-
20% of the equity went immediately to secured lenders in exchange for releasing DIP claims,
-
The remaining equity would be distributed only after resolving an adversary action from unsecured creditors seeking to invalidate and claw back liens held by secured lenders.
Judge Isgur’s Ruling: Unsecured Creditors Take Majority
Isgur later ruled that certain liens were potentially subject to clawback, and that the value of those clawback claims had to be folded into Mesquite’s total equity valuation. That calculation gave unsecured creditors 70% of the claims—and therefore 70% of the equity.
Secured lenders countered that the liens were worthless because they had been subordinated to the released DIP claims, and therefore could not be valued as clawback assets.
Fifth Circuit Rebuke: “Value or Property, Not Both”
On May 30, a Fifth Circuit panel agreed with the secured creditors, concluding:
-
The disputed liens were not subject to clawback.
-
Even if they were, the bankruptcy estate had already recovered the liens, meaning the unsecured creditors could not claim both the property and its purported value.
The panel relied on Section 550(a) of the Bankruptcy Code, which allows a bankruptcy estate to recover either property or its value—but not both—rejecting Isgur’s broader interpretation.
