The Fifth Circuit explained the interplay between Sections 550(a) and 550(d) in terms of what and how much a plaintiff can recover from avoiding a lien.

If the court avoids a lien as a preference under Section 547(b), Circuit Judge Edith H. Jones explained that the court may not both avoid the lien and give a money judgment for the value of the collateral subject to the lien. Awarding both, she said in her May 30 opinion, would be a double recovery prohibited by Section 550(d).

The chapter 11 debtor was an oil and gas producer whose property was swinging wildly in value, up and down and up again. We will simplify and recharacterize the complicated the capital structure, the plan and the procedural history to facilitate understanding the circuit’s holding.

On confirmation of the chapter 11 plan, take it as a given that the assets were worth $85 million by agreement. That amount covered only a portion of the debt owing to the so-called DIP lenders, who financed the reorganization and had superpriority liens on all assets.

Next in line after the DIP lenders were secured creditors, whose lien was subject to a preference attack to occur after plan confirmation. After that came unsecured creditors.

The confirmed plan called for distributing the new equity depending on the outcome of an allegation that the secured creditors’ lien was avoidable as a preference. At the $85 million valuation, the DIP lenders would receive all of the new equity, because $85 million would not cover all of the advances made under the DIP loan.

If the lien were avoided after confirmation, the plan arguably called for allocating the new equity according to the value of the assets at that time.

Years after confirmation, the bankruptcy court decided that the secured creditors’ lien was preferential. The bankruptcy court both avoided the lien and ruled that the assets were then worth $200 million. Given the higher valuation, the DIP lenders would share the new equity with junior creditors. The Fifth Circuit agreed to hear a direct appeal by DIP lenders, who wanted all of the equity because they had valid liens on all the assets.

The DIP lenders were of the view that avoiding the lien should have been the only appropriate relief. If the lien alone were avoided, the DIP lenders argued that they were still entitled to all of the new equity, because their super-priority DIP lien covered all the assets.

No Double Recovery

On appeal, the DIP lenders contended that awarding any relief other than voiding the lien would be a double recovery prohibited by Section 550(d). The outcome turned on the interplay between Sections 550(a) and 550(d).

Section 550(a) provides that “the trustee may recover . . . the property transferred, or, if the court so orders, the value of such property.” Section 550(d) reads, “The trustee is entitled to only a single satisfaction under subsection (a) of this section.”

The junior creditors contended that the word “or” in Section 550(a) effectively means “and,” allowing the court to both avoid the lien and award “the value of the property.” In part, the junior creditors based their argument on the Bankruptcy Code’s Rule of Construction in Section 102(5), which says that “‘or’ is not exclusive.” A treatise says that “or” means “A or B, or both.”

The argument did not persuade Judge Jones. She said that the Bankruptcy Code “does not apply the background Rule of Construction when [the] surrounding context makes ‘A and B’ logically impossible or dictates otherwise.”

For Judge Jones, Section 550(d) and its prohibition of anything more than a single satisfaction is the “context” for interpreting “or” in Section 550(a) and “compels the conclusion that Section 550(a) uses ‘or’ in its disjunctive form.”

In other words, Judge Jones said, “A trustee cannot use Section 550(a) to recover the value of property that was already returned to the estate.” She quoted the Collier treatise where it says that allowing “the trustee to recover both the property and its value . . . is absolutely prohibited by Section 550(d)[,] which provides that the trustee is ‘entitled to only a single satisfaction under subsection (a).’”

Judge Jones said the junior creditor’s argument “would require bankruptcy courts to calculate a value award in every case that involves the avoidable transfer of a depreciating asset, even if that asset is returned.”

Judge Jones vacated the judgment of the bankruptcy court and remanded, perhaps intending for the DIP lenders to receive all of the new equity.