Perhaps now more than ever unsecured creditors face an uphill battle to obtain a meaningful recovery in most corporate bankruptcy cases. The debtor’s assets are typically “liened up” well in advance of a bankruptcy filing, leaving little value unencumbered for anyone other than senior lenders. The trend in many commercial bankruptcy cases is towards a quick auction of the debtor’s assets,[1] meaning that, after secured lenders are paid from the asset-sale proceeds, the likelihood of unsecured creditors receiving meaningful value under a plan of reorganization or liquidation may be remote.

When there is no available cash to pay them under a plan, unsecured creditors may be assigned the rights of a debtor to bring avoidance actions and other litigation claims against third parties. These litigation assets possess real value only when there are resources available to prosecute the claims aggressively to yield meaningful settlements or judgments for the benefit of unsecured creditors. Without these resources, a debtor may be unable to bring a claim or may be forced to settle a claim for less than full value. It can be a challenge to finance bankruptcy estate litigation when the debtor’s remaining resources, after payment of senior creditors, are needed for the bankruptcy estate’s wind-down and claims-administration expenses.

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