How to Calculate the Distribution Due on a Claim Subordinated to Equity Level?

January 05, 2017

Section 510(b) of the U.S. Bankruptcy Code specifically provides that certain claims arising from the purchase or sale of common stock of the debtor shall have the same priority as common stock. Since in many bankruptcy cases common equity holders receive no distribution, the question of how to value and treat such subordinated claims is theoretical. But, in the case of Orange County Nursery, common shareholders were entitled to distribution. Hence, the dilemma: the creditors had a fixed monetary claim, not a number of shares; the confirmed plan, however, provided shareholders with pro rata distribution based on their shareholdings. How can the two be reconciled?

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