Priority and Superpriority Bankruptcy Claims

In a recent bankruptcy case, Illinois reached a superpriority claim settlement agreement with the major coal producer Peabody Energy, reports MiningWeekly.com. Large coal producers, such as Peabody Energy, are sometimes allowed to self-bond so that they can operate mines without setting aside sums of money reserved for cleaning up their mining site in the future. Now that Peabody Energy has filed for bankruptcy protection, Illinois and three other states are entitled to a percentage of the company’s $200-million self-bonding obligations. The presiding bankruptcy court is expected to approve the superpriority settlement agreement that Peabody Energy has reached with the state of Illinois. But what exactly is a “superpriority claim” in a bankruptcy proceeding? This article provides a brief overview of the different types of claims that creditors can assert in a bankruptcy proceeding and explains what a superpriority claim is.

Priority in Bankruptcy Proceedings

When a company or an individual files for bankruptcy, their creditors have an opportunity to file claims with the bankruptcy court asserting what the bankrupt party owes them. However, people generally file for bankruptcy protection because they are unable to repay what they owe, therefore, just because a creditor files a claim does not mean that he or she will be repaid as the bankrupt party’s estate is probably not large enough to repay every debt that is owed. Secured creditors are entitled to the collateral that secured the borrower’s debt to them, or to the value of the collateral in cash. On the other hand, unsecured creditors are paid out based on what is known as “priority.”

Priority is governed under section 11 U.S. Code § 507 of the U.S. Bankruptcy Code and governs the order in which unsecured creditors are paid from the available funds in the bankrupt party’s estate. All unsecured debts are ranked and assigned a priority. The claim with the higher priority is paid in full before the next highest claim is paid, and so on and so forth. Under federal bankruptcy laws some types of unsecured debt, such as support claims, administrative fees and back taxes, are given priority over other types of unsecured debts. These debts are paid first because Congress determined, for one public policy reason or another, that these debts are the most important.

Superpriority Claims in Bankruptcy Proceedings

Superpriority claims are important as they can be either secured or unsecured and are often the most powerful claims asserted in a bankruptcy proceeding. Superpriority claims are generally obtained under 11 U.S Code § 507(b), when a secured creditor can show that the trustee of the asset put up as collateral did not provide adequate protection for the asset. However, a creditor is not automatically entitled to superpriority status simply because the value of an asset put up as collateral has decreased.

Need Legal Advice?

Claim priority in a bankruptcy case can be extremely complicated, especially when multiple creditors are claiming that their debt should be repaid first. If you are considering filing for bankruptcy anywhere in the Chicago area contact the Bentz Holguin Law firm right away to discuss your legal options with one of our experienced bankruptcy lawyers.