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Copyright (c) 2002 National Conference of Bankruptcy Judges
The American Bankruptcy Law Journal

ARTICLE: Almost all you Ever Wanted to Know About Carve Out *

* Homage a Klee. This piece, however, might not be so comprehensive as the Professor's well-known article on another "uniquely bankruptcy phrase." See Kenneth N. Klee, All You Ever Wanted to Know About Cram Down, 53 Am. Bankr. L.J. 133 (1979). On the other hand, Professor Klee later wrote Cram Down II, 64 Am. Bankr. L.J. 229 (1990).

Summer, 2002

76 Am. Bankr. L.J. 445


by Richard B. Levin **


"Carve out" is often used in cash collateral and debtor in possession financing agreements as though the term imports an entire body of substantive content. Unlike "cram down," however, which has a relatively well-defined meaning derived from 1129(b) of the Bankruptcy Code, 1 "carve out" does not derive its substance from any particular section of the Bankruptcy Code.

As generally used, a carve out is an agreement between a secured lender, on the one hand, and the trustee or debtor in possession (both referred to as "debtor" in this Article), on the other, providing that a portion of the secured creditor's collateral may be used to pay administrative expenses. 2 The agreement, which is subject to court approval, usually limits the nature, amount, and timing of expenses covered, often by reference to a budget. For example, the carve out in a debtor in possession financing order may be limited to professional fees for the debtor, for the committee, and for a superseding trustee. The carve out will usually be limited to a maximum amount, and its continuing availability may be conditioned on the occurrence or nonoccurrence of an event, such as a default under the financing documents. Until the event, the debtor may pay administrative expenses from its operating cash flow.

Carve out agreements seldom address the way the carve out should operate when it is most needed, that is, when the debtor's operating cash flow and unencumbered assets are inadequate to pay ...
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