When the corporation filed for Chapter 11 bankruptcy after the pandemic, the bankruptcy court approved debtor-in-possession (DIP) financing, largely from the corporation’s secured creditors. The unsecured creditors objected, leading the court to deny the corporation’s motion to proceed with the DIP loans pending additional negotiation. When the corporation and the creditors reached a negotiated agreement, the court approved the final DIP order. The COVID pandemic shortly thereafter led oil and gas prices to plummet, so the corporation defaulted on its obligations under the DIP order. The corporation proposed multiple reorganization plans, one of which the bankruptcy court approved (the “Plan”). The Plan released all security interests against the corporation in exchange for granting the DIP creditors approximately twenty percent of the stock in the new corporation. Additionally, the Plan addressed the three phases of litigation for the bankruptcy proceedings. In Phase One, the bankruptcy court interpreted the Final DIP Order, upholding the validity of the DIP security interests and the lender’s stock allocation. For Phase Two, the court ruled the secured creditor’s pre-petition liens were “avoidable preferential transfers” due to the lenders failure to timely perfect their security interests outside of the ninety-day lookback period. Phase Three allocated the remainder of the reorganized corporation’s shares. The court first determined the value of the avoided security interests. From the valuation, the court awarded the secured creditors and DIP creditors thirty percent of the corporation’s shares, with the remaining seventy percent of the equity going to the unsecured creditors. The secured creditors appealed, raising two legal issues for consideration: (1) whether the bankruptcy court valuation under the Plan disregarded the “single satisfaction” provision of 11 U.S.C. § 550; and (2) whether Bankruptcy Code section 550 limited the “preserved avoidance actions” following the release and discharge of the creditor’s security interests.
In Ad Hoc Grp. Of Senior Secured Noteholders v. Del. Trust Co. (In re Sanchez Energy Corp.), 139 F.4th 411 (5th Cir. 2025), the Fifth Circuit vacated and remanded the bankruptcy court’s decision. The court remanded the case to the bankruptcy court to award the DIP creditors one hundred percent of the equity of the reorganized company because the value of the DIP security interests was greater than the total assets of the corporation. Next, the court held that the bankruptcy court erred in its plan interpretation because the Plan did not provide for “‘valuation’ in a vacuum irrespective of defenses that were available to the secured creditors under the same Plan.” It explained that the Plan made the distributions of equity to DIP, secured, and unsecured creditors conditional on the results of the Lien-Related Litigation, preserving all defenses and rights of the DIP Lenders. When the bankruptcy court ultimately upheld the validity of the DIP liens, the Ad Hoc Secured Creditors were entitled not only to the minimum twenty percent equity specified by the Plan, but also to one hundred percent in light of the value of their superpriority liens. The court also concluded that the equity allocation went against 11 U.S.C. §§ 550(a) and (d) and that the lower court allowed more than one satisfaction against the secured creditors. When applying Texas law and the Bankruptcy Code’s rule of construction to the Plan, the language of section 550(d) led the court to interpret the “or” in section (a) disjunctively, meaning that the bankruptcy estate’s in-kind recovery of the returned liens precluded an additional monetary recovery of the pre-petition liens’ values at the petition date. The court also highlighted that the bankruptcy court erred when it allowed recovery of the value of the pre-petition liens in addition to requiring their return to the debtors’ estate under the Plan. The bankruptcy court claimed that avoidance of the certain liens would not restore the estate because the DIP lenders had rendered the pre-petition liens worthless through later superpriority financing. This reasoning was flawed because no party objected to the Final DIP Order, the Plan did not mandate the litigation phases, and section 550’s plain text bars awarding value when property is returned. Consistent authority confirms that section 550 remedies are mutually exclusive, and courts cannot grant value once the estate has recovered the property in kind.
By Taylor O’Brien [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]