Priority Claims in Chapter 11: Understanding the Hierarchy

In Chapter 11 bankruptcy, a priority claim refers to a debt that is entitled to special treatment and will be paid before non-priority claims. The Bankruptcy Code establishes a hierarchy of claims, with higher priority claims being paid first. 124

Types of Priority Claims:

1. Secured Claims: These are claims where the creditor has a lien on some collateral. Examples include mortgages and secured loans. 14
2. Priority Unsecured Claims: These include expenses of administration, maintenance and support claims, unsecured tax claims of the government, and certain employee claims. 134
3. Super Priority Claims: These are claims that have a higher priority than even secured claims, such as Debtor-in-Possession (DIP) financing, which is short-term post-petition financing provided to the debtor. 15

Key Principles:

• Absolute Priority Rule (APR): This rule dictates that higher priority claims must be paid in full before lower priority claims can receive any recovery. 125
• Hierarchy of Payments: The order of payment is as follows: DIP loans, secured claims, priority unsecured claims, general unsecured claims, and finally, equity holders. 145

Understanding the priority of claims is crucial for both debtors and creditors in a Chapter 11 case, as it determines the extent to which creditors can expect to be paid under a confirmed Chapter 11 plan.