Junior Creditors Could Share In 363 Bankruptcy Sales

By Charles Tabb and Tamar Dolcourt (August 3, 2018, 2:47 PM EDT) -- On July 9, 2018, the U.S. Court of Appeals for the Seventh Circuit issued an important opinion raising the possibility that out-of-the-money junior creditors might be entitled to share in the proceeds of a free-and-clear bankruptcy sale under Title 11 Section 363(f) of the United States Code, even where the senior secured party is underwater. In Illinois Department of Revenue v. Hanmi Bank, while the court ultimately held in favor of the senior secured lenders on the evidence presented (finding a failure of proof by the junior creditors of the value of the interest supposedly lost in the sale), the court's reasoning opened the door to giving juniors a share of the sale proceeds. Before the Hanmi Bank case, the prevailing view was that an underwater senior creditor always could keep all of the proceeds of a free-and-clear sale as a matter of law. Junior creditors would get nothing....

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