Showing a Card to Bankruptcy Claimants

Pension plan claimant seeks double recovery at shareholder expense

People often think the only winners in a bankruptcy are the lawyers. The bankruptcy code itself gives preference to fees incurred in the process of preserving and administering the post-petition estate. Looking also at the 2023 billing rates for Kirkland & Ellis bankruptcy attorneys, for example (largely considered among the best in the business), it’s easy to see how the bankruptcy estate can be whittled down to a sliver of its former glory after the vultures attorneys take their share (jk K&E).

Among pre-petition creditors of the bankrupt business, recovery depends on myriad factors, predominantly whether or not the creditor is secured. For unsecured creditors, certain claims (e.g., wage-related claims and certain tax claims) are ranked according to worthiness, while others are pooled together to partake in any recovery on a pro-rata basis. Unsecured creditors without any special benefits are typically the bankruptcy “fulcrum,” where the value of the bankruptcy estate ends.

Shareholders are the last in line under the absolute rule of priority. That might be common knowledge, but that fact doesn’t prevent the SEC from letting shareholders know—in bold—the chances of recovery in a bankruptcy are slim:

from SEC website

But not all bankruptcies result in complete shareholder loss. Hertz shareholders, for example, took home about $8/share after all was said and done in the 2021 restructuring. When the prevailing viewpoint on bankruptcy stocks is a donut recovery, any recovery can make for an attractive opportunity. Finding these diamonds in the rough is a challenge that requires sifting through hundreds, if not thousands of pages of bankruptcy dockets to decipher the universe of assets and total claims against those assets.