankruptcy Code § 541; Chapter Four, The "Estate" — What Exactly Is It?

Ex Parte

Without notice to other parties. Ex parte relief is granted only in emergency circumstances. Usually First Day Orders are entered as Interim Orders by the Bankruptcy Court on an ex parte basis subject to negative notice.

Examiner

A court-appointed investigator authorized to delve into the financial and business affairs of a Chapter 11 debtor-in-possession. Examiners are frequently accounting firms. Examiners generally have limited powers and are compensated as an administrative claim of an estate. Examiner appointments are mandatory in certain circumstances. See Bankruptcy Code § 1104(c); Chapter Two, The Players And Their Roles.

Exclusivity Period

In Chapter 11 cases, a period of 120 days after the order for relief is entered wherein only the debtor may file a plan of reorganization. If a plan is filed within that time, the debtor has another sixty days to get the plan confirmed. This period may be extended for cause, or be shortened or terminated for cause, or as the result of a Chapter 11 trustee being appointed. See Bankruptcy Code § 1121(b); Chapter Five, Step One: The Negotiation Process And Dynamics.

Executory Contract

An unexpired contract requiring performance by both parties, which the


Executive Guide to Corporate Bankruptcy

	trustee or debtor may elect to assume and continue or reject. Example: The trustee might elect to keep a valuable lease by paying the back rent and assuming the lease. Special rules apply to collective bargaining agreements, retiree benefit plans, shopping center leases, time-share contracts, and intellectual property licenses. See Bankruptcy Code §§ 365, 1113 and 1114; Chapter Four, Dealing With Executory Contracts And Unexpired Leases. See also Unexpired Leases, below. *Family Farmer* For the purposes of Chapter 12 proceedings, a family farmer is an individual (and spouse) engaged in farming operations or a corporation that meets the debt limitation of $1.5 million, plus certain other debt and ownership restrictions set forth in Bankruptcy Code § 101(18)(A) and (B). See Chapter Two, The "Bankruptcy Code." Feasibility Analysis The analysis by which the debtor shows to the Bankruptcy Court that it will be able to make payments required of it under a *plan of reorganization. The Bankruptcy Court can only confirm* a plan of reorganization if it finds that the plan is "feasible." See Bankruptcy Code § 1129(a)(11); Chapter Five, Step Five: The Plan Confirmation Process. *Feasibility Requirement* The Bankruptcy Code's requirement that before a Bankruptcy Court can *confirm* a *plan of reorganization* that it be satisfied that confirmation of the plan is not likely to be followed by a subsequent liquidation or need for further reorganization (unless subsequent liquidation is contemplated under the terms of the plan). The Bankruptcy Court makes this finding pursuant to the *feasibility analysis* that must be presented by the debtor as part of the plan confirmation process. See Bankruptcy Code § 1129(a)(11); Chapter Five, Step Five: The Plan Confirmation Process. *Fiduciary Obligation* The obligation of the *DIP* to act in the best interests of the creditors and all other parties in interest. The DIP must act with the highest degree of honesty, similar to a trustee of a trust. When a company is *insolvent, it is generally accepted that the DIP owes a fiduciary obligation to the creditors and not the equityholders* of the company. Committees also have fiduciary obligations to their constituents. See Chapter Two, The Players And Their Roles; Chapter Three, Making The Transitions — Attitudinal Adjustments." *Final Decree* An *order* entered by the Bankruptcy Court formally closing a *Chapter 11 Proceeding* after confirmation of a *Plan* when litigation and other matters have been completed. See Chapter Five, The "Final Decree."

Glossary of Commonly Used Bankruptcy Terms

"First Day" Orders

Orders entered by the Bankruptcy Court usually within the first few days of a Chapter 11 proceeding, which provide emergency relief to a debtor to allow it to continue to operate its business. First day orders typically include orders allowing the DIP to continue to honor employee wage checks that were issued prebankruptcy, payment of essential trade vendors (usually under the so-called "Doctrine Of Necessity"), and perhaps immediate approvals of Cash Collateral Stipulations and DIP Financing arrangements. Most first day orders are entered as interim orders, and sometimes on an ex parte basis. See Chapter Four, First Day Orders.

First Meeting Of Creditors

The debtor's first duty to appear and testify under oath and to be questioned by creditors occurs at this meeting, held not less than twenty nor more than forty days after the order for relief. The meeting is presided over by a hearing officer or a trustee, but not a judge. Bankruptcy Code § 341; Rule 2003.

"Flat Puppy Filing"

A slang term originated by Patrick Murphy (a very well-respected lawyer in San Francisco) used to denote a bankruptcy proceeding filed under emergency circumstances with little or no preplanning or preparation. The phrase comes from the vignette of the small child bringing a puppy that has been run over by a car or truck to its parent, handing the mangled animal to the parent with pleading eyes saying "Fix it." In emergency bankruptcy cases with little or no preparation or cash, the odds of successfully restructuring, while not insurmountable, are certainly weighing against the debtor. See Chapter Two, The "Proactive" Versus "Reactive" Reorganization Cases. See also "Free Fall" Bankruptcy, below.

Foreign Subpoena

A subpoena served outside the jurisdiction in which a bankruptcy case is pending, usually by having another District Court reissue a subpoena obtained locally.

Fraudulent Conveyance

Under both state and federal law, a transfer of property by the debtor for less than the true value of the property during the year (or more) prior to bankruptcy. Example: Debtor transfers real property worth $10,000 to an uncle for $50 during the year prior to the bankruptcy. Such fraudulent conveyances may be voided or the fair value of the asset recovered. This may also be called a "fraudulent transfer." See Bankruptcy Code §§ 544 and 548; Chapter Four, The "Strong Arm" Powers.

Fraudulent Transfers

See Fraudulent Conveyance, above.


Executive Guide to Corporate Bankruptcy

*"Free Fall" Bankruptcy* See Flat Puppy Filing, above. *Gap Period* The period between when an *Involuntary Bankruptcy Petition* is filed and the time when the *Order For Relief* is entered. During this time the debtor may continue to operate its business. See Bankruptcy Code § 303; Chapter Two, Getting The Process Started. *"Going Effective"* The phrase used to denote when a debtor is obligated to perform under a confirmed plan of reorganization. After the Bankruptcy Court confirms he plan, there may still be conditions to going effective under that plan. or example, a condition might be that the debtor finalizes documentation and funding of a working-capital exit facility or some other condition. See Chapter Five, Step Six: "Going Effective." Impaired Claims A *claim* by a creditor that will have its legal or equitable rights altered under plan of reorganization. The significance of having an impaired claim is that only holders of impaired claims may vote on a plan of reorganization. Generally, any alteration of a creditor's claim will make that claim impaired thereby allowing the creditor to vote on a plan of reorganization. See Bankruptcy Code § 1124; Chapter Five, Step Four: The Solicitation Process. *Indubitable Equivalent* A form of adequate protection allowing the court or debtor flexibility in fashioning a remedy that protects a creditor's interest in collateral; for example, giving a portion of the collateral back to a lender in partial satisfaction of debt. See Bankruptcy Code § 361. See Chapter Four, Relief From Stay And The Concept Of "Adequate Protection." Information-Blocking Mechanisms. See "Chinese Walls," above. *Insider* Someone who has a particularly close relationship to the debtor. This can include relatives, partners or partnerships, affiliated companies (parents or subsidiaries), or a "person in control" of the debtor. The danger of being an insider is that it increases one's vulnerability to a preference suit by the trustee. Whereas unsecured creditors are susceptible to preference recoveries for payments made during the ninety days prior to bankruptcy, insiders are vulnerable for payments received within one year prior to bankruptcy. See Bankruptcy Code § 101(31).

Glossary of Commonly Used Bankruptcy Terms

Insolvent

The general inability to pay debts as they become due, or a financial condition whereby liabilities exceed the value of assets at a fair market value. See Bankruptcy Code § 101(32); Chapter Two, What's This "Insolvency" Thing?

Interim Orders

An order issued by a Bankruptcy Court that is presently effective but will still be subject to a fairly short period when creditors and other parties may object to the terms of the order and have the Bankruptcy Court reconsider it. Interim orders sometimes, but not always, are entered on an ex parte basis, and usually First Day Orders are entered as interim orders. Interim orders are usually entered in circumstances where relief is required immediately (such as in cases where immediate DIP financing is needed) and there is not sufficient time for parties to be heard before the entry of the interim order. See Chapter Four, First Day Orders.

Interlocutory

Not final. Regarding judgments and orders of the Bankruptcy Court, an interlocutory order may not be appealed to the Bankruptcy Appellate Panel or District Court without obtaining, by motion, leave of court. A motion for leave to appeal is filed with the notice of appeal.

Involuntary Bankruptcy

A bankruptcy case that is commenced against a company, not by the company, as in the case of a voluntary bankruptcy. For an involuntary petition to be filed, the debtor must generally not be paying debts as they come due. Under current bankruptcy law, if the debtor has more than twelve creditors, then three creditors with claims totaling at least $10,775 are required in order to file an involuntary petition; if there are less than twelve creditors, only one petitioning creditor is necessary if the claim equals or exceeds $10,775. See Bankruptcy Code § 303; Chapter Two, Getting The Process Started.

Involuntary Petition

A petition filed by creditors seeking an order for relief against the debtor under Chapters 7 or 11. Creditors are usually seeking to stop an action of another creditor by the imposition of the automatic stay, or control over actions of insiders through protections. See Bankruptcy Code § 303; Rules 1003, 1010, 1011, 1013; Official Form 5.

Judicial Lien

A lien (or interest in property) obtained by judgment, levy, sequestration, or other legal or equitable remedy, and includes garnishment liens. See Bankruptcy Code § 101(32).


Executive Guide to Corporate Bankruptcy

	*Jurisdiction* The power of a court over persons, property, or the subject matter of dispute. Bankruptcy Courts are commonly held to have nationwide jurisdiction over persons. See also Bankruptcy Court Jurisdiction. *Leveraged Buyout or "LBO"* A process whereby the equity in a company is acquired and the assets of the acquired company are used to either act as *collateral* for the acquisition debt, or where the acquired company itself becomes obligated on the acquisition debt. If the acquired company subsequently gets into financial difficulties, the other creditors of that company may assert that the LBO debt or *liens* should be avoided as a *fraudulent conveyance* because the company itself received no benefit from the LBO, but rather the selling and purchasing shareholders received the benefit. From a straight balance-sheet perspective, the acquired company became obligated on a debt (or perhaps gave a lien on its assets), but the consideration for the loan flowed to old shareholders who sold their shares. See Chapter Two, The "Proactive" Versus "Reactive" Reorganization Cases . Lien A charge against or interest in property (such as a mortgage or security interest) taken to secure payment of a debt or performance of an obligation. Generally, liens are consensual (by agreement), judicial, or statutory. See Bankruptcy Code § 101(33). *Lien Priming* See Super Priority Financing, below. *Liquidation Analysis* The analysis performed by the debtor (or its professionals), to show the Bankruptcy Court as part of the plan confirmation process that creditors will receive more under the plan of reorganization than they would in a liquidation of the company under a *Chapter 7 Proceeding. This analysis is necessary in order to meet the "Best Interests Of Creditors Test."* See Chapter Five, Step Five: The Plan Confirmation Process. *Mortgage* See Lien, above. *Motion* A pleading used to commence contested matters, usually setting forth the factual and legal basis for relief. Any request for a court order that is not an adversary proceeding under Rule 7001 should be commenced by a motion.

Glossary of Commonly Used Bankruptcy Terms

Negative Amortization

The phrase used to identify when a plan is capitalizing some or all interests such that it is added to the principal of the debt. For example, a plan of reorganization may provide that a creditor's claim of $1,000 is to be paid at an interest rate of prime plus 2 percent, but the pay rate will only be at prime with the additional 2 percent being added to the principal of the loan to be paid in the future. This is usually done because the cash-flow projections for the Reorganized Debtor presented as part of its feasibility analysis do not support the full payment of all interest. Negative amortization plans are viewed very skeptically by Bankruptcy Courts because they clearly indicate problems with the feasibility requirement portion of the Bankruptcy Code for plan confirmation purposes.

Negative Notice

A process whereby a Bankruptcy Court will enter an Interim Order, and then direct the debtor (or some other party) to provide notice to creditors and parties in interest. The order will be presently effective, but parties will have a period of time to voice their concerns or objections at which time the Bankruptcy Court may have a hearing and modify the Interim Order. The mechanism of negative notice is essential for emergency situations, and is most often used with First Day Orders. See Chapter Four, First Day Orders.

"New Value Exception" or "New Value Corollary"

A judicially created exception to the Absolute Priority Rule that provides, essentially, that old equityholders may receive or retain their equity in a debtor when unsecured creditors are not being paid in full provided they infuse "new value" into the debtor as part of the plan confirmation process. There is still uncertainty as to whether the so-called "new value exception" to the Absolute Priority Rule survived the enactment of the Bankruptcy Code in 1978, and the U.S. Supreme Court, notwithstanding having this issue squarely before it at least three times since 1988, has yet to issue a definitive ruling on this point. See Bankruptcy Code § 1129(b); Chapter Five, Step Five: The Plan Confirmation Process.

"Non-Core" Matters

A claim or action that is related to a bankruptcy case but is not a core matter. The Bankruptcy Court does not have jurisdiction to render a final order on non-core matters absent consent of all parties, which may be implied under certain circumstances. See 28 U.S.C. § 157(b); Chapter Four; Bankruptcy Court Jurisdiction (And Limitations On That Jurisdiction).

"Non-Core/Non-Related" Matters

A claim or action that does not arise under the Bankruptcy Code, and also does not have a tangible connection to the bankruptcy case. When a


Executive Guide to Corporate Bankruptcy

	matter is deemed to be "non-core/non-related," the Bankruptcy Court has no *jurisdiction* to render any decisions with respect to such disputes. See 28 U.S.C. § 157(b); Chapter Four, Bankruptcy Court Jurisdiction (And Limitations On That Jurisdiction). *Notice* A process whereby creditors and parties in interest are given notice that a debtor (or some other party) is seeking to do something in a bankruptcy proceeding. In the Bankruptcy Rules and Bankruptcy Code, notice requirements are whatever notice is appropriate under the circumstances. Forms of notice may include formal written notice, telephonic notice, or even Internet/e-mail notice, depending on the matter. See Bankruptcy Code § 102; Chapter Four, First Day Orders. See also Notice By Publication. *Notice By Publication* Giving *notice* to creditors and parties in interest through publication of the form of notice in newspapers or, in exceptional circumstances, by television or radio advertisements. This is frequently done, for example, in circumstances where the debtor is not exactly sure which people hold claims against it, such as in potential mass tort cases or other such circumstances. Notice by publication has also been used to provide notice via the Internet, and is frequently used with respect to giving notice of a *Bar Date. See* Bankruptcy Rule 9007. See also Channeling Injunctions, above. *Official Committee Of Equityholders* In a Chapter 11 case, a committee appointed by the U.S. Trustee generally comprised of the seven largest holders of the debtor's equity securities willing to serve. Also known as an Equityholders Committee. See Bankruptcy Code § 1102; Chapter Two, The Players And Their Roles. See also *Official Committee of Unsecured Creditors, below. Official Committee Of Unsecured Creditors* In Chapter 11 cases, a committee appointed by the U.S. Trustee of the seven largest unsecured creditors of the debtor willing to serve. The Unsecured Creditors Committee serves both watchdog and proactive functions in a case, and may hire its own counsel, financial advisors, and so forth. Unsecured Creditors Committees are authorized in Chapter 7 cases, but are rarely used. Also known as a Creditors Committee. The 1994 Bankruptcy Reform Act amended the Code to allow for reimbursement, as an administrative claim, of the reasonable costs of members of the Committee. See Bankruptcy Code § 1102; Chapter Two, The Players And Their Roles. *Offset* The ability to credit a debt owed to one by the debt owed by that person to you. For example, if a debtor owes a creditor $100, but that creditor also

Glossary of Commonly Used Bankruptcy Terms

owes the debtor $80, under the principles of offset, the debtor could take the position that it only owes the creditor $20 and not the full $100 because of a credit of the debt owed by the creditor to the debtor. See Bankruptcy Code § 553. See also Setoff, below.

One-Half/Two-Thirds Requirement

For purposes of class voting in a plan of reorganization, a class is deemed to accept a plan if more than one-half in numbers of creditors that actually vote on the plan and more than two-thirds in the amounts of those claims vote to accept the plan. Under those circumstances, the class will be deemed to accept the plan and even creditors that do not vote to accept the plan will be bound by the terms of that plan. See Bankruptcy Code § 1126; Chapter Five, Step Four: The Solicitation Process.

Operating Reports

Reports required to be filed periodically (usually monthly) by a Debtor-In-Possession, which set forth operational financial information so that the Bankruptcy Court and all creditors can see how the debtor is doing operationally in its Chapter 11 proceeding. See Chapter Four, Reporting Requirements And Other Annoyances.

Order

A judicial command or direction. Orders are sought by motion. A judgment generally is broader than an order, determines all rights at issue, and resolves all matters pending in a dispute. A judgment is sought in an adversary proceeding.

Order For Relief

The order entered by the Bankruptcy Court upon the filing of a voluntary Chapter 11 Proceeding. Prior to the Bankruptcy Code, the mere filing of a voluntary petition did not in and of itself result in an order for relief being entered, but rather a hearing was necessary to "adjudicate" the company a bankrupt. Under the Bankruptcy Code (in place since 1978), the filing of a Chapter 11 voluntary petition acts as the order for relief at which time the automatic stay is in place and the debtor officially becomes a Debtor-In-Possession.

"Ordinary Course Transactions"

Transactions in which a DIP is allowed to engage in a Chapter 11 Proceeding without an order of the Bankruptcy Court. For example, if a debtor company is in the retail sales business, the debtor can continue to sell to ordinary course customers without Bankruptcy Court approval or interference. See Bankruptcy Code § 1107, Chapter Four, Stabilizing The Business Operations.


Executive Guide to Corporate Bankruptcy

	*Overbid Protections* In asset sales in bankruptcy cases, an initial bidder (to prevent itself from becoming a "*stalking horse"), may require, as a condition to its submitting its initial bid, that it be given certain protections in the bidding process. One of those protections may be an "overbid protection," which would essentially provide that any bid over the initial bid must be a large increment to avoid one- or two-dollar bidding wars. See* Chapter Four, Sale Of Assets. *Party In Interest* A term of art in bankruptcy law that means any party that has the right to stand up and be heard by a Bankruptcy Court. The term "party in interest" goes beyond a *creditor. For example, the Securities and Exchange Commission, while rarely holding a claim, is a party in interest that has the right to be heard in all bankruptcy cases. See* Bankruptcy Code § 1109. *Perfected Lien* A *lien* for which all of the necessary steps for *perfection* have been taken. If a secured creditor has a lien that is not perfected under applicable nonbankruptcy law, the DIP may use its *"strong arm" powers* to avoid the lien. *Perfection* Steps necessary under the Uniform Commercial Code and other applicable state law to make a lien effective as to third parties and, ultimately, effective against a *trustee* in bankruptcy. Forms of perfection usually involve filing of documents in the public records for the county or state in which the property is located. *Petition* The document filed by a debtor that initiates a bankruptcy proceeding. Petitions may be filed voluntarily by the debtor or filed involuntarily. See Chapter Two, Getting The Process Started. *Petitioning Creditor* A creditor that has filed an *Involuntary Petition* against a company. *Plan Ballot* A ballot by which the holder of an *impaired claim* votes to accept or reject a *plan of reorganization. See* Chapter Five, Step Four: The Solicitation Process. See also Ballot Report, above. *Plan Of Reorganization* A document that divides the claims of creditors into groups and restructures their payments and/or collateralization. Some creditors are not affected and are considered "unimpaired." All creditors (other than unimpaired creditors) vote on the plan of reorganization. Each class that is im

Glossary of Commonly Used Bankruptcy Terms

paired must accept the plan by the one-half/two-thirds requirement. See Bankruptcy Code § 1123; Chapter Five, Step Two: The Plan Of Reorganization.

Preference

A payment made to an unsecured creditor or, possibly, an undersecured creditor during the ninety days prior to the bankruptcy filing. These payments are voidable and recoverable by the trustee (or even the debtor on behalf of the estate). An unsecured or undersecured creditor who receives new security during the ninety-day period also receives a preferential transfer, and the new collateralization may be voided. The Bankruptcy Code prohibits a trustee from bringing a preference action if the amount to be recovered is less than $600. See Bankruptcy Code § 547; Chapter Four, The "Strong Arm" Powers.

"Prepackaged" Bankruptcy"

A phrase used to identify a wide range of circumstances, starting from a situation where a debtor has had the opportunity to negotiate the essential terms of a plan of reorganization with some or all of its creditors (technically called a "prenegotiated" bankruptcy), to where the debtor has not only negotiated the terms of the plan of reorganization, but also solicited plan ballots from creditors prior to filing a Chapter 11 Proceeding. See Chapter Two, The "Proactive" Versus "Reactive" Reorganization Cases.

Prima Facie

Presumption that facts are true unless rebutted by opposing party. A proof of claim is prima facie proof of the claim amount until a party objects and presents evidence to the contrary.

Priority Claim

Claims that, under bankruptcy law, must be paid before unsecured claims may be paid anything. Examples include certain taxes, wages, consumer deposits, and so forth. Priority claims can also include, as a first priority, all administrative claims of the estate. See Bankruptcy Code § 507; Chapter Two, The "Pecking Order" — Payment Priorities In Reorganization Cases.

Pro Hac Vice

Signifies the admission of a member of the bar in one jurisdiction to practice, usually on a limited matter, in another jurisdiction's courts. A member of the bar of the second jurisdiction must generally move for admission pro hac vice of the out-of-state attorney.

Pro Rata Basis

A proportionate amount. When applied to a claim it refers to the ratio of the consideration distributed on the amount of that claim to the amount that the claim bears to all the other claims in a particular class. Simply put, if


Executive Guide to Corporate Bankruptcy

	there are $1,000 of total claims in a class of which one creditor holds $100 (or 10 percent), for every dollar that is payable to the creditors in that class, the creditor with the $100 amount will receive 10¢ (or 10 percent) on a pro rata basis. *Pro Se or Pro Per* Without legal representation, or appearing on one's own behalf. Corporations, partnerships, and business entities other than sole proprietorships may not appear without counsel in bankruptcy cases. *Proof Of Claim* A pleading filed with the clerk of the Bankruptcy Court setting forth the claim's amount, nature and classification (such as, secured, unsecured, administrative, priority and so forth). The supporting documentation is usually attached. See Chapter Five, Quantifying The Debts—The "Bar Date" Order. See also Bar Date and *Bar Date Order. Purchase-Money Security Interest* Description of *security interest* taken by creditor in property that the debtor acquired with funds advanced by the creditor taking the security interest. See also Lien. *Reclamation* The ability under certain states' laws to get products back that were sold to a company on credit if the company was insolvent at the time of the sale. This usually affects retail bankruptcies where vendors who supply inventory ship goods, and within a short period of time the company files bankruptcy. Under most states' laws, a claim for reclamation must be made within a short period of time (usually ten days) after delivery of the goods. See Chapter Four, Dealing With The "Special Claims." Reject or *Rejection* The process whereby a debtor elects to walk away from its responsibilities and benefits under an *executory contract* or *unexpired lease. Under these circumstances, the other party to the lease or contract will have a claim* for money damages as a result of the rejection, which equates to a breach of the lease or contract. See Bankruptcy Code § 365; Chapter Four, Dealing With Executory Contracts And Unexpired Leases. See also Assume or Assumption. *Relief From The Automatic Stay* A contested matter filed with the Bankruptcy Court in which the creditor requests that the Bankruptcy Court modify or lift the stay to allow the creditor to proceed in its actions against the debtor's property. Example: A secured creditor requests the Bankruptcy Court to lift the automatic stay in order to continue the state foreclosure on the debtor's realty. The creditor

Glossary of Commonly Used Bankruptcy Terms

normally asserts that the secured position does not have adequate protection, e.g., a $100,000 mortgage on realty worth only $75,000. See Bankruptcy Code § 362(d); Chapter Four, The Automatic Stay.

Reorganization

The recapitalization of a distressed company through a Chapter 11 Proceeding.

Reorganization Process

The process of negotiating and documenting the restructuring of a company. See Chapter Two, The Reorganization Process.

Reorganized Company

The debtor company after it emerges from Chapter 11 pursuant to a confirmed plan of reorganization. See Chapter Five, Step Six: "Going Effective."

Reorganized Debtor

See Reorganized Company, above.

Sales Free And Clear of Liens

The ability of a DIP under the Bankruptcy Code to sell assets even if the secured creditor with a lien on the asset to be sold does not consent. In such sales, a secured creditor may have credit bid rights. Usually what occurs in these cases is that the Bankruptcy Court will order the assets sold with the secured lender's lien to "attach to the sales proceeds." Accordingly, a lender with a first lien on a machine in the amount of $100 that is sold for $105 will have its lien on the machine removed as part of the sale, but the lien will attach to the first $100 in sales proceeds. See Bankruptcy Code § 363; Chapter Four, Sales Of Assets.

Schedules

Schedules of Assets and Liabilities, which all debtors (or the trustee) must file with the court under penalty of perjury. See Chapter Four, Reporting Requirements And Other Annoyances.

Secured Creditor

A creditor that has a perfected lien or security interest on assets of the estate.

Security Agreement

An agreement between a creditor and debtor that creates a consensual lien under the Uniform Commercial Code. See also Lien.

Security Interest

The creditor's right in property created in a security agreement. See also Lien.


Executive Guide to Corporate Bankruptcy

	*Serial Filings* See *Chapter 22s, above. Setoff* See Offset, above. *Single-Asset Real Estate Cases* Under the 1994 Bankruptcy Reform Act, this definition was added to the Bankruptcy Code to describe real estate: (1) with a single property or project (other than residential real property with less than four units); (2) which generates substantially all of the debtor's income; and (3) on which no other substantial business is conducted; and (4) with no more than $4 million of secured debt. The consequence of being a single-asset real estate case is expanded rights of creditors with respect to stay relief if the debtor has neither filed a plan within ninety days of the order for relief nor commenced monthly payments to secured creditors. See Bankruptcy Code § 101(51B). *Small Business Chapter 11* Under the 1994 Bankruptcy Reform Act, an accelerated (and hopefully less expensive) reorganization proceeding that an individual, partnership, or corporation, if eligible can elect but is not required to do so. The Small Business Chapter 11 provisions of the Code limit exclusivity period extensions, combine the hearing on the Disclosure Statement and the plan, and allow the court not to appoint an unsecured creditors committee. A business is considered a small business if it has total unsecured and secured debt of no more than $2 million. See Bankruptcy Code § 101(51C). *Solicitation Package* A package consisting of a Disclosure Statement, plan of reorganization, all of the exhibits to those documents, the Bankruptcy Court's *order* approving the Disclosure Statement, the plan ballot and any other materials that will be sent by a debtor in order to seek acceptances of its plan of reorganization. See Chapter Five, Step Four: The Solicitation Process. *Solicitation Process* The process whereby the *solicitation package* is sent to all holders of *impaired claims* to get them to vote on a *plan of reorganization. See* Chapter Five, Step Four: The Solicitation Process. *"Stalking Horse"* The term used in asset sales in bankruptcies to describe the disadvantage of being the first bidder willing to come forward on an asset. Since asset sales are always auction sales in bankruptcy proceedings, the first bidder is generally the one that all other bidders are bidding against. The phrase is derived from the old hunting technique where an animal was

Glossary of Commonly Used Bankruptcy Terms

used to attract game for hunters. Potential bidders usually seek to minimize the downside to being a "stalking horse" by the use of Overbid Protections, "Bust Up" Fees, and "Window Shop" Provisions. See Chapter Four, Sale Of Assets.

Statement Of Financial Affairs

Document that must be filed by all debtors, under penalty of perjury, listing detailed information as to the whereabouts of financial records, prebankruptcy transfers, prebankruptcy income, and so forth. See Chapter Four, Reporting Requirements And Other Annoyances.

Statements and Schedules

See Schedules and Statement Of Financial Affairs, above.

Statutory Lien

A lien created by operation of law, such as a mechanic's or garageman's lien, a stableman's lien or a landlord's lien.

Stay Relief

See Relief From Automatic Stay, above .

Stipulation

A voluntary agreement between the parties resolving a legal dispute or a part thereof. In a bankruptcy proceeding, stipulations often must be noticed to creditors.

"Strong Arm Powers"

The powers of the trustee or DIP to avoid certain liens and bring property into the estate for the benefit of creditors, including preference and fraudulent transfer avoidance powers. See Bankruptcy Code §§ 544, 547, 548, and 549; Chapter Four, The "Strong Arm" Powers.

Sua Sponte

On the court's own motion. Sometimes, particularly in emergency situations, courts enter orders even when no party has requested they do so.

Subordinated Claims

Claims that takes a junior position in priority to other claims. Claims may be subordinated by agreement or through an adversary proceeding. See Bankruptcy Code § 510.

Subpoena

A command of the court for the party to whom it is addressed to appear at a specific place, at a certain time.

Subpoena Duces Tecum

A command of the court for the party to whom it is addressed to appear and produce certain documentary evidence.


Executive Guide to Corporate Bankruptcy

	*Subrogation* The substitution of one party into another party's position. For example, when a guarantor pays the debtor's obligation to a creditor, the guarantor steps into the shoes of the creditor and may pursue the creditor's claim. See Bankruptcy Code § 509. *Substantial Contribution* A term of art used in the Bankruptcy Code whereby a creditor can seek to have its professional fees reimbursed as an *administrative claim* on the basis that the creditor's actions in the case (for which it incurred professional fees) benefitted all of the creditors of the *estate. Frequently, "Bust Up" Fees* and the professional fees of *Ad Hoc Committees* are sought under the substantial contribution provisions of the Bankruptcy Code. See Bankruptcy Code § 503(b). *Substantive Consolidation* The legal theory whereby numerous companies (with their assets and liabilities) are treated as one company. This can either be done pursuant to a *motion* filed in a Bankruptcy Court in a *Chapter 11 Proceeding, but is most often done through a confirmed plan of reorganization. See* Chapter Five, Step Two: Drafting The Plan Of Reorganization. *Super Priority Administrative Claim* An *administrative claim* that takes seniority over all other administrative claims in a case. See Bankruptcy Code § 507; Chapter Four, Financing The Preconfirmation Operations. *Super Priority Financing* *DIP financing* whereby a creditor is given a senior *lien* on assets of the *estate* even though those assets are already subject to liens. This is also known as "*lien priming." See* Bankruptcy Code § 364(d); Chapter Four, Financing The Preconfirmation Operations. *Tag-Along Rights* Rights that are triggered when one or more shareholder gives notice to the other parties to a shareholder agreement (i.e., the other shareholders) that such shareholders intends to sell their shares to a third party. Tag-along rights allow the shareholder(s) receiving this notice to include their shares in the sale (hence the term "tag along"), usually on a pro rata basis (and thereby carving back the number of shares that the selling shareholder can sell). The provisions granting these rights are typically lengthy and set forth the mechanics for how the rights become operable. *Temporary Allowance* When a *claim* has been objected to, it is not an *allowed claim* such that it may vote on a plan of reorganization. Accordingly, the *Bankruptcy Rules*

Glossary of Commonly Used Bankruptcy Terms

provide that the Bankruptcy Court may temporarily allow the claim for voting purposes. This avoids the filing of claims objections just to disenfranchise a particular creditor. See Bankruptcy Rule 3018; Chapter Five, Step Four: The Solicitation Process.

Transfer Taxes

Under some states' laws, any transfer of real or personal property may be subject to state taxes, which are usually levied as a percentage of the value of the property being transferred. This may also be known as a "document tax" or "stamp tax." Under the Bankruptcy Code, transfer taxes are not enforceable such that assets transferred under a plan of reorganization are not collectible. See Bankruptcy Code § 1146(c); Chapter Five, Step Two: The Plan Of Reorganization.

Trustee

A person appointed by the Bankruptcy Court to administer the bankruptcy estate. In a Chapter 7 Proceeding, the trustee's primary function is to be a liquidating and collection agent. If a trustee is appointed in a Chapter 11 Proceeding, he or she is charged with responsibility for proposing a plan of reorganization. In Chapters 12 and 13, a standing trustee exists to administer the plan. See Bankruptcy Code § 1104; Chapter Two, The Players And Their Roles.

Unexpired Leases

A real or personal property lease under which the debtor is the lessee or lessor, which has not ended under its own terms prebankruptcy, or which has not been terminated prebankruptcy. Only unexpired leases that are in existence as of the date the Chapter 11 Proceeding is filed may be assumed by the DIP. See Bankruptcy Code § 365; Chapter Four, Dealing With Executory Contracts And Unexpired Leases. See also Executory Contracts.

Unofficial Committees

See Ad Hoc Committees, above.

Unsecured Claims

Those claims asserted in a bankruptcy proceeding that are not secured by lien rights in any real property or personal property of the estate or the debtor. An unsecured claim may have seniority over other claims as an unsecured Priority Claim. See Chapter Two, The "Pecking Order"—Payment Priorities In Reorganization Cases. See also Administrative And Priority Claims, above.

U.S. Trustee

In all districts, a formal Office of the U.S. Trustee exists as an arm of the U.S. Department of Justice. The U.S. Trustee, not the court, appoints trustees from a private panel. The U.S. Trustee program was designed to


Executive Guide to Corporate Bankruptcy

	free the courts from administrative supervision over trustees. See Chapter Two, The Players And Their Roles. *Venue* A concept determining the proper geographical location for filing a bankruptcy case or other action. Venue is proper if the debtor has resided or has a domicile, place of business, or property in the district 180 days preceding the filing of the petition. More than one venue may be proper in a case. See 28 U.S.C. § 1408; Chapter Four, The Venue Game. *Voluntary Bankruptcy* When a troubled company voluntarily files a Chapter 11 petition, thereby commencing a *Chapter 11 Proceeding* and resulting in an *Order For Relief. See* Bankruptcy Code § 301; Chapter Two, Getting The Process Started. *"Window Shop" Provisions* Buyer protection devices usually negotiated in asset sales in bankruptcy cases. Since the *Debtor-In-Possession* has a fiduciary duty to maximize values for all assets, generally speaking all asset sale contracts in bankruptcy cases are subject to "higher and better bids" through some sort of an auction process. Potential buyers, to protect themselves from being a *"stalking horse"* against whom other bidders will compete, may require that the debtor not actively solicit other offers, but rather may only entertain other offers if bidders come to them. The Bankruptcy Court must approve any such restrictions in asset purchase and sale agreements in bankruptcy cases. See Chapter Four, Sale Of Assets. *"Zone Of Insolvency"* An imprecise term that is sometimes used in law review articles and in some judicial decisions. While *insolvency* is a balance-sheet test, when a company is in financial distress and may not be technically insolvent but is still clearly on its way there, some courts have imposed special *fiduciary duties* on the Board of Directors of such companies because they are in the "zone of insolvency." See Chapter Three, Making The Transitions: Attitudinal Adjustments.