What are some examples of pro rata in bankruptcy law?
Examples of Pro-Rata in Bankruptcy Law
Pro-rata is a distribution method that works among similarly situated Creditors. It determines how much of a bankruptcy estate a Creditor can receive. It also takes into account the total claim size of the Creditor class. The amount that each Creditor receives depends on the size of their allowed bankruptcy claims.
Transfers of specifically identifiable commodity contracts
One example of pro-rata in bankruptcy law involves transfers of specifically identifiable commodity contracts. This type of transfer involves the division of the total amount of property held in a commodity contract by the number of units in that commodity contract. The transfers can be one or more.
Pro rata distribution is a central theme in the Bankruptcy Code's commodity broker provisions, which are located in chapter 7. Under this section, public customers of commodity brokers can share in the shortfall if there is a difference between the value of their property and the value of their shares. Pro-rata guidelines are set forth in appendix B of this part of the code.
Pro-rata also applies to transfers of publicly identifiable commodity contracts. In this case, the trustee transfers the positions in the commodity contract based on the number of customers who have open commodity contracts. The value of the commodities must be determined using the last market day's realizable market value, which includes accrued interest.
Government tax claims
The bankruptcy priority order gives government tax claims top priority, but only if they're unsecured. Other types of government claims do not get priority under bankruptcy law. For example, a statutory tax lien from a tax collector is a secured claim and does not receive top priority, so tax claims don't get the top spot.
Transfers of equity security interest holders
In bankruptcy law, the transfer of an equity security interest may occur pro rata. However, the transferee does not have to pay the debtor the entire amount. For example, a debtor can make a payment to the transferee of pennies on the dollar. Afterward, the remaining debt is discharged.
Preference transfer law has long been a source of significant controversy. Creditors have consistently objected to the trustee's ability to reverse such transfers. But the trustee's power is limited to transfers made in the 90-day period prior to the filing of the bankruptcy petition. This is particularly disconcerting to non-repeat bankruptcy players.
The pro-rata rule is an important feature of bankruptcy law. It helps to avoid the unjust treatment of creditors. The law does not require creditors to share equally in the estate, but it does ensure that similar creditors receive a fair share.
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