GLOSSARY OF BANKRUPTCY TERMS

§363 Sale A sale of assets by a debtor, with the approval of the Bankruptcy Court, is effected
pursuant to section 363 of the Bankruptcy Code. Therefore, any sale of a business or its assets
out of a bankruptcy is commonly referred to as a §363 sale. “Bankruptcy Sale” and “§363 sale”
are synonymous.

Chapter 11 The most common form of bankruptcy that A company would deal with. Chapter
11 is a reorganization proceeding in which the debtor may continue in business or in possession
of its property as a fiduciary. A Chapter 11 proceeding can go one of three ways: (1) a sale of
assets (a), whereby the proceeds of the sale are to be used to satisfy the debt; (2) A confirmed
Chapter 11 plan that provides for the manner in which the debtor will repay the claims of
creditors in whole or in part over time; or (3) a conversion to a Chapter 7 (in the event options 1
and 2 don’t pan out) followed by a liquidation of assets.

Administrative Claims Admin claims include claims by professionals retained in the bankruptcy
case, such as attorneys, investment bankers, etc. If the bankruptcy does not produce adequate
liquidity through the sale of assets or other actions to repay all secured claims plus administrative
claims, the bankruptcy estate is deemed “administratively insolvent”. This happens with some
frequency, which is why it is important for A company to get a “carve-out”.

Article 9 Proceeding In lieu of allowing the debtor to file for Bankruptcy, a secured creditor
may elect to foreclose on their collateral (the debtor’s assets) and liquidate the assets in order to
repay their claim. Article 9 proceedings are a state court proceeding, and therefore the venue is
an important consideration for the lender (some states are more debtor-friendly than others).
Generally, the creditor(s) need to have a compelling reason (such as the avoidance of massive
legal fees in a Chapter 11) to pursue an Article 9 transaction, and will only do so if it will lead to a
significantly better recovery than the alternative.

“ABC” (Assignment for the Benefit of Creditors) In lieu of filing for Bankruptcy (Chapter 7
in the case of a proposed liquidation), a Company may elect to make an assignment (of its assets)
for the benefit of creditors. In this situation, the priority creditor(s), typically the bank, would
take control of the Company’s assets and liquidate them as payment for their claim. Generally,
the creditor(s) need to consent in advance to such assignment, otherwise the officers of the
Company may have personal liability for what happens to the assets when they “hand over the
keys”.

Assume (as in assume an obligation) An agreement to continue performing duties under a

contract or lease. In the context of an M&A transaction, if the buyer “assumes” certain contracts,
such as a real estate lease or a lease for equipment, that assumption reduces the total obligations
of the bankruptcy estate.

Automatic stay An injunction that automatically stops lawsuits, foreclosures, garnishments, and
all collection activity against the debtor the moment a bankruptcy petition is filed. The timing of
most bankruptcies is geared toward triggering the automatic stay in order to avoid a lawsuit or
other action against the Company.

B
Bankruptcy A legal procedure for dealing with debt problems of individuals and businesses;
specifically, a case filed under one of the chapters of title 11 of the United States Code (the
Bankruptcy Code).

Bankruptcy Code The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-
1330), the federal bankruptcy law.

Bankruptcy Estate Once a Company files for “Bankruptcy” (typically meaning bankruptcy
protection under the terms of Chapter 11, which enable the Company to continue to operate with
Bankruptcy Court approval), the Company is officially known as the “Debtor”, and the
bankruptcy estate (or “debtor’s estate) is defined as all legal or equitable interests of the debtor in
property at the time of the bankruptcy filing. The estate includes all property in which the debtor
has an interest, even if it is owned or held by another person. Therefore the Court’s power to
“disgorge” or unwind any transfers of cash or assets that occurred immediately prior to the filing.

Bankruptcy Petition When the Company “files for bankruptcy”, the actual document filed by
the debtor (in a voluntary case) or by creditors (in an involuntary case) that opens the bankruptcy
case is the petition. (There are official forms for bankruptcy petitions.)

Carve-Out Secured claims get priority in any bankruptcy settlement, followed by post-petition
administrative claims. Pre-petition unsecured claims, such as would be owed to an investment
banker who earned a portion of their fee prior to the filing, would be at the end of the line.
Therefore, it is important for A company to get a carve-out from the secured creditor(s) at the
time of the engagement. The carve-out is a contractual agreement with the secured creditor(s)
whereby they agree to pay our fee out of their recovery in the event that (a) we complete a
transaction and earn the fee; and, (b) the estate is administratively insolvent or for whatever
reason our fees are not immediately approved.

Chapter 7 A Chapter 7 case is a liquidation proceeding, available to individuals, married

couples, partnerships and corporations. For a business, Chapter 7 generally connotes that the
business has “shut its doors” and therefore given up on any chance of realizing “going concern
value” for the business.

Chapter 11 The most common form of bankruptcy that A company would deal with. Chapter
11 is a reorganization proceeding in which the debtor may continue in business or in
possession of its property as a fiduciary. A Chapter 11 proceeding can go one of three ways:
(1) a sale of assets (a §363 sale), whereby the proceeds of the sale are to be used to satisfy the
debt; (2) A confirmed Chapter 11 plan that provides for the manner in which the debtor will
repay the claims of creditors in whole or in part over time; or (3) a conversion to a Chapter 7
(in the event options 1 and 2 don’t pan out) followed by a liquidation of assets.

Chapter 13 A repayment plan, most common for individuals with debts falling below statutory
levels. This is typically a personal bankruptcy (although many S-Corporations may qualify)
which provides for repayment of some or all of the debts out of future income over 3 to 5
years.

Collateral Property which is subject to a lien (or a secured interest) by a creditor. A creditor
with rights in collateral is a secured creditor and has additional protections in the Bankruptcy
Code for the claim secured by collateral. The measure of the secured claim is the value of the
collateral available to secure the claim: therefore, if the lender provided equipment financing
for a $5 million manufacturing line, and the liquidation value of that equipment is $1 million,
then the value of that secured lien is reduced to the $1 million (or whatever value is ultimately
achieved in a sale of that asset). In the event that the allocation of purchase price to a specific
asset that is collateral is deemed “insufficient” – the creditor can object to the sale – and
remove the asset from the estate (subject to court approval).

Confirmation The court order which makes the terms of the plan for repayment of debts in a
Chapter 11 binding. The terms of the confirmed plan control over all pre-existing contracts or
obligations as between the debtor and creditor.

Creditor The person(s) or organization(s) to whom the debtor owes money or some other
form of legal obligation.

Cramdown If the creditors do not approve a plan of reorganization, the court may still
approve it, if the bankruptcy judge believes it is in the best interest of all parties. Normally a
cramdown involves reducing a secured creditor's debt to the fair market value of the property,
with the balance of the debt determined to be unsecured.

Claim A creditor's assertion of a right to payment from the debtor or the debtor's property. An
“Allowed” claim is a claim that has been adjudicated by the Court to be valid and in most cases
subject to immediate disbursement from the debtor’s account - and not subject to further dispute.
For example, when we file a fee application (to get paid for our services) we are filing a claim.
When the judge signs an order allowing us to get paid, it becomes an “Allowed Claim”. If the
estate is administratively insolvent then our Allowed Claim doesn’t get paid unless and until
enough dollars come in to make the case solvent.

Committee (also “The Official Committee of Unsecured Creditors”) Early in the Bankruptcy
process, the U.S. Trustee will notify all of the unsecured creditors of a meeting (or conference
call) at which the creditors will form an Official Committee of Unsecured Creditors. This
Committee will then appoint an attorney (Committee Counsel) to act on their behalf.

Committee Counsel The attorney appointed by the Official Committee of Unsecured Creditors
to represent the interest of all general unsecured creditors in the bankruptcy proceeding. If there
is insufficient interest to constitute a Committee, then the U.S. Trustee may stand in.

Creditors' Meeting (also 341 meeting) The 341 meeting is a meeting of creditors required by
section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a
trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors' meeting.

Debtor A person, company, or legal entity that has filed a petition for relief under the
Bankruptcy Code.
Debtor-in-Possession A debtor that has been given approval by the Bankruptcy Court to
continue to operate a business and act essentially as their own trustee.

Debtor-in-Possession Financing (or “DIP” financing) A short-term debt financing that

provides the debtor in possession with new working capital to operate the business. The DIP
financing is often contentious, as it “deepens the insolvency” of the debtor – essentially it is like
giving a person who is bankrupt a new credit card in order to continue living a normal life while
all of their “old” creditors wait around to be paid. Also, the DIP is usually given a super-priority
status –meaning that any new money coming into the estate can be used to repay the DIP first.

ECF (Electronic Case Filing): CM/ECF is the federal courts' case management and electronic
case files system. It provides courts enhanced and updated docket management. It allows courts
to maintain case documents in electronic form. And it gives each court the option of permitting
case documents -- pleadings, motions, petitions -- to be filed with the court over the Internet.
CM/ECF implementation in the bankruptcy courts has been underway since early 2001.
https://pacer.login.uscourts.gov/cgi-bin/login.pl?court_id=00idx

Executory Contracts Generally includes contracts or leases under which both parties to the
agreement have duties remaining to be performed. If a contract or lease is executory, a debtor
may assume it or reject it. By rejecting an executory contract (with Court approval) the Debtor
can get out of a union labor contract, a lease for unwanted office space, or other obligations that
would otherwise prevent the Company from operating at a profit and repaying its debts.

First Day Motions When the Bankruptcy Petition is filed, the debtor’s counsel will also file a
raft of motions with it – collectively referred to as the “first day motions”. These will typically
include a motion to approve the use of cash collateral, which is the essential motion to ensure that
the Company will be able to operate during the Bankruptcy process.

“Free and Clear” A characterization of assets sold by a debtor in a bankruptcy proceeding,

meaning free and clear of obligations, liens or encumberances. The concept of buying assets
“free and clear” – which in most cases include freedom from successor liability – is what makes
the acquisition of assets from a bankruptcy sale especially attractive.

Fraudulent Transfer Any transfer of assets (including cash bonuses, severance payments, or a
sale of assets) made within 12 months prior to a bankruptcy filing, or within the “zone of
insolvency” can be reviewed by the Bankruptcy Court and if deemed inappropriate in hindsight,
may be classified as a Fraudulent Transfer. In such case, the receiver of the assets can be
compelled by the court to return the assets to the estate.

Fresh Start The characterization of a debtor's status after bankruptcy, i.e., free of most debts.
(Giving debtors a fresh start is one purpose of the Bankruptcy Code.)

“General, Unsecured Claims” Claims (debts) that do not fall into the administrative or secured
category. Trade payables, unpaid employee expense reimbursements, company credit cards, and
the like are unsecured claims. If the bankruptcy has funds, after paying administrative and
priority claims, then unsecured claims will receive a pro-rata payment.

Insolvency If a business is operating in a mannner which is unsustainable given their earnings

and financing arrangements (such as a business which is losing millions every month and will
soon be out of cash), it may be insolvent. However, insolvency is to some degree subjective, as
that same business may be on the verge of receiving a new round of venture capital, completing
an IPO, or some other event which will provide new capital.

Liquidation A sale of a debtor's property with the proceeds to be used for the benefit of creditors.

New Value Any professional providing services to the debtor post-petition (meaning “during the
bankruptcy”) may be paid current for their services to the extent they are bringing “new value” to
the estate. However, any claims by those professionals (whether they be the investment banker,
the attorney, etc.) arising from pre-petition claims can only be paid as a general, unsecured claim.
The argument that investment bankers hear when they bring offers to the table pre-petition and
then expect to get paid post-petition is “what new value have you brought since the Company
filed?”

Parties in Interest Those parties who have standing to be heard by the court in a matter to be
decided in the bankruptcy case. The debtor, the U.S. Trustee, and the creditors are parties in
interest for most matters. It is the obligation of the debtor to notify all parties in interest of the
bankruptcy, and there is a standard 20-day notification policy in place for most significant
motions, such as a motion to sell assets (which is why most bankruptcy sales require 20+ days to
complete).

Perfection (also “a Perfected Lien”) When a secured creditor has taken the required steps to
perfect his lien, the lien is senior to any liens that arise after perfection. For example, filing a
financing statement with the secretary of state perfects a lien in personal property. An
unperfected lien is valid between the debtor and the secured creditor, but may be behind liens
created later in time, but perfected earlier than the lien in question.

“Pre-Pack” (also “Pre-Packaged Bankruptcy Sale”) There are several variations of this
concept, but the general idea is that the Company and a buyer will agree to terms in advance that
both parties believe will be acceptable to all of the Company’s creditors. Once the agreement is
made in principal, then the Company files for Chapter 11, and simultaneously files a motion for
approval of a plan of reorganization that details (a) the sale of assets; (b) the repayment of debt –
in whole or in part; and (c) provision for administrative claims. In reality, it is difficult to get all
of the creditors to agree in advance – particularly when it would require certain creditors to
accept 10 cents on the dollar. If any creditor objects, then the court may not allow the sale to
move forward without a trial (or in some cases an auction), which takes longer and costs more
money.
Preferences (or preferential debt payments) A debt payment made to a creditor in the 90-day
period before a debtor files bankruptcy (or within one year if the creditor was an insider) that
gives the creditor more than the creditor would receive in the debtor's bankruptcy case.
Examples include investment banking fees paid prior to filing, management stay bonuses paid
prior to filing, and even employee bonuses paid as many as 12 months prior to filing, etc. (In the
case of Transcept, the court went after bonuses paid to management in the ordinary course – 7
months prior to filing).

Priority The Bankruptcy Code's statutory ranking of unsecured claims that determines the order
in which unsecured claims will be paid if there is not enough money to pay all unsecured claims
in full. For example, under the Bankruptcy Code's priority scheme, money owed to the case
trustee or for prepetition employee compensation (including vacation and sick time in some
states) must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt)
is paid.

Secured Creditor A creditor holding a claim against the debtor who has the right to take and
hold or sell certain property of the debtor in satisfaction of some or all of the claim. Banks, Sub-
Debt, and Bond Holders are generally “secured” creditors.

Statement of financial affairs A series of questions the debtor must answer in writing
concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an
official form a debtor must use.)

Transfer Any mode or means by which a debtor disposes of or parts with his/her property.

Trustee The representative of the bankruptcy estate who exercises statutory powers, principally
for the benefit of the unsecured creditors, under the general supervision of the court and the direct
supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or
corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11
cases. The trustee's responsibilities include reviewing the debtor's petition and schedules and
bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In
chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors.
Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional
responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing
plan payments to creditors.

U.S. Trustee An officer of the Justice Department responsible for supervising the administration
of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring
creditors' committees; monitoring fee applications; and performing other statutory duties. As far
as A company is concerned, the U.S. Trustee is the chief adverse party to our engagement terms
until such time that the Official Committee of Unsecured Creditors is constituted and they appoint
Committee Counsel.
Undersecured Claim A debt secured by property that is worth less than the full amount of the
debt.

W
WARN Act The Worker Adjustment and Retraining Notification Act (WARN Act) is a United
States law protecting employees by requiring most employers with 100 or more employees to
provide 60 calendar-day advance notification of plant closings and mass layoffs of employees.
Employees entitled to notice under the WARN Act include managers and supervisors, hourly
wage, and salaried workers. The WARN Act requires that notice also be given to employees'
representatives (i.e. a labor union), the local chief elected official (i.e. the mayor), and the state.
The purpose of the advance notice is to give workers transition time to seek and obtain other
employment, avoid homelessness, etc. If adequate notice is not given, then the Company can be
held responsible for paying equivalent wages for the notice period, and if the Company can’t pay,
then the Board and/or the executive officers of the Company can be held personally liable.

“Zone of Insolvency” Once a business is operating in the “Zone of Insolvency”, the fiduciary
responsibility of the board of directors and the executive team shifts from protecting the interests
of shareholders to protecting the interests of their creditors. This is a challenge for most boards
and executives, as they themselves are typically large equity holders. However, if a CEO makes
the mistake of “swinging for the fences” while in the Zone of Insolvency, they may be personally
(and even criminally) liable. An example would be if the CEO refused to cut staff and thereby
continued to operate at a loss because he expected to complete a sale of the business in the near
term. If that sale process falls through, then in the process the CEO has “deepened the
insolvency” at the expense of the creditors, and may be found to be in breach of their fiduciary
responsibility.