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Treatment of “Double Dips” in Bankruptcy: Does Section 502(e)(1)(B) Disallow the Second Dip?

By James H. Millar¹
February 7, 2025

One of the financing devices getting some recent press is the so-called “double dip”—the ability of a creditor to have two claims against a bankruptcy debtor to recover the amount owed on a single debt. Two claims, of course, means that a double-dipping creditor would receive twice the recovery as compared to other creditors of equal rank. The question often arises, however, whether double dips should be respected in a bankruptcy case.

While there are plenty of articles and webinars out there that analyze the application of various other theories to contest a double dip in a bankruptcy case, in this piece, we consider the application of Section 502(e)(1)(B) to double dips. Section 502(e)(1)(B) by its very terms and underlying purpose seeks to disallow redundant claims against a debtor. It advances a fundamental principle of the Bankruptcy Code—to promote equitable distribution among all creditors of the same class.

In that light, it seems that this section may well be applicable to the double dips that arise in recent efforts at financial engineering. So let’s dive into an explanation of double dips and Section 502(e)(1)(B). Then we’ll turn to an application of that section to double dips.

What is a Double DIP?

Simply put, a double dip is a financing structure that provides for two claims against a company to repay a single debt. In the first instance, one might reasonably ask: why do I need two dips? As long as the company pays my debt in full, what’s the big deal?

In a solvent situation, the answer of course is that one dip is plenty—payment in full is all a creditor is entitled to receive. But imagine an insolvent situation. Let’s say a company is a debtor in bankruptcy and, within its bankruptcy case, is going to pay only 40 cents on the dollar as a distribution on claims. If a creditor has two claims, each of which receives 40 cents, that’s 80 cents on the dollar and twice the return as everyone else. And since the amount of distributable value does not increase, this additional recovery comes at the expense of the other creditors. In sum, the double dip, if respected, would provide a tremendous benefit to the double-dip creditor in the insolvency of the company.

Let’s look at a hypothetical for a simple double dip structure to see how it works.² Imagine that OpCo wants to issue new debt in the principal face amount of $250 million that provides for a double dip against OpCo. In the first instance, OpCo drops down a subsidiary, DipCo. Next, DipCo issues $250 million in debt to the lenders that is secured by all the assets of DipCo. Also, of critical importance, OpCo provides a guarantee of that new debt. If we were to stop right there, the lenders have two claims—a secured claim against DipCo on the new debt and another claim (presume it is secured) against OpCo on the guarantee. So far, so good.

DipCo, however, is a special purpose vehicle set up for just this financing maneuver. Its only asset is the $250 million received from the lenders on account of the issuance of new debt. It doesn’t have any other assets, liabilities, employees or operations. So what does it do with that $250 million?

DipCo upstreams the $250 million to OpCo pursuant to a separate intercompany loan agreement. DipCo then holds a $250 million receivable from OpCo and has a $250 million payable owed to the lenders—and nothing else. For good measure, the lenders have a security interest over the receivable from OpCo so that they are sure to receive any payments made by OpCo on that receivable. In practice, the $250 might not even be deposited in DipCo’s bank account (if it even has one). Rather, as far as flow of funds, the $250 million might go from the lenders directly to OpCo. Suffice to say that the $250 million in loan proceeds ends up almost immediately with OpCo.

Here’s a picture of this structure:

Now, we’ll consider what happens if OpCo goes into bankruptcy. As we see from the picture, there are two claims against OpCo that benefit the lenders. The first is the direct claim by the lenders based on the guarantee. The second is the claim by DipCo on the intercompany loan agreement. Proceeds from that second claim are immediately captured by the lenders as well.

To make it interesting, assume that OpCo also has another $250 million of senior secured debt and all debt shares pari passu. And assume that OpCo is worth $300 million. Absent the double dip, all lenders would be treated equally and receive a recovery of 60 cents on the dollar. But, if a double dip were permitted, the recovery to the double dip creditors increases to 80 cents on the dollar while the recovery to the other secured lenders drops to 40 cents on the dollar. In the event of a double dip, there are $750 million of claims against a company only valued at $300 million meaning that each claim is going to receive distribution of 40 cents on the dollar. Here’s what everyone gets from OpCo:

• Lenders based on guarantee of $250 million: $100 million
• DipCo based on intercompany loan of $250 million: $100 million
• Other debt of $250 million: $100 million

The lenders receive $100 million from OpCo directly. But they also have a claim against DipCo and thereby recover the $100 million from DipCo that it received from OpCo. In total, the lenders have received $200 million—or 80 cents on the dollar—on their $250 million debt. The other claimants of equal rank receive only 40 cents on the dollar, or $100 million. The double dip works in that hypothetical; the lenders are happy; the other creditors are disgruntled.

But will that structure actually be respected in bankruptcy? Can it be this easy to get double what everyone else receives? Next, we’ll turn to Section 502(e)(1)(B) of the Bankruptcy Code.

What is Section 502(e)(1)(B) of the Bankruptcy Code?

Before we get to the text of the statute, let’s cut to the chase: the primary purpose of Section 502(e)(1)(B) of the Bankruptcy Code is to prevent “double-dipping” against the bankruptcy estate.³ As the First Circuit stated: “The sole purpose served by section 502(e)(1)(B) is to preclude redundant recoveries on identical claims against insolvent estates in violation of the fundamental Code policy fostering equitable distribution among all creditors of the same class.”⁴ The legislative history likewise notes that Section 502(e)(1)(B) “prevents competition between a creditor and his guarantor for the limited proceeds in the estate.”⁵

Consider the paradigmatic example of the guarantor relationship. OpCo issues debt to the lenders in the amount of $250 million. That debt is guaranteed by another entity, GuaranteeCo. In the event Guarantee Co. ever has to make good on the guarantee, it has a claim for reimbursement back against OpCo.

We can illustrate the typical guarantor relationship as follows:

Looking at this figure, one can easily see the potential for two claims against OpCo if OpCo were to file bankruptcy. First, the lenders would make a claim based on the underlying debt for $250 million. Next, GuaranteeCo would make a contingent claim for $250 million based on its reimbursement right against OpCo. In other words, if GuaranteeCo has to pay the lenders, GuaranteeCo would seek to recover from OpCO based on its right to reimbursement. Section 502(e)(1)(B), however, prevents this double counting of claims against the estate.

Section 502(e)(1)(B) of the Bankruptcy Code requires that a bankruptcy court “disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that . . . such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim.”⁶ Boiling down the statutory text, for a claim to be disallowed under this section, three elements must be shown:

• Co-liability — the party asserting the claim must be liable with the debtor on the claim of a third party;
• Contingency — the claim must be contingent at the time of its allowance or disallowance; and
• Reimbursement or Contribution — the claim must be for reimbursement or contribution.⁷

We see that each of these elements is satisfied in our guarantor example. First, OpCo and GuaranteeCo are both liable to the lenders on the underlying debt, thus establishing the co-liability element. Second, the claim by GuaranteeCo against OpCo is contingent, with the contingency being whether GuaranteeCo actually has to payout on the guarantee. Third, GuaranteeCo’s claim against OpCo is the classic claim for reimbursement. With all those elements satisfied, Section 502(e)(1)(B) would disallow GuaranteeCo’s claim against Opco.

Application of Section 502(e)(1)(B) to Double Dips

Before getting into the specific elements, we’ll first compare the pictorial representations of the simple double dip and the guarantee situation.

As we see, the situations are similar. First, in both instances, the lender lends the money to OpCo, the ultimate recipient. In the double dip situation, the money supposedly passes through DipCo, but only for an instant. (And again, in practice, the money might flow directly from the lenders to OpCo.)

Second, the lenders have two claims, one against OpCo and one against the other entity (either GuaranteeCo or DipCo, as the case may be). The claim against OpCo is denominated a “guarantee” in the double dip situation, but call it whatever you want, it is a direct claim against OpCo for payment of the debt to the lenders.

Third, the other entity (GuaranteeCo or DipCo) has a claim against OpCo, for which it would use the funds to repay the lenders. In the guarantee situation, the claim is a reimbursement claim (which may or may not be the subject of a separate agreement). In the double dip situation, the claim is a claim on a receivable for money purportedly lent to OpCo.

Of critical importance, the substance looks very similar: the lenders have made a loan ultimately to OpCo for which they may look to OpCo and the other entity for repayment. The documents just call it something different. Should that be enough to take it outside the scope of Section 502(e)(1)(B)?

We’ve all heard about courts looking through the form to the substance of a transaction.⁸ Courts also look to the economic reality of a situation as opposed to “dictionary definitions and formalistic labels.”⁹ A willingness of a court to look past labels—to the substance as opposed to the form—would be critical in determining whether to disallow the double dip as violative of Section 502(e)(1)(B).

Here, a court might look at this situation in substance to be a loan to OpCo guaranteed by DipCo. While the documents are labeled as something other than a loan to OpCo guaranteed by DipCo, the substance shows that the situations are entirely similar. Moreover, it may well be that the situation was engineered to allow for a double dip, expressly contrary to the equitable considerations of the Bankruptcy Code.

That said, let’s take a look at the specific elements of disallowance under Section 502(e)(1)(b).

Co-liability

For co-liability to exist, the party asserting the claim against the debtor must be liable with the debtor on the claim of a third party. Here, the party asserting the claim at issue in the double dip situation is DipCo. So we ask the question: Is DipCo liable with the debtor OpCo on the claim of a third party? The answer is clearly “yes.” Both DipCo and OpCo are liable to the lenders on the underlying debt—DipCo as the issuer of the debt and OpCo as the guarantor.

Contingency

For this element, the claim at issue—i.e. DipCo’s claim against OpCo—must be contingent at the time of its allowance or disallowance. This element can get tricky, as determining whether a claim is or is not “contingent” for the purposes of Section 502(e)(1)(B) can be quite nuanced. In the typical guarantee situation, “[t]he law is clear that ‘[t]he contingency contemplated by [section] 502(e)(1)(B) relates to both payment and liability.’ … Therefore, a claimant’s ‘claim is contingent until their liability is established … and the co-debtor has paid the creditor.’”¹⁰

When we apply that rule of law to the guarantee situation, the result is clear. GuaranteeCo has a reimbursement claim against OpCo if and to the extent it pays any money on its guarantee in favor of the lenders. That reimbursement claim, according to the courts, is contingent until GuaranteeCo actually makes payment to the lenders.

The contingency element in the double dip situation is less clear. We have to look at what the documents say. But also we have to look at the realities of the situation.

First, under the documents, does DipCo hold a non-contingent-on-its-face note that it can assert against OpCo? In other words, under the documents, is DipCo able to claim the $250 million against OpCo irrespective of whether it uses that money to repay the lenders and irrespective of whether OpCo has already paid the lenders? Or, rather, are there conditions of any sort in the underlying agreements that limit the situations in which DipCo may assert its claim against OpCo? The takeaway is that any underlying documents should be examined to see if there are any patent contingencies to OpCo’s obligation to pay DipCo.

Next, a court would likely consider the economic realities of the situation—are there in fact any contingencies surrounding DipCo’s claim. One might ask the questions: Would there ever be a situation where DipCo could get the money from OpCo and use it for something else other than payment of the debt owed the lenders? And could that situation exist if OpCo had already paid the lenders based on the guarantee? This approach probably takes testimony from those at the company and other circumstantial evidence to determine if the debt to DipCo would ever be paid in a scenario other than to repay the lenders.

The questions (and surely many others of the sort) would seek to get at the underlying intent of the parties. Is OpCo liable to DipCo if and only if DipCo has to pay the lenders? If that’s the case, it looks much more like DipCo holds a contingent claim against OpCo just the same as in the guarantee situation.

Reimbursement or Contribution

The final element addresses whether the claim is one for reimbursement or contribution. Given that “contribution” is a word associated with the law of torts,¹¹ we’ll focus on the word “reimbursement.” As we see, courts read the term “reimbursement” to encompass a broad spectrum of claims.

The use of the word “reimbursement” in the statute cannot be viewed as accidental. It is a broad word which encompasses whatever claims a codebtor has which entitle him to be made whole for monies he has expended on account of a debt for which he and the debtor are both liable. Had Congress meant to limit section 502(e)(1)(B) to claims for indemnification, it could easily have said so. To hold that [ ] direct claims for fraud and breach of contract seeking the same relief as the claims for indemnity or contribution are not claims for reimbursement would emasculate section 502(e)(1)(B).¹²

Regardless of the label, a claim will be characterized as a reimbursement claim if “in substance it seeks from the debtor the repayment of money that [the other entity] has expended on account of a debt for which they are both liable.¹³ If the other elements of Section 502(e)(1)(B) are satisfied, one would not expect this element to erect a bar to disallowance of the claim.

Conclusion

Section 502(e)(1)(B) of the Bankruptcy Code seeks to disallow multiple claims that seek to repay a single debt—the so-called “double dip.” It is meant to codify the equitable notion of fairness among creditors and equality of distribution. By its statutory terms, however, it is limited to contingent claims for reimbursement or contribution.

While a Court has never ruled on the applicability of Section 502(e)(1)(B) to a double-dip financing to the author’s knowledge, Section 502(e)(1)(B) may well have application to the financing double dip world.¹⁴ If a court were to look through the form to the substance and economic reality of a given situation, it could use this section to prevent the double dip. Moreover, by its very terms, Section 502(e)(1)(B) may apply.

The foregoing analysis focuses on the simple double dip structure. In practice, a double dip may be much more complex, with additional entities and correspondent claims entering the mix. That said, one always has to be on the lookout for a claimant seeking a double-dip recovery. In that circumstance, Section 502(e)(1)(B) may present a statutory obstacle to double dips.

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1 *James H. Millar is a corporate restructuring partner at Faegre Drinker Biddle & Reath LLP, resident in the New York office.

2 For a good summary of double dip structures, see generally Fallout From Liability Management Exercises: Double Dip and Pari Plus Fights In and Out of Bankruptcy (Published on Reorg Nov. 15, 2023), https://app.reorg.com/file/1240334/Reorg+Webinar%3A+Fallout+From+Liability+Management+Exercises%3A+Double+Dip+and+Pari+Plus+Fights+In+and+Out+of+Bankruptcy-18-10-17-6527.pdf

3 Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 923 (1st Cir.1993). See also, e.g., In re Alta Mesa Res., Inc., Case No. 19-35133, 2022 WL 17984306, at *4 (Bankr. S.D. Tex. December 28, 2022) (reading statute to avoid “double payment result”); In re Lyondell Chem. Co., 442 B.R. 236, 253 (Bankr. S.D.N.Y. 2011) (“As we all know, section 502(e)(1)(B) serves the important purpose of avoiding redundant recoveries.”). Courts also recognize another purpose, which is to allow for the “expeditious resolution of issues so as not to burden the estate by claims which have not come to fruition.” E.g., In re Lull Corp., 162 B.R. 234, 236 (D. Minn. 1993)

4 In re Hemingway Transp., Inc., 993 F.2d at 923.

5 H.R. Rep. No. 595, 95th Cong., 1st Sess., at 354 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6310; S. Rep. No. 989, 95th Cong., 2d Sess., at 65 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5851.

6 11 U.S.C. § 502(e)(1)(B).

7 In re Lyondell Chem. Co., 442 B.R. at 243.

8 See, e.g., In re Lyondell Chem. Co., 442 B.R. at 257 (stating courts look at substance over form).

9 Ultra Petroleum Corp. v. Ad Hoc Comm. of Opco Unsecured Creditors (In re Ultra Petroleum Corp.), 51 F.4th 138, 147 (5th Cir. 2022).

10 In re Lyondell Chem. Co., 442 B.R. at 249 (quoting In re APCO Liquidating Trust, 370 B.R. 625, 636

(Bankr. D. Del. 2007) (internal citations omitted) (quoting In re Drexel Burnham Lambert Grp. Inc., 148 B.R. 982,

987 (Bankr. S.D.N.Y. 1992))). See also In re Lull Corp., 162 B.R. at 236, 239 (D. Minn. 1993) (“A contingent claim is a claim which has not yet accrued and which is dependant upon some future event that may never happen. Therefore, the contingency relates to both payment and liability.”) (internal quotations and citation omitted).

11 In re Wedtech Corp., 87 B.R. 279, 283 (Bankr. S.D.N.Y. 1988).

12 Route 21 Assocs. Of Belleville, Inc. v. MHC, Inc., 486 B.R. 75, 95 (S.D.N.Y. 2012) (quoting In re Wedtech Corp., 87 B.R. at 287).

13 Id.

14 The Author is aware of at least one other case that has presented these arguments to the Court though none were ruled on. See Motors Liquidation Company GUC Trust v. Appaloosa Investment Limited Partnership, 12-09802, U.S. Bankr. Ct. SDNY (2012).

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The views of our Contributors should not be attributed to their respective firms or the Creditor Rights Coalition. In addition, the Coalition may take positions as part of its Advocacy efforts that do not necessarily reflect the view of Contributors and should not be attributed to any Contributor.