Legal and Bankruptcy Framework Flashcards

What are 'executory contracts' in a Chapter 11 bankruptcy?

Answer: Contracts where material obligations remain on both sides, which the debtor can assume or reject

Executory contracts are agreements where both parties still have material performance obligations; a Chapter 11 debtor can assume (keep) or reject (breach) these contracts to optimize its cost structure.

What is a 'disclosure statement' in a Chapter 11 case?

Answer: A document providing creditors with adequate information to make an informed decision on the reorganization plan

The disclosure statement accompanies the plan of reorganization and provides creditors with the information they need — including financial projections and recovery analysis — to vote on the plan.

What does 'equitable subordination' mean in bankruptcy?

Answer: A court subordinating a creditor's claim as a penalty for inequitable conduct

Equitable subordination allows a bankruptcy court to lower the priority of a creditor's claim — often an insider — as a remedy for conduct that was inequitable or harmful to other creditors.

What is a 'stalking horse bid' in a Section 363 sale?

Answer: An initial bid that sets a floor price and bid procedures for a bankruptcy asset auction

A stalking horse bidder is a pre-selected buyer whose offer establishes the minimum acceptable price and bid procedures for a bankruptcy auction, providing certainty while allowing higher bids.

What is the 'best interests of creditors' test in a Chapter 11 plan?

Answer: A test requiring each creditor to receive at least what they would in a Chapter 7 liquidation

The best interests test requires that each creditor receive under the plan at least the present value of what they would receive if the company were liquidated under Chapter 7.

What is 'substantive consolidation' in bankruptcy?

Answer: Treating the assets and liabilities of related entities as a single pool for distribution purposes

Substantive consolidation pools the assets and liabilities of affiliated debtors, treating them as one entity for distribution, often used when corporate boundaries were ignored and records commingled.