Legal Definitions - superpriority

Superpriority is a special legal status granted by a bankruptcy court to a new lender who provides essential funds to a company or individual undergoing bankruptcy. This status ensures that the new lender will be among the very first to be repaid from the debtor's assets, even ahead of other creditors who were owed money before the new loan was made.

This extraordinary measure is typically approved when the debtor cannot obtain necessary credit from any other source and the new funds are crucial for the debtor's reorganization or continued operation. The goal is to incentivize new lending that helps preserve the value of the business, ultimately benefiting all creditors by increasing the chances of a successful recovery.

Here are a few examples illustrating how superpriority works:

• Example 1: Funding Critical Operations

  Imagine "Fashion Forward," a struggling retail chain, files for Chapter 11 bankruptcy. To keep its stores open and fulfill existing customer orders, it needs to purchase new inventory. However, its usual suppliers and banks are unwilling to extend credit due to the bankruptcy risk. A new lender, "Bridge Capital," agrees to provide a loan specifically for inventory purchases, but only if the bankruptcy court grants their loan superpriority status. The court approves, recognizing that without new inventory, Fashion Forward would have to close immediately, leading to a much worse outcome for all existing creditors.

  This illustrates superpriority because Bridge Capital's loan for new inventory is deemed essential for Fashion Forward's continued operation and potential reorganization. By granting superpriority, the court ensures Bridge Capital's loan will be repaid before most other debts, incentivizing them to provide the critical funds that no one else would.

• Example 2: Emergency Repairs for Essential Assets

  "Tech Innovations Inc.," a software development firm, enters Chapter 11 bankruptcy. A critical server farm, essential for hosting its client applications and generating revenue, experiences a catastrophic failure. Repairing or replacing the equipment requires a significant capital outlay that Tech Innovations cannot afford, and no traditional lender will provide a loan without collateral or a strong credit history, which the bankrupt company lacks. A specialized equipment financing company, "Phoenix Lenders," agrees to fund the repairs, but only if their loan receives superpriority status from the bankruptcy court. The court grants this status, understanding that without the server farm, Tech Innovations would cease to function, destroying any hope of recovery for its creditors.

  Here, the superpriority status granted to Phoenix Lenders is crucial for Tech Innovations to continue its core business operations. The court prioritizes this new loan because it directly enables the company to generate revenue, which ultimately benefits all creditors by creating a path for repayment that would otherwise not exist.

• Example 3: Environmental Compliance

  A real estate development company, "Urban Renewal Corp.," files for bankruptcy. One of its key properties, which could be sold to generate significant funds for creditors, has a court-mandated environmental cleanup requirement before it can be listed. Urban Renewal Corp. has no funds for the cleanup, and no bank will lend for the project given the company's financial state. An environmental remediation firm, "Green Solutions," offers to perform the cleanup on credit, but only if the bankruptcy court grants their payment claim superpriority. The court agrees, as the cleanup is necessary to make the property marketable, thereby increasing the overall assets available to repay all creditors.

  In this scenario, superpriority is granted to Green Solutions because their work is a prerequisite for liquidating a major asset. By ensuring Green Solutions gets paid first, the court facilitates an action that will ultimately benefit all other creditors by making a valuable asset available for sale.