This document analyzes the legal mechanisms that allow creditors to potentially receive a "double-dip" recovery in bankruptcy through asserting claims against both a guarantor entity and primary obligor entity for the same debt. It describes how a creditor can receive an allowed claim for the full amount owed against each debtor. It also explains how bankruptcy law treats intercompany claims and claims for reimbursement in a way that prevents offsetting of recoveries, allowing the creditor to potentially recover more than the amount owed from multiple entities. However, it notes there are risks like substantive consolidation that could eliminate this result.

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Journal
A M E R I C A N B A N K R U P T C Y I N S T I T U T E
The Essential Resource for Today’s Busy Insolvency Professional
Written by:
Mark P. Kronfeld1
Owl Creek Asset Management LP; New York
markk@owlcreeklp.com
B
ankruptcy lawyers and distressed
investors often loosely use the
term “double-dip” to describe
scenarios where a creditor can increase
its recovery by multiplying its allowed
claim against a particular entity or assert-
ing claims against multiple entities (or
any combination thereof). For example, a
“double-dip” exists in bankruptcy, where
a creditor has the benefit of a guarantee
from a debtor entity (the first dip) and
the primary obligor asserts an indepen-
dent “incremental” claim (the second
dip) against a debtor entity, which also
ensures to that same creditor’s benefit.
This incremental claim can arise by vir-
tue of an intercompany loan, a fraudu-
lent-transfer claim or even by statute.
Where the incremental claim is asserted
against the guarantor entity, this would
give rise to a “true double-dip,” which
would provide for a 2x recovery vis à vis
the guarantor entity (capped at payment
in full).
The double-dip issue
has appeared in a
number of recent
restructurings, includ-
ing Enron Corp., CIT
Group Inc., Lehman
Brothers Holdings
Inc., General Motors
Corp., Smurfit-Stone
Container Corp. and
AbitibiBowater Inc.
Regardless of the variety of the double-
dip, the creditor’s ability to benefit from
full simultaneous multiple claims and
receive enhanced recoveries from the
double-dip is based on a number of key
legal and factual predicates.
In Diagram 1, the parent company
(guarantor) creates a finance subsidiary
(issuer/principal obligor) whose purpose
is to issue debt and transfer the proceeds
to the parent. The subsidiary is created
solely for the business concerns of the
parent and has no tangible assets.2
Assume for purposes of Diagram 1
that—as is common—the parent guar-
antee is a “guarantee of payment” for
the full principal amount. It is therefore
immediately triggered and enforceable
upon the subsidiary’s default. This is in
contrast to a “guarantee of collection,”
which contains certain conditions prec-
edent to enforceability. Moreover, even
though guarantees often contain guaran-
tor waivers of all rights of subrogation,
indemnity and reimbursement against the
principal obligor,3
assume that the guar-
antee in question does not have such a
waiver and, in the event that the parent
actually pays on the guarantee, it will
have a claim for reimbursement against
the subsidiary for any amounts paid
under applicable state common law.4
3 Although § 509 allows claims for contribution, reimbursement and sub-
rogation in certain circumstances, a pre-petition agreement can waive
such rights. O’Neil v. Orix Credit Alliance (In re Northeast Contracting
Co.), 187 B.R. 420, 427 (Bankr. D. Conn. 1995).
4 See McDermott v. City of N.Y., 406 N.E.2d 460, 462 (N.Y. 1980)
(“[W]‌here payment by one person is compelled which another should
have made...a contract to reimburse or indemnify is implied in law.”).
The Anatomy of a Double-Dip
Financial Statements
About the Author
Mark Kronfeld is a partner and senior
analyst at Owl Creek Asset Management
LP in New York.
1 The author would like to thank Matt Williams, a partner at Gibson Dunn
& Crutcher LLP, for his assistance in connection with this article.
2 For instance, corporations might establish wholly owned foreign finance
subsidiaries to issue non-U.S. dollar-denominated debt in order to
mitigate exchange rate risk or to access diversified sources of funding
or for tax benefits. Offers and sales conducted outside of the U.S. can
also be structured to be exempt from the liability provisions of the U.S.
Securities Act of 1933.
Mark P. Kronfeld
Diagram 1

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Outside of bankruptcy, so long as
the parent continues to pay its debts
there is no issue, but on the company’s
insolvency, the finance subsidiary bonds
will receive the benefit of a $2 billion
allowed claim against the parent—two
times the amount of the principal origi-
nally loaned.
The result is simple math: The par-
ent in essence is required to make two
distributions to the indenture trustee
for the bonds on account of the $1 bil-
lion claim: first, as a direct distribution
on account of the $1 billion guarantee
claim, and second, indirectly via the $1
billion intercompany claim, which flows
to the subsidiary and out to the subsid-
iary’s creditors (again, the bonds). Put
another way, because the guarantee
claim and the intercompany claim of an
equal amount are both allowed in full
against the parent and compete with the
parent’s other creditors on a pro-rata
basis, bondholders receive the benefit
of a $2 billion claim against the parent
for a $1 billion advance.
A recent example of this occurred in
Lehman Brothers. Prior to the petition
date, Lehman Brothers Treasury Co. BV
(LBT), a finance subsidiary, issued more
than $30 billion in notes and immediate-
ly upstreamed the proceeds to its parent,
Lehman Brothers Holdings Inc. (LBHI).
As in Diagram 1, the LBT notes were
guaranteed by LBHI. In the subsequent
insolvency proceedings, the LBT note-
holders asserted a direct claim on the
guarantee against LBHI and sought to
recover indirectly from LBHI on account
of the intercompany claim flowing to
LBT. Both claims were allowed pursu-
ant to the plan.5
Why Does the Double-Dip Work?
Why do the bondholders get the ben-
efit of two claims for a single advance?
First, when a primary obligor and a guar-
antor are liable on account of a single
claim, the claimant can assert a claim for
the full amount owed against each debtor
until the creditor is paid in full. This is a
function of applicable state law and the
Bankruptcy Code, which provides that
a claim must be allowed “in the amount
of such claim in lawful currency of the
United States as of the date of the filing
of the petition.”6
Post-petition payments
by a guarantor or obligor do not reduce
the claim against the other.7
The bonds
get a full $1 billion claim against the par-
ent and the subsidiary, regardless of any
partial recoveries received.
Second, absent substantive consoli-
dation,8
subordination or recharacteriza-
tion, claims resulting from unsecured
intercompany loans are generally entitled
to the same pro-rata distribution in bank-
ruptcy as every other unsecured claim.
Therefore, the $1 billion intercompany
claim is entitled to a distribution from the
parent’s bankruptcy estate,9
which distri-
bution flows down to the subsidiary and
out its bondholders.
Inanyinsolvencysituation,
nonborrowercreditsupportcarries
withitthepromiseofadditional
recoveriesagainstdifferentobligors.
Third, until the underlying creditor
is paid in full, the Bankruptcy Code
(via §§ 502 and 509) effectively disal-
lows and/or subordinates the guaran-
tor’s claim for reimbursement against
the principal obligor, making it impos-
sible for the guarantor to assert a claim
that competes with the recovery of the
principal creditor. In the parent compa-
ny/finance subsidiary structure previ-
ously discussed, the parent has a claim
against the subsidiary for reimburse-
ment to the extent it makes a payment
on the guarantee, and in the example,
that claim has not been waived in the
underlying documentation. Were that
claim allowed against the subsidiary,
it would set off against and reduce the
intercompany claim.10
Section 502(e)(1)(b) provides that
the guarantor is not entitled to an allowed
claim for reimbursement against the
principal obligor if such claim is “con-
tingent” (i.e., if the guarantor has not
paid on the guarantee). Moreover, even
if the guarantor pays a portion of the
amount due (rendering the claim no lon-
ger “contingent”), § 509(c) subordinates
the claim of the guarantor until the pri-
mary creditor is paid in full (either from
the debtor or from any other source).
Similarly, while § 509(a) provides that a
guarantor who pays a portion of the prin-
cipal claim can subrogate to the claim of
the original creditor (the indenture trust-
ee for the bonds), that subrogation right
is also subordinated to payment in full
of the underlying creditor. Because the
claim is disallowed (if contingent) and
subordinated (if not contingent), it can
never be set off against the intercompany
claim until the bonds are paid in full.
Possible Threats
Complications relating to guaran-
tees may impact the double-dip, and
the terms of the governing guarantee
must be examined. Is it a guarantee of
payment or collection? Is the guarantee
joint and several? Was the guarantee
(and/or intercompany transactions per-
formed) given prior to the expiration of
any applicable statutes of limitations for
fraudulent conveyance?11
The governing law under the guaran-
tee should also be examined, as well as
the law applicable to the entire structure.
The discussion above assumes applica-
tion of U.S. and state law generally, but
many finance subsidiaries are incorporat-
ed in foreign jurisdictions. If foreign law
applies to either the guarantee or inter-
company claim, the double-dip could be
jeopardized. For instance, certain juris-
dictions may, as a matter of law, subor-
dinate intercompany claims.
Risks of substantive consolidation
must also be analyzed because substan-
tive consolidation, if utilized by the
bankruptcy court, will eviscerate guar-
antees and intercompany claims. Under
the doctrine of substantive consolida-
tion, intercompany claims of the debtor
companies are eliminated, the assets of
all debtors are treated as common assets
and claims against any of the debtors are
treated as against the common fund.12
Courts analyzing substantive-consolida-
tion disputes have considered numerous
factors, including commonality of owner-
ship, directors and officers; whether sub-
sidiaries were inadequately capitalized;
the existence of separate employees and
businesses; the existence of corporate for-
malities; commingling of assets and func-
tions; the degree of difficulty in segregat-
ing assets and liabilities; and creditor
expectations. Substantive consolidation
of a U.S. entity and a foreign entity may,
however, pose particular challenges.
5 The plan ultimately provided that 20 percent of the allowed LBT guaran-
tee claim would be reallocated to other classes of creditors in connec-
tion with resolution of a dispute over substantive consolidation.
6 11 U.S.C. § 502(b).
7 In re Gessin, 668 F.2d 1105, 1107 (9th Cir. 1982) (creditor’s claim
against guarantor not reduced by amount received from principal debtor).
8 Courts generally, and absent certain exceptions, respect corporate for-
malities and the separateness of related or affiliated corporate entities.
9 Because the claims are held by two separate entities, the intercom-
pany claim and the guarantee claim should arguably be recognized as
distinct, allowable claims. See, e.g., Northwestern Mut. Life Ins. Co. v.
Delta Air Lines Inc. (In re Delta Air Lines Inc.), 608 F.3d 139 (2d Cir.
2010) (holding that claims of two creditors related to same underlying
facts were not duplicative because claims arose pursuant to separate
legal obligations and total recovery would not exceed 100 percent).
10 A subrogee under § 509 is entitled to assert § 553 setoff rights for post-
petition payments on a pre-petition guarantee. In re Jones Truck Lines
Inc. v. Target Stores, 196 B.R. 123, 129 (Bankr. W.D. Ark. 1996).
11 Pursuant to federal and applicable state law, guarantees can be avoided
as constructive fraudulent conveyances if the guarantor was insolvent
or rendered insolvent at the time it issued the guarantee and did not
receive reasonably equivalent value in exchange for issuing the guaran-
tee. 11 U.S.C §§ 544(b) and 548.
12 In re Augie/Restivo Baking Co. Ltd., 860 F.2d 515, 518 (2d Cir. 1988).

3. Other factual issues need to be under-
stood as well. When a finance subsidiary
is the issuer, the debt proceeds are typi-
cally transferred to another entity such
as the parent. The means by which the
transfer is made must be examined as
part of the double-dip analysis. Upstream
dividends and/or downstream capital
infusions will generally not give rise to
intercompany claims. If there is no inter-
company claim, there is no double-dip.
However, to the extent any “divi-
dends” or “capital infusions” take
place within the applicable statute of
limitations, they may be avoidable as a
fraudulent conveyance giving rise to an
intercompany claim, thereby creating a
double-dip. In fact, a claim against the
debtor recipient of the debt proceeds by
virtue of a fraudulent conveyance may
be superior to a claim arising under an
intercompany loan where the fraudulent
conveyance is treated as a general unse-
cured claim but the intercompany claim
might have been deemed subordinated
or recharacterized.
Moreover, even if the intercompany
transfers appear as a “loan” on the inter-
company ledger, its terms should be
ascertained to understand any risk that
the bankruptcy court might recharacter-
ize the intercompany transaction.13
In
particular, the rights and obligations of
the counterparties to the intercompany
transaction should be analyzed. In the
Smurfit-Stone cross-border proceeding,
the Canadian court held that although
the intercompany claim upon which
bondholders relied for a portion of their
“double” recovery was clearly a “loan”
in the general sense, it was nonetheless
not a basis for a double-dip recovery
because the terms of the intercompany
loan stated that upon an insolvency pro-
ceeding, the “loan” would be repaid in
valueless equity.14
Equally important is the tracing of
the amount and flow of funds. Diagram
2 presents a variation on the double-dip
theme. The facts are similar to those in the
first scheme, but instead of transferring
the $1 billion to the parent (a guarantor),
the finance subsidiary has transferred the
cash to a nonguarantor debtor affiliate.
Although the recovery on the inter-
company claim still results in distribu-
tion to the subsidiary for the benefit of
bondholders, the claim is diluted by
the nonguarantors’ other creditors,
resulting in less than a true double-dip.
Obviously, if the nonguarantor subsid-
iary was solvent or made a larger distri-
bution, bondholders could recover more
than 2x, but regardless, the true double-
dip is jeopardized when the cash flows
out to a nonguarantor.
Leakage could also result if the
finance subsidiary/principal obligor has
additional third-party creditors (such
creditors will dilute recovery on account
of the principal claim against the financ-
ing subsidiary). Note that even if there
are no creditors on the subsidiary bal-
ance sheet, and even if the subsidiary’s
documents preclude the incurrence
of additional debt, the entire capital
structure needs to be understood. For
example, is there a large underfunded
pension, and is the pension likely to be
the subject of a distress termination in
bankruptcy? If so, the Pension Benefit
Guaranty Corp. may attempt to assert a
claim against the subsidiary.15
Conclusion
In any insolvency situation, nonbor-
rower credit support carries with it the
promise of additional recoveries against
different obligors. Creditors with the
benefit of guarantees (and investors
determining what securities to buy)
should carefully examine the applicable
facts and law to determine whether any
variety of double-dip exists and whether
it will enhance recoveries. n
Reprinted with permission from the ABI
Journal, Vol. XXXI, No. 2, March 2012.
The American Bankruptcy Institute is a
multi-disciplinary, nonpartisan organization
devoted to bankruptcy issues. ABI has
more than 13,000 members, representing
all facets of the insolvency field. For more
information, visit ABI World at www.
abiworld.org.
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Diagram 2
13 The bankruptcy court will attempt “to discern whether the parties called
an instrument one thing when in fact they intended it as something
else.” Cohen v. KB Mezzanine Fund II LP (In re SubMicron Sys. Corp.),
291 B.R. 314, 323 (D. Del. 2003), aff’d, 432 F.3d 448 (3d Cir. 2006).
14 In re Smurfit-Stone Container Corp., Case No. 09-10235 (BLS) (Bankr.
D. Del. Feb. 4, 2010) [Docket No. 4735]. It has been asserted that
where the principal obligor is a Canadian unlimited liability com-
pany (ULC), § 135 of the Nova Scotia Act Representing Joint Stock
Companies may provide for an independent claim against the ULC’s
parent entity. The nature of the § 135 claim and the “triple-dip” sce-
nario is beyond the scope of this article.
15 Pursuant to the Employee Retirement Income Security Act, each mem-
ber of a “controlled group” that is engaged in a trade or business is
jointly and severally liable for the pension-related liabilities of the other
members of the controlled group.