An insurance company seeking to enforce a court judgment against a company in Chapter 11 Bankruptcy asked the bankruptcy court to give its $2 million claim priority over five unsecured debts owed to our clients, which were firms linked to the bankrupt company. The insurance company argued that because the loans were from creditors related to the bankrupt company, they should be disallowed altogether or at least treated like equity, and placed junior to the insurer’s claim.
We convinced the court to allow the principal amount of each claim, along with some accumulated interest.
A successful California real estate developer founded a number of companies to build and operate his projects. One of those projects, an entertainment center, ran into financial difficulties and filed Chapter 11 bankruptcy.
A major portion of its debt included loans the entertainment center had received from other companies the entrepreneur had founded, several of which are run by his adult children.
The $2 million insurance company claim was related to a workers' compensation case. The insurer had paid a claim to a worker injured in an accident at the entertainment facility. It then sued and argued the entertainment company was responsible for the injury.
The insurer won at trial. The company appealed and filed for bankruptcy protection before the appeal was heard.
The five related companies had lent money to the entertainment company to finance construction projects, provide working capital and other purposes.
The insurance company argued that the relationships between the linked companies that had lent money to the entertainment facility, combined with the fact that the loans were unsecured, meant that these debts were really “disguised equity.”
The debts to the related companies, the insurer said, should not be treated on a par with other unsecured claims – notably its own.
Had the insurance company prevailed, it would have had effective control of the unsecured claims, giving it significant voice in the direction of the Chapter 11 case.
In a day-long trial, we convinced the bankruptcy judge that the loan claims of the five linked entities were just as valid as that of the insurance company.
This successful outcome affirmed the right of related companies that provide intercompany financing to have their legitimate claims allowed in bankruptcy.