air ball after an underwhelming sale, cannot impede a transaction that
otherwise generates a meaningful return for you.
Shut Down the Allies
Desperate subordinate lenders often recruit unlikely allies to fight wars
for them. This includes Chapter 11 trustees or examiners who might
not share a debtor’s philosophy that one’s sole mission in life is to
pay senior lenders (particularly those holding personal guaranties) in
full. Intercreditor agreements accordingly should prohibit subordinate
lenders from seeking or supporting the appointment of Chapter 11
trustees or examiners of any kind.
No 1111(b) Elections
Subject to limited exceptions, an under-secured creditor may elect to
have its entire claim treated as fully secured under a plan.
belaboring what’s infamously known as the “1111(b) election,” suffice
it to say that, if exercised, it can dramatically alter the landscape of
what otherwise should be a confirmable plan (and potentially a plan
you support). Pluck this arrow from your subordinate lender’s quiver
by prohibiting 1111(b) elections.
Payment Termination and Turnover
Should you find yourself in a situation where you have to swallow
hard and allow a subordinate lender to receive some sort of payments
to book a deal, your intercreditor agreement nevertheless should
provide that this charity stops in bankruptcy. It also should provide
that any payments received by a subordinate lender in violation of
the agreement, for example adequate protection payments or collateral
proceeds, are held in trust by them for your benefit and bear interest.
A trust relationship generally cannot be created unless the borrower
also is a party to your agreement. If you cannot secure the borrower as
a party, then your agreement should provide that prohibited payments
will be applied by the subordinate lender to its debt and then turned
over to you. The subordinate lender should then be subrogated to your
rights under your loan for exercise only after you are paid in full.
A Note on Enforceability
In bankruptcy, “[a] subordination agreement is enforceable . . . to the
same extent that such agreement is enforceable under [state] law.”
is significant because “subordination agreement” doesn’t necessarily
mean “intercreditor agreement with subordination provisions [and a
buffet of pro-senior terms].” Should that stop you from including them?
Probably not. But at least know that these terms, which are “ancillary”
to traditional debt and lien subordination, have been questioned and,
in some cases, not enforced by bankruptcy courts.
To help enhance the enforceability of your intercreditor agreement,
do three things: First, make sure the agreement contains choice-of-law provisions, selecting the state law most favorable for enforcement,
particularly as it relates to those “ancillary” terms nearest and dearest
to you. Second, if possible, make the borrower a party to the agreement. Finally, ensure that the agreement is clear and unambiguous.
Ambiguity is a way subordinate lenders commonly escape the enforcement of the agreement in bankruptcy court.
Hopefully now you’ll have no problem getting subordinate lenders
to sit down, shut up and mind their own business in bankruptcy. If
they don’t, just call my mom. She’ll hit them on the head with a spoon
I love that woman. abfj
ROCCO I. DEBI TE T TO is a partner at Hahn, Loeser & Parks, and not the son
of the woman in the photograph.
5 11 U.S.C. § 1111(b)( 1)(A)(i).
6 11 U.S.C. § 510(a)
it might not be entitled to vote on the plan, nullifying any right you
have to cast or control that vote.
No Pursuit of Claims
When a borrower files for bankruptcy, all parties’ liens and claims,
including those of senior lenders, are subject to scrutiny by the
debtor and all other creditors and interested parties, such as
creditors’ committees. You can preemptively restrict at least one of these
parties by forbidding subordinate lenders from investigating or challenging the nature, extent, validity or priority of your liens and claims,
including by financing, joining in, supporting or accepting any benefit
from any such investigation or challenge. You similarly should forbid
asserting any claim or cause of action against you in the bankruptcy,
such as avoidance actions (preference claims) under Chapter 5 of the
DIP Financing/Cash Collateral
Perhaps the most opportune time for senior lenders to set the right tone
for a Chapter 11 proceeding is in connection with a debtor’s request
for post-petition financing or ability to use cash collateral. At this
point, a senior lender can secure critical protections and concessions
in connection with the bankruptcy, such as releases and milestones
for asset sales or plan confirmation. Intercreditor agreements should
provide that subordinate lenders will not object to the terms, conditions or amounts of any DIP financing by you or to an agreed upon
use of your cash collateral. Similarly, intercreditor agreements should
prevent subordinate lenders from offering, extending or participating
in DIP financing or allowing (or seeking to prohibit) use of their own
cash collateral unless you agree.
Believe it or not, you might find yourself in a position where you’re
better off with a borrower safely ensconced in Chapter 11. Consider
the alternatives: Chapter 7, where a sharp trustee might want nothing
more than a pound of your flesh (and that’s after lunch) or outside of
bankruptcy, where your borrower finally is free to commit all those
financial sins it sorely missed while under the bankruptcy court’s
watchful eye. Accordingly, intercreditor agreements should prohibit
subordinate lenders from seeking to convert a bankruptcy from one
chapter to another or to dismiss filing altogether.
Many bankruptcies entail sales of substantially all of the debtor’s
assets. Intercreditor agreements should prohibit subordinate lenders
from supporting or contesting any use, sale or lease of assets (including
bid and sale procedures) without your consent. On the other hand,
upon your request, you should require their support of any such use
or disposition. Further, you should acquire control over subordinate
lenders’ rights to credit bid their secured claims.
4 These restrictions
help ensure that subordinate lenders, who might be facing a significant
4 11 U.S.C. § 363(k).
Desperate subordinate lenders often recruit unlikely allies
to fight wars for them. This includes Chapter 11 trustees
or examiners who might not share a debtor’s philosophy
that one’s sole mission in life is to pay senior lenders
(particularly those holding personal guaranties) in full.