Enforcement of Intercreditor Agreements in Recent Disputes Among Creditors in Bankruptcy

Section 510(a) of the Bankruptcy Code upholds subordination agreements entered into between lenders prior to bankruptcy but does not operate as a complete bar to lender disputes. Ambiguity in intercreditor agreements may pose potential problems concerning waiver of rights to object during bankruptcy. How courts have considered intercreditor agreements in recent disputes among creditors in bankruptcy is examined by Professor Jennifer Martin.


Enforceability of pre-petition intercreditor agreements in bankruptcy has drawn more attention with the increase in restructurings in bankruptcy in the wake of a troubled business climate. Of course, first priority lenders and second priority lenders both desire protection during a restructuring. Not surprisingly, many lending arrangements involving multiple lenders take into account the potential of disputes and bankruptcy. Section 510(a) of the Bankruptcy Code upholds these arrangements, providing that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." When it comes to subordination agreements during bankruptcy reorganizations, though, this provision must be read alongside the power of the bankruptcy court to confirm plans under § 1129, approve sales under § 363(b), and the mandate that the court appoint examiners in certain cases under § 1104(c). Accordingly, whether, and to what extent, an intercreditor agreement falls under the protections of § 510(a) and the authority of the bankruptcy court under other provisions has been the subject of several recent cases illustrating the limits of parties' abilities to make arrangements prior to bankruptcy.

While a court may conclude that a second priority lender has standing to object to a proposed sale of assets despite the existence of an intercreditor agreement, that does not mean that the lender will be able to prevent a sale that is supported by "good business reason[s]." In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010) [an enhanced version of this opinion is available to lexis.com subscribers], concerned a proposed sale of assets in bankruptcy of a power plant that provides electricity to the Boston, Massachusetts area to a buyer who would take the assets free and clear of creditors' claims. The creditors consisted of first lien holders, second lien holders, and unsecured creditors. The dispute arose when the debtor filed a motion to approve the sale and the second priority lenders and unsecured creditors objected to the sale to the buyer.

No Express Waiver of Right to Object to Sale in Agreement

The first lien holders claimed that the second lien holders lacked standing to complain about the sale of the assets because they had waived their rights in an intercreditor agreement that governed the relationship between and among the secured parties. Two provisions of the agreement were critical to the dispute. First, the intercreditor agreement provided that the first lien holders would have the exclusive right to enforce rights and make determinations regarding the collateral without further consultations with the second lien holders. Second, the intercreditor agreement further provided that until the debtor paid the first lien holders in full, the sole right of the second lien holders was to hold a lien on the collateral and receive payment after the discharge of the obligations to the first lien holders. While the court agreed that the intercreditor agreement was a subordination agreement for purposes of § 510(a), the court disagreed with the first lien holders as to the ability of the second lien holders to object to the sale, finding that the second lien holders had not waived their rights to object. The court noted that the intercreditor agreement did not contain "some provision that reflects an express or intentional waiver of rights." In re Boston Generating, LLC, 440 B.R. 302, 319 (Bankr. S.D.N.Y. 2010). Quite simply, the court would not find an express waiver where the intercreditor agreement did not contain one.

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