Core Provisions in Intercreditor Agreement A typical ICA addresses the following key issues: • Establishment of Relative Priority: Specifying the ranking of liens among creditors and setting the expectations for lien perfection to ensure enforceability and clarity of priority. • Payment Subordination and Waterfall: Establishing the order and timing of payments, ensuring senior creditors are paid first before junior creditors receive any distribution. • Exercise of Remedies: Dictating how and when junior creditors may enforce their rights and access collateral — often requiring the passage of a standstill period or senior lender consent. • Collateral Proceeds: Detailing how proceeds from collateral sales or recoveries are distributed among creditor classes. • Turnover Obligations: Requiring junior creditors to turn over proceeds received in violation of the specified priority scheme to the senior lender. • Voting and Consent Rights: Allocating decision-making authority among creditors, including rights to approve amendments, waivers and enforcement decisions. • Bankruptcy Participation: Defining the rights and limitations on creditor actions during a borrower’s insolvency proceeding, including restrictions on voting, adequate protection, financings, bankruptcy sales and plan treatment.2 These common provisions can provide senior creditors with influence that exceeds their economic stake the borrower’s capital structure, often to the detriment of creditors who are not party to the ICA. Why Intercreditor Agreements Matter More Today As capital structures grow more complex and constrained credit availability becomes the new norm, ICAs have become central to lender coordination and recovery outcomes. Recent distressed activity and litigation have increased the stakes. Lender-on-lender litigation has underscored this reality.3 Lenders, borrowers and legal professionals must now approach these agreements not as mere boilerplate to be addressed as a final step to a loan closing, but as critical instruments of credit protection, enforcement strategy and litigation risk management. Notable Court Rulings Over the past several decades, the enforcement of ICAs has taken on increasing significance in bankruptcy proceedings. While the Bankruptcy Code provides that “subordination agreements” are enforceable in bankruptcy to the same extent such agreements are enforceable under applicable non-bankruptcy law (see 11 U.S.C. § 510(a)), disputes among creditors frequently arise as junior lenders often seek to participate and protect value. Courts have not been entirely consistent in their treatment of these agreements, and outcomes often turn on the specific language of the ICA. As a result, case law continues to evolve, shaping creditor expectations and strategies in both distressed and non-distressed lending environments. 1. In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010): Issue: Whether a second-lien lender could object to bankruptcy sale under § 363 even though the ICA contained a waiver of such rights. Ruling: The bankruptcy court enforced the ICA and the waiver and barred the junior lender from objecting to the proposed sale. Lesson: The court reinforced that clear and express waivers in an ICA will generally be upheld as a matter of contract in bankruptcy, especially in sophisticated lending transactions.4 2. In re MPM Silicones, LLC (Momentive), 2014 WL 4436335 (Bankr. S.D.N.Y. 2014): Issue: Whether a loosely-worded lien subordination clause could bar junior lienholders from objecting to confirmation of a plan. Ruling: The court narrowly interpreted the ICA and held that vague drafting fails to silence junior lienholders and eliminate their standing; to enforce a “silent second,” ICAs must use precise, restrictive language. Lesson: Courts may limit the scope of ICA waivers in favor of bankruptcy’s policy of creditor participation unless the language is unambiguous.5 3. In re Tribune Co., 472 B.R. 223 (Bankr. D. Del 2012): Issue: Whether restrictions in an ICA that impact a junior creditor’s right to vote on a plan of reorganization be enforced. Ruling: The bankruptcy court found that bankruptcy law and policy does not override a right granted by Congress in the Bankruptcy Code to creditors to vote their claims. Lesson: The Bankruptcy Code’s enforcement of subordination agreements does not permit a court to authorize a junior creditor’s disenfranchisement and voice in all cases. 4. In re NESV Ice, LLC, 661 B.R. 427 (Bankr. D. Mass. 2024): Issue: Whether senior lender, as an assignee, could exercise voting rights of a junior creditor based upon prepetition ICA in bankruptcy. Ruling: Enforceable only if used in good faith; using claims strictly for litigation strategy would subvert the bankruptcy. Lesson: Assignments of voting rights in ICAs generally cannot override the right of a creditor to vote on a Chapter 11 plan as guaranteed by the Bankruptcy Code. Similarly, assignment of voting rights to a senior lender have been found by courts to be unenforceable because subordination agreements address payments — not voting. 6 Colorado Banker 10
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