from seeking adequate protection of their collateral through
avenues like replacement liens on post-petition collateral or
periodic payments. At a minimum, they should provide that
your prior consent is required for any such undertaking.
Restricting subordinate lenders’ ability to seek relief
from the automatic stay or adequate protection helps ensure
that you don’t have to incur the expense of defending your
rights, which they already agreed are superior to theirs. It
also undercuts a common tactic for secured lenders to exert
control over a debtor and its exit strategy, and helps keep cash
in the estate for other uses, namely paying you.
Chapter 11 Plans
To confirm a plan under which one or more classes of
claims is impaired (not paid in full), at least one impaired,
non-insider class must accept it.
2 This is Congress’s way of
saying, “It’s okay to short everybody as long as somebody
getting shorted is OK with it.” Recognizing this, intercreditor
agreements should provide that you have the authority to
vote subordinate lenders’ claims for (or against) any plan or,
alternatively, direct subordinate lenders to vote however you
instruct. Thus, if you find yourself with a plan under which
you’re unimpaired (paid in full), your subordinate lender —
who’s getting two cents on the dollar, by the way — nevertheless will have to help deliver that impaired, consenting class
necessary for confirmation.
Controlling voting is just the start. A debtor has the exclusive right to propose a plan of reorganization during the first
120 days of a Chapter 11 filing,
3 after which almost anybody
can propose one. Intercreditor agreements should prohibit
subordinate lenders from proposing their own plans or only
allow this with your consent to the terms of the plan itself.
Intercreditor agreements also should contemplate the possibility of you proposing a plan (even one conveying the simple
message, “I get everything,” through 50 pages of masterful
legalese), by providing that subordinate lenders will support
— with a smile — any plan you propose.
Proofs of Claim
Intercreditor agreements should authorize you to file proofs of
claim on behalf of subordinate lenders and provide for their
full cooperation in the process. This is important. If a subordinate lender drops the ball on filing a proof of claim, then > >
2 11 U. S.C. § 1129(a)( 10)
3 11 U. S.C. § 1121(b)
Growing up, our family abided by the mandate, “sit down and shut up.” For example: “But Mom, I don’t want meatloaf for dinner!”
“Sit down and shut up.”
“Mind your own business” seldom lagged far
behind. Case in point:
“Mom, you should tell your friend to stop smoking
Pall Malls around her oxygen tank.”
“Mind your own business.”
Ultimately, the mandates weren’t bad. I’ve gone
further in life just by sitting down, shutting up and
minding my own business than by doing virtually
anything else. Not surprisingly, the mandates apply to
asset-based lending, particularly when you’re forced to
share a borrower with subordinate lenders. Controlling
these meddlesome bedfellows is critical, especially in
bankruptcy where those emboldened with a “nothing-
to-lose” attitude can undermine you. A good intercred-
itor agreement goes a long way toward getting these
folks to sit down, shut up and mind their own business.
Intercreditor agreements come in all shapes and
sizes. Just when lawyers think they’ve seen the most
draconian one ever, some grizzled loan officer conjures
up new and innovative terms to shock the conscience
(Believe me; law firms aren’t driving this sort of progress
in financial neutering). Here are the essentials you’ll
want in your intercreditor agreement when the bankruptcy soiree gets underway.
Automatic Stay/Adequate Protection
Intercreditor agreements should forbid subordinate
lenders from seeking relief from the bankruptcy stay or
1 These are in addition to standard debt and lien subordination provisions,
which are not unique to bankruptcy.
Sit Down, Shut Up and Mind Your Own Business:
Controlling Subordinate Lenders in Bankruptcy
BY ROCCO I. DEBITETTO
As the senior lender, your rights to recoup your funds should be top priority during bankruptcy proceedings.
But those pesky subordinate lenders often get in the way. Rocco I. Debitetto explains the best way to craft
an intercreditor agreement that forces subordinate lenders to “sit down, shut up and mind their own business”
until you get paid.
Restricting subordinate lenders’ ability to seek
relief from the automatic stay or adequate
protection helps ensure that you don’t have to incur
the expense of defending your rights, which they
already agreed are superior to theirs.
ROCCO I. DEBI TE T TO
Hahn Loeser & Parks