Enforcement of Intercreditor Agreements in Bankruptcy

Transcription

1 Enforcement of Intercreditor Agreements in Bankruptcy Seth Jacobson, Ron Meisler, Matt Kriegel, Katherine Field The leveraged-loan and capital markets have seen a major increase in the amount of second-lien debt during the last decade, growing from $65 million in 2000 to $4.8 billion in As this trend has continued, lenders and borrowers have developed complex intercreditor agreements carefully allocating everything from lien priorities and the related application of proceeds of collateral, enforcement rights, access rights, rights to use intellectual property, rights to provide debtor in possession financings and waivers of various rights in bankruptcy. While 510(a) of the Bankruptcy Code specifically provides that subordination agreements are enforceable, the enforceability of various other provisions of intercreditor agreements have been the subject of debates in the courts. While earlier cases have questioned the enforceability of certain waivers in bankruptcy courts, the trend is to recognize enforceability if the agreements are enforceable under state law. Hart Ski and Its Progeny: a Narrow Reading of 510(a) Section 510(a) of the Bankruptcy Code provides 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. 2 In re Hart Ski Manufacturing Co., Inc. 3 was the first published case addressing the enforceability of an intercreditor agreement under 510(a) of the Bankruptcy Code. Several years before Hart Ski Manufacturing Company filed for bankruptcy, the debtor s former owner sold its busi- Seth Jacobson is a partner and the leader of the Banking practice of the Chicago office of Skadden, Arps, Slate, Meagher & Flom LLP. He repeatedly has been listed in The Best Lawyers in America and was selected for inclusion in Chambers USA: America s Leading Lawyers for Business 2010 and the International Who s Who of Banking Lawyers Ron Meisler is a partner in the Corporate Restructuring practice at Skadden, Arps, Slate, Meagher & Flom LLP and has been listed twice in Turnarounds & Workouts as one of the nation s Outstanding Young Restructuring Lawyers. Matt Kriegel and Katherine Field are associates in the Corporate Restructuring practice at Skadden, Arps, Slate, Meagher & Flom LLP. The opinions expressed in this article are solely the opinions of the authors and not of Skadden, Arps, Slate, Meagher & Flom LLP. 343

2 344 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] ness and, in connection with the sale, the seller agreed to provide certain purchase-money financing. Simultaneously, the purchaser entered into a working-capital facility to allow it to operate the business. An intercreditor agreement between the seller and the new lender expressly subordinated the purchase-money financing to the working-capital facility. The intercreditor agreement provided that the subordinated lender could not assert collect, enforce or release any collateral securing the indebtedness or enforce any security agreements, real estate mortgages, lien instruments, or other encumberances [sic] securing said indebtedness except that it may collect regularly scheduled payments when and as due without the senior lender s consent. 4 The agreement also contained a provision requiring that any money received by the subordinated lender be turned over to the working-capital lender until the working-capital facility was paid in full. It did not contain, however, now-customary provisions waiving certain of the subordinated lender s rights in the event of the borrower s insolvency. Hart Ski Manufacturing Company eventually filed for bankruptcy and the subordinated lender filed a motion for adequate protection. The working-capital lender opposed the request for adequate protection, seeking summary judgment on the basis that the intercreditor agreement prohibited the subordinated lender from enforcing its rights before the working capital facility was paid in full and therefore prohibited the filing of the adequate protection motion. The Hart Ski court refused to grant summary judgment, holding that although Congress clearly intended 510(a) to allow creditors to contractually alter priority of payment among themselves, [t]here is no indication that Congress intended to allow creditors to alter, by a subordination agreement, the bankruptcy laws unrelated to distribution of assets. 5 The Hart Ski decision is short and spare on detailed analysis of the intercreditor agreement. It is also not surprising in its result because, in the absence of an express waiver, many bankruptcy courts would be reluctant to strip the subordinated lender of its right to request adequate protection. The Hart Ski court says as much, concluding that [t]o hold that, as a result of a subordination agreement, the subordinator gives up all its rights to the subordinee would be totally inequitable. 6 The Hart Ski court went further, however, reasoning that there are certain rights unrelated to priority of distribution that are guaranteed to creditors by the Bankruptcy Code the right to assert and prove a claim, the right to seek adequate protection, the right to lift of stay under proper circumstances and the right to vote on any plan of reorganization and such rights cannot be affected by the actions of parties prior to the commencement of a bankruptcy case when such rights did not even exist. 7

3 Enforcement of Intercreditor Agreements in Bankruptcy 345 Hart Ski and its narrow interpretation of 510(a) created doubt as to the enforceability of bankruptcy waiver provisions. 8 Nonetheless, as subsequent cases confirm, the need for capital outweighed the risks and the business community persisted in its efforts to allocate rights and remedies among secured lenders. 9 The enforceability of such contractual allocations remained very much in doubt even at the advent of the rapid expansion of the second-lien loan market in approximately The results of the handful of published opinions dealing with the enforceability of bankruptcy waiver provisions in subordination agreements prior to 2000 were mixed, with some courts enforcing and other courts refusing to enforce such provisions. 11 In 2000, a bankruptcy court in the Northern District of Illinois in In re 203 North LaSalle Street Partnership 12 held that a provision authorizing the first-lien lender to vote the claim of the second-lien lender in a plan of reorganization was unenforceable. The intercreditor agreement at issue provided that in the event of any bankruptcy, insolvency or receivership [the second-lien lender] irrevocably agrees that the [firstlien lender] may, at it sole discretion vote or consent in any such proceedings with respect to, any and all claims of [second-lien lender]. 13 The 203 North LaSalle court s analysis is more detailed than that of Hart Ski, but it rests on much the same foundation: certain rights granted by the Bankruptcy Code cannot be waived through a prepetition contract. Section 510(a) cannot overcome these rights. The court begins its analysis with 1126(a) of the Bankruptcy Code, which provides that the holder of a claim is entitled to vote to accept or reject a plan of

4 346 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] reorganization. 14 In the court s view, this right was affirmatively granted by Congress to each holder of a claim and was indefeasible, irrespective of an explicit waiver in the intercreditor agreement. This conclusion may be somewhat puzzling because the court was not imposing itself between a creditor and a debtor, but instead between two sophisticated creditors. The court noted, as did the Hart Ski court, that it is generally understood that prebankruptcy agreements do not override contrary provisions of the Bankruptcy Code. 15 Although Hart Ski and 203 North LaSalle rest on much the same foundation namely, that rights granted by the Bankruptcy Code cannot be waived through a prepetition contract, even between two creditors the subordination agreements at issue in the two cases are very different. The Hart Ski subordination agreement contained no express waiver by the junior lender of its right to seek adequate protection. 16 By contrast, the intercreditor agreement at issue in 203 North LaSalle explicitly provided that the first-lien lender was entitled to vote the second-lien lender s claim in any plan of reorganization. On this point, the 203 North LaSalle court took note of the pre-code Rule of Explicitness, which required an explicit agreement to modify the general rule under 506(b) of the Bankruptcy Code that an undersecured lender is not entitled to postpetition interest. Under the Rule of Explicitness, the agreement, requiring the payment of postpetition interest to the senior lender out of the dividend that would otherwise be paid to the subordinated lender, had to clearly show that the general rule is to be suspended, at least vis-a-vis [the] parties. 17 Although the court took note of the Rule of Explicitness, it concluded that it had no application in analyzing the voting waiver provision. Unfortunately, the court does not address why parties to a prepetition contract are entitled to alter the general rule of 506(c), at least between themselves, as long as they are explicit in doing so, while other provisions of the Bankruptcy Code (such as 1126(a)) cannot be altered. In addition, the 203 North LaSalle court rejected the argument that the second-lien lender had validly appointed the first-lien lender as agent to vote its claim. While Rule 3018(c) of the Federal Rules of Bankruptcy Procedure permits a creditor to assign an agent to vote its claim, 18 the court noted that [t]he test of agency is the existence of the right to control the method or manner of accomplishing a task by the alleged agent. 19 Because the intercreditor agreement entitled the firstlien lender to vote the second-lien lender s claim in any which way it pleased, including contrary to the interests of the second-lien lender, the court held that Rule 3018(c) did not save the voting-assignment provision. Under the 203 North LaSalle court s narrow reading, a reading consistent with Hart Ski, agreements concerning order of priority of payment of claims in bankruptcy are enforceable under 510(a), but bankruptcy law waiver provisions are not. 20

5 Enforcement of Intercreditor Agreements in Bankruptcy 347 Turning Away from Hart Ski Once constituting just a small fraction of the secured financing market, second-lien loans became much more common over the last decade. 21 Some courts, perhaps owing to an increased familiarity with intercreditor agreements and bankruptcy waiver provisions, began to turn away from the narrow interpretation of 510(a) adopted by the Hart Ski and 203 North LaSalle courts. In the 2006 case of In re Aerosol Packaging LLC, 22 the intercreditor agreement at issue purported to authorize the first-lien lender to take certain actions on behalf of the second-lien lender, including voting the second-lien lender s claims. The subordinated lender, citing to 203 North LaSalle, argued that the voting provision was unenforceable because 1126(a) of the Bankruptcy Code expressly provided it the right to vote its claims and 510(a) did not allow parties to abridge the bankruptcy rights of a secured lender through a prepetition contract. The factual similarities of Aerosol Packaging and 203 North LaSalle are clear. Unlike the 203 North LaSalle court, however, the Aerosol Packaging court found nothing in 1126(a) that expressly or implicitly prevented the second-lien lender from delegating or bargaining away its voting rights. It therefore rejected the argument that 1126(a) rendered the voting provision unenforceable. Under 510(a), as the court read it, any provision of a subordination agreement is enforceable in a bankruptcy proceeding to the extent it would be enforceable under applicable nonbankruptcy law. 23 The court analogized the voting provision to a power of sale provision authorizing a real estate lender to act as agent for the borrower in executing a deed to convey title to foreclosed property. The voting provision, like a power of sale provision, enabled the first-lien lender to act in its own interest (as opposed to the principal s interest). As a result, the court concluded that the voting provision was enforceable under Georgia state law and therefore was enforceable in the bankruptcy proceeding. 24 The court further underscored its contract interpretation approach to resolving the intercreditor dispute, remarking that the second-lien lender was not without remedy, as it could, under the terms of the agreement, free itself from the agreement s ongoing effect by paying the first-lien lender s claim in full in cash. 25 A Trend Toward Considered Enforcement of Bankruptcy Waiver Provisions The Aerosol Packaging court s rejection of the narrow interpretation of 510(a) adopted by the Hart Ski and 203 North LaSalle courts marks a turning point in the enforcement of bankruptcy waiver provisions in intercreditor agreements. 26 Although the legacy of Hart Ski and 203 North LaSalle continues to create uncertainty, 27 cases after Aerosol

6 348 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] Packaging have generally adopted the contract interpretation approach and assumed, implicitly or explicitly, 28 that bankruptcy waiver provisions are enforceable to the extent that they are enforceable under applicable nonbankruptcy law. In determining whether a bankruptcy right has been waived, courts have analyzed the language of the particular intercreditor agreement provisions under applicable contract law. However, courts have increasingly acknowledged the broader circumstances of the intercreditor dispute at issue (including the conduct of the parties) when considering these waiver provisions. In In re Ion Media Networks, Inc., 29 for example, the second-lien lender objected to confirmation of a proposed plan under which the first-lien lenders were to recover the value attributable to certain FCC broadcasting licenses. The second-lien lender maintained that the FCC licenses were unencumbered assets under the terms of the security agreement. 30 The Ion Media court concluded that the terms of the intercreditor agreement to which the second-lien lender was subject expressly prohibited lien challenges even challenges to purported liens and, as a result, the court determined that the second-lien lender lacked standing to object to the plan. The intercreditor agreement between the lenders explicitly recognized the priority of the first-lien lenders interests, stating: Each of the Secured Parties acknowledges and agrees (x) to the relative priorities as to the Collateral (and the application of the proceeds therefrom) as provided in the Security Agreement and acknowledges and agrees that such priorities (and the application of proceeds from the Collateral) shall not be affected or impaired in any manner whatsoever including, without limitation, on account of (iii) any nonperfection of any lien purportedly securing any of the Secured Obligations (including, without limitation, whether any such Lien is now perfected, hereafter ceases to be perfected, is avoidable by any bankruptcy trustee or otherwise is set aside, invalidated, or lapses). 31 Moreover, the intercreditor agreement included language prohibiting challenges to this priority, stating: [U]pon the commencement of a case under the Bankruptcy Code by or against any Grantor, (b) each secured party agrees not to take any action or vote in any way inconsistent with this Agreement so as to contest (1) the validity or enforcement of any of the Security Documents (2) the validity, priority, or enforceability of the Liens, mortgages, assignments, and security interests grant-

7 Enforcement of Intercreditor Agreements in Bankruptcy 349 ed pursuant to the Security Documents or (3) the relative rights and duties of the holders of the first Priority Secured Obligations 32 Focusing on the use of the term purportedly securing, the court determined that the second-lien lender agreed to grant an indisputable first lien interest [in] purported Collateral, including the FCC broadcasting licenses. 33 The court found in the intercreditor agreement plain and purposeful language demonstrating the second-lien lender s intent to remain silent in the event of a chapter 11 case. 34 It is of note that the Ion Media court criticized the conduct of the second-lien lender. In particular, the court described the second-lien lender as an activist distressed investor that purchased deeply discounted second lien debt for pennies on the dollar that ha[d] been using aggressive bankruptcy litigation tactics as a means to gain negotiating leverage or obtain judicial rulings that will enable it to earn outsize returns on its bargain basement debt purchases. 35 The court went on to note that the second-lien lender s obstructionist, destabilizing and wasteful behavior exposed it to a damages claim by the first-lien lenders for breach of contract. 36 While the extent of the influence of the second-lien lender s conduct on the judge s decision is unknown, the court s interpretation of the intercreditor agreement s purportedly securing language appears to have been dispositive. In In re Erickson Retirement Communities, LLC, 37 a Northern District of Texas bankruptcy court engaged in a similar analysis. In contrast to Ion Media, however, the second-lien lenders actions appear to have had more influence in the Erickson court s interpretation of the intercreditor agreements at issue. In Erickson, the second-lien lenders had sought appointment of an examiner to investigate the appropriateness and fairness of the allocation of value among the different debtors estates. The second-lien lenders were subject, however, to two intercreditor agreements containing typical stand-still provisions that prohibited them from exercis[ing] any rights or remedies or tak[ing] any action or proceeding to collect or enforce any of the Subordination Obligations without the first-lien lenders consent until the first-lien lenders had been paid in full. 38 The intercreditor agreements further provided that the second-lien lenders waived, for the benefit of the first-lien lenders, any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Agreement and any legal or equitable discharge of [the second-lien lenders ] obligations under the intercreditor agreements. 39 Because the court concluded that the intercreditor agreements were enforceable under 510(a) and Maryland law, 40 the only issue remaining was whether the second-lien lenders actions violated the agreements. The court concluded that the filing of

8 350 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] the examiner motion was tantamount to both a pursuit of a remedy and the commencement of an action and was therefore prohibited by the stand-still provisions of the intercreditor agreements. 41 As a result, the court held that the second-lien lenders lacked standing and/or waived the right to pursue the examiner motion. Although the court reached its conclusion on the basis of the language of the intercreditor agreement, it is clear that, as in Ion Media, the court was very much aware of the underlying motivations of the second-lien lenders. The court remarked that the second-lien lenders examiner motion was unmistakably aimed at slowing down the confirmation process and gaining leverage to enhance or create recoveries for the [second-lien lenders], the very type of obstructionist behavior that the [intercreditor] agreements are intended to suppress. 42 Unlike the Ion Media court, however, the Erickson court recognized that the second-lien lenders perceived improper intentions in bringing the examiner motion supported the court s interpretation, twice noting that it reached its conclusion that the provisions prohibited the second-lien lenders actions in the context of these cases at this time. 43 The court in In re Boston Generating, LLC 44 was more explicit still in its consideration of the broader circumstances of an intercreditor dispute when interpreting the relevant intercreditor agreement. The debtors in Boston Generating engaged in an extensive prepetition marketing and sale process for substantially all their assets. The debtors entered into an asset purchase agreement to be consummated through a 363 sale. A motion was filed on the petition date seeking approval of bidding and auction procedures. The debtors capital structure included first-lien and second-lien secured debt. The second-lien lenders, who would have been out of the money under the proposed sale to the stalking horse bidder, objected to the bidding procedures and, later, the proposed sale. The intercreditor agreement between the parties stated: Until the Discharge of First Lien Obligations has occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced the First Lien Collateral Agent, at the written direction of [First Lien Lenders holding a majority of the First Lien Debt], shall have the exclusive right to enforce rights, exercise remedies and make determinations regarding the release, sale, disposition or restrictions with respect to the Collateral without any consultation with or the consent of the Second Lien Collateral Agent or any Second Lien Secured Party provided that the Lien securing the Second Lien Obligations shall remain on the proceeds of such Collateral released or disposed of subject to the relative priorities. 45

9 Enforcement of Intercreditor Agreements in Bankruptcy 351 Despite the second-lien lenders waiver of all rights to make determinations regarding the sale [or] disposition of the shared collateral, the court held that the second-lien lenders could object to the process because there was no express prohibition against objection to bidding procedures anywhere in the inter-creditor agreement. 46 Notwithstanding this finding that the second-lien lenders had standing to object, the court approved the bid procedures. No other qualified bids were received and the debtors therefore sought approval of the sale to the stalking horse bidder. The second-lien lenders again objected, asserting that the debtors did not properly exercise their fiduciary duties in moving forward with the sale and refusing to consider a Chapter 11 plan. 47 The first-lien lenders, who would be paid in full under the proposed sale to the stalking horse bidder, again pointed to the intercreditor agreement to argue that the second-lien lenders did not have standing to pursue their sale objection. The court ultimately approved the sale, but importantly, not before addressing the second-lien lenders objection. The court noted language in the intercreditor agreement concerning the exercise of remedies that it could have interpreted as barring the second-lien lenders from objecting to the sale motion. 48 However, at the sale hearing, the first-lien agent and the second-lien agent had stipulated that the actions taken by the first-lien agent in connection with the proposed sale were not an exercise of remedies. Although it was not clear to the court why the first-lien agent would take such a position, the court nonetheless accepted the stipulation, thus making the exercise of remedies argument inapplicable to the standing issue. Evaluating the remainder of the intercreditor agreement, the court concluded that, given the absence of any unambiguous, express waiver, the second-lien lenders had standing to object to the sale motion. 49 The waiver provision quoted above appears to set forth clearly which party makes determinations among the lenders as to sales or dispositions of shared collateral. The first-lien lenders are seemingly empowered to do so. The court acknowledged as much, noting that its decision that the second-lien lenders had standing to object was a close call. 50 The court reached this conclusion because, among other things, in its view, the second-lien lenders were not engaging in obstructionist behavior. 51 Instead, the court explained that the second-lien lenders were very close to the money and want to make sure the Debtors have discharged their fiduciary duty to get the highest price for their assets. 52 The Boston Generating court s consideration of additional facts surrounding the intercreditor dispute demonstrates that these factors can play and, in fact, have played a role in courts rulings regarding the interpretation of intercreditor provisions.

10 352 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] Clear Drafting Remains a Lenders Best Protection Ion Media, Erickson and Boston Generating all suggest that the circumstances surrounding an intercreditor dispute can influence a court s interpretation of ambiguous intercreditor agreements. Courts, however, have less leeway to consider these peripheral factors if intercreditor rights are unambiguously delineated in the intercreditor agreement. A clear illustration of this point is the case of Aurelius Capital Master, Ltd. v. Tousa Inc. 53 In Tousa, the debtor negotiated a cash collateral order with the first-lien lenders and the creditors committee. 54 The secondlien lenders were not involved in the negotiation. Although they generally supported the cash collateral stipulation, the second-lien lenders objected to the use of cash collateral to fund the committee s investigation of liens and pursuit of claims against them. 55 The bankruptcy court approved the cash collateral order over the second-lien lenders objection on the basis of an intercreditor agreement between the first-lien and second-lien lenders. 56 The relevant provision provided: If any Credit Party becomes subject to any Insolvency Proceeding and if the First Priority Representative desires to consent (or not object) to the use of cash or other collateral under the Bankruptcy Code then the Second Lien Term Loan Agent agrees, on behalf of itself and the other Second Priority Secured Parties that each Second Priority Secure Party (I) will be deemed to have consented to the use of such cash or other collateral [and] will not request or accept any form of adequate protection or any other relief in connection with the use of such cash. 57 The second-lien lenders appealed, arguing that the debtor was obligated under 363 of the Bankruptcy Code to prove that the lenders interests were adequately protected. The district court dismissed the appeal for lack of standing, concluding that the second-lien lenders had clearly bargained away [their] right to object by entering into the Intercreditor Agreement. 58 Clear drafting allowed the Tousa court to enforce the applicable bankruptcy waiver provision, thereby disposing of the secondlien lenders objection in a way that comported with the parties expectations in entering into the intercreditor agreement. Other Cases Illustrate That a Plain Language Approach Results in Enforceable Intercreditor Agreements Although not directly addressing bankruptcy waiver provisions, two recent cases further highlight courts use of a plain language approach in enforcing the terms of intercreditor agreements. Like the Tousa court, the courts in In re Musicland Holding Corp. 59 and In re Delphi Corp. 60

11 Enforcement of Intercreditor Agreements in Bankruptcy 353 each turned to the express language of the particular intercreditor agreement to resolve the lenders dispute. Notably, in the first of these cases, Musicland, the court concluded the clear language of the intercreditor agreement compelled a result that was contrary to the subordinated creditors expectations. In Musicland, the first-lien lenders had extended loans secured by a first priority lien on substantially all of the debtors assets. The subordinated creditors were trade creditors who were granted a second lien on the debtors inventory and its proceeds. The debtors required additional liquidity. The first-lien lenders were unwilling to extend additional loans, but a new lender agreed to advance funds under a term loan. Because the intercreditor agreement between the parties subordinated the liens of the subordinated creditors only to the liens of the Revolving Loan Creditors to the extent of the Revolving Loan Debt, any new loan not constituting Revolving Loan Debt by a Revolving Loan Creditor would have been subordinated to all liens. To avoid this result, the first-lien lenders and the new lender amended the revolving credit agreement to make the new lender a Revolving Loan Creditor and incorporate the new term loan as Revolving Loan Debt. The borrower ultimately repaid the term loan in full and, shortly thereafter, the first-lien lenders tightened covenants under the revolving credit facility, precipitating a liquidity crisis that ultimately led to Musicland s bankruptcy filing. The subordinated creditors found themselves substantially undersecured and commenced an adversary proceeding challenging the repayment of the term loan, specifically claiming that the amendment of the revolving credit agreement to include this loan violated the intercreditor agreement. 61 The terms of the intercreditor agreement stated that the subordinated creditors waive notice of, and hereby consent to, (a) any amendment, modification, supplement, extension, renewal, or restatement of any of the Revolving Loan Debt or the Revolving Creditor Agreements. 62 Moreover, the intercreditor agreement defined Revolving Loan Debt as any and all obligations, liabilities and indebtedness of every kind, nature and description owing by the debtor whether now existing or hereafter arising under the revolving credit agreement. 63 The Revolving Loan Creditors definition was similarly broad in including the original lenders, their successors and assigns and any other lender or group of lenders that at any time refinance, replaces or succeeds to all or any portion of the Revolving Loan Debt or is otherwise a party to the Revolving Creditor Agreements. 64 In granting the first-lien lenders motion to dismiss the claim, the court concluded that the intercreditor agreement was unambiguously broad and authorized the first-lien lenders to amend the revolving credit

12 354 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] agreement to bring in a new term loan lender. The court focused on the fact that the definitions of Revolving Loan Debt and Revolving Loan Creditors in the intercreditor agreement were both open to new types of debt and new lenders. Furthermore, the court explained, by authorizing any amendment of the debt or the underlying agreements, the subordinated creditors expressed their consent to exactly that: any amendment. 65 While the court acknowledged that the subordinated creditors may have understood their bargain to be for a lien subordinate only to the existing credit facility, the unambiguous language of the intercreditor agreement controlled its decision. 66 Bankruptcy courts also look to the express terms of intercreditor agreements when resolving disputes over parties rights in the context of remedies. Approximately 14 months after the petition date in the bankruptcy proceedings of Delphi Corporation, 67 the debtors refinanced their existing prepetition and postpetition credit facilities through a three-tiered credit facility consisting of a $1.75 billion first priority revolving credit facility ( Tranche A ), a $250 million first priority term loan ( Tranche B ) and a $2.495 billion second priority term loan ( Tranche C ). The credit agreement also contained provisions setting forth the respective rights and priorities of the three tranches of lenders. 68 In the agreement, each lender irrevocably appointed the administrative agent to act as its agent and authorized the agent to take such actions on its behalf and to exercise such powers as are delegated to such Agent by the terms [of the DIP credit agreement]. 69 Additionally, all lenders agreed that in the event of default, the agent may, and at the request of the Required Lenders, shall, take one of more of the following actions : (i) terminate or suspend forthwith the Total Commitment; (ii) declare the Loans or any portion thereof then outstanding to be forthwith due and payable (iv) setoff amounts in the Letter of Credit Account or any other accounts maintained with the Administrative Agent and (v) exercise any and all remedies under the Loan Documents and under applicable law available to the Administrative Agent and the Lenders. 70 The Required Lenders were defined as: Lenders having Tranche A Commitments at such time and Lenders holding a portion of the Tranche B Loan at such time representing in excess of 50% of the sum of (x) the Total Tranche A Commitment at such time plus (y) the Total Tranche B Commitment at such time. 71

13 Enforcement of Intercreditor Agreements in Bankruptcy 355 On two occasions after the debtors refinanced their DIP credit facility, the debtors requested an extension of the facility s maturity date. Such extensions, which required the unanimous consent of the lenders, were granted, bringing the final maturity date to December 31, By the fall of 2008, a time of unprecedented turbulence in the capital markets and in the automobile industry, it became clear that the debtors would not emerge from Chapter 11 prior to the end of that year. Owing to the same issues, however, it was unlikely that Delphi s lenders would unanimously agree to any further extension of the maturity date on commercially reasonable terms. Thus, the debtors began negotiating a forbearance agreement, referred to as an accommodation agreement, that would allow them to continue to use the proceeds of the postpetition credit facility, to the extent already drawn, notwithstanding the passing of the maturity date. After the agent and a number of Tranche A and B lenders sufficient to meet the definition of Required Lenders agreed to forbear from the exercise of remedies, the debtors filed a motion for approval to enter into and implement such accommodation agreement. Certain Tranche C lenders, however, objected to the accommodation agreement, arguing that it was a de facto extension of the maturity date that required the unanimous consent of all lenders. 72 Pointing to the express intercreditor terms of the DIP credit agreement, the bankruptcy court approved the accommodation agreement over the Tranche C lenders objection. Specifically, after careful analysis of the provisions quoted above, the court held that, the administrative agent, in its discretion and mandatorily at the request of the required lenders, has the right to exercise remedies or forbear in respect of such remedies as a matter of contract under the DIP credit agreement. 73 Through the accommodation agreement, the agent was properly and at the direction of the Required Lenders carrying out this contractual authority to forbear from exercising the remedies otherwise available to the lenders. Citing a similar recent lender collective action case, 74 the court explained that the fact that forbearance has a similar effect to extension [of the maturity date] is insufficient to override the parties agreements with regard to collective action to enforce their respective rights under the DIP credit agreement. 75 Additionally, the court rejected the Tranche C lenders argument that they individually had the right to enforce the debtors payment obligations after the maturity date because, again, the DIP credit agreement did not by its terms provide them with that right. 76 Although the Musicland and Delphi cases do not implicate the enforcement of bankruptcy waiver provisions, they stand among a line of recent cases, beginning with Aerosol Packaging, in which bankruptcy

14 356 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] courts have consistently examined intercreditor agreements using ordinary contract interpretation principles. These cases suggest that courts will turn to the plain language of intercreditor agreements to resolve disputes in the manner most consistent with the written documents expressing the parties expectations. Although courts may continue to look to facts and circumstances of the case in interpreting arguably ambiguous provisions, 77 a lender s best protection against intercreditor litigation and unanticipated demotion of its position in the borrower s capital structure is a clearly drafted agreement setting forth the rights of each group of lenders. The 1129(b) Loophole? Despite the emerging trend discussed above, one recent case suggests that a clever second-lien lender may be able to take actions, in limited circumstances, that could overcome the express terms of the intercreditor agreement to which it is subject. In re TCI 2 Holdings, LLC 78 involved competing plans of reorganization. The first-lien lenders supported a plan that would have provided them with 100% of the equity of the reorganized debtors. Under this plan, the second-lien noteholders would have been wiped out. The second-lien noteholders and the debtors supported a plan of reorganization (referred to as the ACH/Debtor Plan ) that included a rights offering that allowed participating secondlien noteholders and general unsecured creditors to purchase up to 70% of the equity of the reorganized debtors. The second-lien noteholders would also receive an additional 5% of the equity as a direct distribution. Under the ACH/Debtor Plan, the first-lien lenders were to receive partial payment in cash and a new term loan at a market interest rate. 79 In addition, all adequate protection payments received by the first-lien lenders during the Chapter 11 proceedings were to be recharacterized as payments of principal under the ACH/Debtor Plan. The intercreditor agreement between the first-lien lenders and second-lien noteholders provided that the second-lien noteholders were prohibited from receiving the proceeds of shared collateral until the obligations owed to the first-lien lenders were paid in full in cash. 80 Furthermore, the intercreditor agreement prohibited the second-lien noteholders from objecting to or contesting the payment of any adequate protection payments to the [first-lien lenders]. 81 The first-lien lenders therefore contended that the ACH/Debtor Plan violated the express terms of the intercreditor agreement and was not confirmable. Although the TCI 2 court took note of the first-lien lenders arguments, it concluded that it need not decide the issue in order to confirm the second-lien noteholders plan. 82 The ACH/Debtor Plan was presented to the court

15 Enforcement of Intercreditor Agreements in Bankruptcy 357 for nonconsensual confirmation under 1129(b). Section 1129(b)(1), which permits a bankruptcy court to confirm a plan of reorganization over the dissent of one or more classes of claims or interests if, among other things, the plan is fair and equitable and does not discriminate unfairly, provides: Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. 83 Section 1129(b)(1) s introductory phrase [n]otwithstanding section 510(a) of this title has been part of the Bankruptcy Code since its enactment, but the TCI 2 court found no case law analyzing its meaning. 84 Instead, the court explained: The only logical reading of the term notwithstanding in section 1129(b)(1) seems to be: Even though section 510(a) requires the enforceability of subordination agreement in a bankruptcy case to the same extent that the agreement is enforceable under nonbankruptcy law, if a nonconsensual plan meets all of the 1129(a) and (b) requirements, the court shall confirm the plan. 85 Despite the anomalous result of overriding 510(a) and eliminating the enforcement of subordination agreements in cases in which the class rejects the plan, the court concluded that the phrase must be given meaning. 86 As a result, the court held that it did not need to determine whether the second-lien noteholders plan violated the intercreditor agreement because, even if such violation occurred, it would not impede confirmation. 87 At least one other court has reached the opposite conclusion. In In re Consul Restaurant Corp., 88 a proposed plan of reorganization would have provided the senior lender with a combination of cash, equity in the reorganized debtor and an unsecured note, while the subordinated lenders would have received, among other things, substantial cash payments. The senior lender, having voted against the plan, objected to confirmation because the plan failed to recognize its rights under a subordination agreement. Although the plan proponent asserted the same argument as the second-lien noteholders and the debtors in TCI 2 namely, that the introductory language of 1129(b)(1) means that nonbankruptcy

16 358 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] subordination rights need not be recognized in cramdown the Consul Restaurant court concluded that subordination rights are nonetheless enforceable under the discrimination and fair and equitable concepts of the statute. 89 Although the reading of 1129(b) adopted by TCI 2 may allow second-lien lenders in some circumstances to win the plan-confirmation battle, it may not be enough to win the war. In most intercreditor disputes, the bankruptcy court must make a determination as to the meaning or enforceability of the provision or provisions at issue in order to resolve the dispute. If the junior creditor prevails in obtaining a favorable determination of its rights under the intercreditor agreement, the principle of res judicata 90 prevents the senior creditor from relitigating the issue in another forum. 91 The senior creditor s only recourse may be to appeal. In the TCI 2 case, however, the court confirmed the plan without decid[ing] whether the Second Lien Noteholders have violated the Intercreditor Agreement. 92 As a result, the aggrieved first-lien lender was free to seek damages based upon the alleged violation of the intercreditor agreement. 93 The first-lien lenders in the TCI 2 case did ultimately sue the second-lien lenders for breach of contract in state court. Venue was subsequently transferred back to the Bankruptcy Court for the District of New Jersey. Eventually, however, the litigation was settled in connection with a global settlement agreement confirmed by the bankruptcy court on October 5, Conclusion It remains to be seen whether 1129(b) will provide a means for second-lien lenders to avoid the limitations of an intercreditor agreement or whether the TCI 2 case was an anomaly. Outside of a plan confirmation battle, however, the broad interpretation of 510(a) adopted in recent cases may provide first-lien lenders with greater certainty that they will be able to enforce waivers of rights in bankruptcy. This certainty is not absolute. The consistent acknowledgement of the facts and circumstances surrounding intercreditor disputes in recent cases suggests that outside factors can influence a bankruptcy court, which is, after all, a court of equity. The surest way to limit the influence that peripheral factors have in determining close calls, however, likely remains prudent conduct and, most importantly, unambiguous drafting. Notes 1. Robert Polenberg, 4Q10 Second-Lien Lending Review, Standard & Poor s. After reaching a high of $30.1 billion in 2007, second-lien issuances decreased dramatically likely owing to the impact of the onset of the global economic crisis on capital markets. In 2008, 2009 and 2010, respectively, there were approximately $3 billion, $1.9 billion and $4.8 billion of

17 Enforcement of Intercreditor Agreements in Bankruptcy 359 new issuances of second-lien debt. Polenberg, 4Q10 Second-Lien Lending Review, Standard & Poor s U.S.C.A. 510(a). 3. In re Hart Ski Mfg. Co., Inc., 5 B.R. 734, 6 Bankr. Ct. Dec. (CRR) 968, 2 Collier Bankr. Cas. 2d (MB) 1189, Bankr. L. Rep. (CCH) P (Bankr. D. Minn. 1980). 4. Hart Ski, 5 B.R. at Hart Ski, 5 B.R. at Hart Ski, 5 B.R. at Hart Ski, 5 B.R. at 736. Although the Hart Ski court ruled that the subordinated lender was permitted to seek adequate protection, the receipt of any money as adequate protection remained governed by the enforceable terms of the subordination agreement. See Hart Ski, 5 B.R. at 736 (noting that senior lender would not be prejudiced because any money collected would be held in trust and paid to the senior lender until it had been paid in full). 8. E.g., Rick Hyman & Jane Kang, Enforceability of the Bankruptcy Waiver : Where Are We Now?, Bloomberg Law Reports Bankruptcy Law, Vol. 5, No. 11, Mar. 2011, at 6 (noting that uncertainty concerning the enforcement of bankruptcy waiver provisions under 510 was based largely on Hart Ski and 203 North LaSalle); Singer, The Lender s Guide to Second-Lien Financing, 125 Banking L.J. 199, 215 (2008) (discussing Hart Ski and noting that there is no definitive answer to the question of whether generally accepted provisions in intercreditor agreements will be enforced in bankruptcy ); Batty & Brighton, Silent Second Liens Will Bankruptcy Courts Keep the Peace?, 9 N.C. Banking Inst. 1, 19 (2005) ( [T]he statements of the Hart Ski court remain troublesome for those seeking to enforce provisions of silent second liens regarding adequate protection and the automatic stay in bankruptcy court. ). 9. The allocation of rights between lenders continued to take place, despite mixed results regarding enforceability in the courts. See, e.g., In re Hinderliter Industries, Inc., 228 B.R. 848 (Bankr. E.D. Tex. 1999) (enforcing claim subordination provision in subordination agreement); In re Curtis Center Ltd. Partnership, 192 B.R. 648, 28 Bankr. Ct. Dec. (CRR) 740 (Bankr. E.D. Pa. 1996) (enforcing unchallenged subordination agreement providing senior creditor with right to vote junior creditor s claim); In re Southeast Banking Corp., 188 B.R. 452, 27 Bankr. Ct. Dec. (CRR) 821 (Bankr. S.D. Fla. 1995), aff d, 212 B.R. 682 (S.D. Fla. 1997), rev d in part, question certified, 156 F.3d 1114, 33 Bankr. Ct. Dec. (CRR) 302, 40 Collier Bankr. Cas. 2d (MB) 1238, Bankr. L. Rep. (CCH) P (11th Cir. 1998), certified question accepted, 92 N.Y.2d 945, 681 N.Y.S.2d 468, 704 N.E.2d 221 (1998), certified question answered, 93 N.Y.2d 178, 688 N.Y.S.2d 484, 710 N.E.2d 1083, 34 Bankr. Ct. Dec. (CRR) 326 (1999) and aff d, 179 F.3d 1307, 34 Bankr. Ct. Dec. (CRR) 755, 42 Collier Bankr. Cas. 2d (MB) 639, Bankr. L. Rep. (CCH) P (11th Cir. 1999) (refusing to enforce subordination agreement where language did not explicitly, precisely, and unambiguously provide for payment of post-petition interest to unsecured senior debentureholders ); In re Inter Urban Broadcasting of Cincinnati, Inc., Nos , , 1994 WL (E.D. La. Nov. 16, 1994), dismissed, 74 F.3d 1238 (5th Cir. 1995) (affirming bankruptcy court s confirmation of a plan where senior lender voted claims of junior lender pursuant to an intercreditor agreement); In re Best Products Co., Inc., 168 B.R. 35 (Bankr. S.D. N.Y. 1994) (enforcing subordination agreement); In re Davis Broadcasting, Inc., 169 B.R. 229, Bankr. L. Rep. (CCH) P (Bankr. M.D. Ga. 1994), order rev d, 176 B.R. 290 (M.D. Ga. 1994) (noting that subordination agreements freely entered into are enforceable); In re Ionosphere Clubs, Inc., 134 B.R. 528, 22 Bankr. Ct. Dec. (CRR) 651, 26 Collier Bankr. Cas. 2d (MB) 955 (Bankr. S.D. N.Y. 1991) (concluding that three obligations secured by a single lien were single claim that was therefore undersecured and adopting pre-code requirement of explicitness to establish senior lender s right to postpetition interest and subordinate other claims thereto); In re General Homes Corp., 134 B.R. 853 (Bankr. S.D. Tex. 1991) (enforcing subordination agreement with respect to priority of claims); In re Henzler Mfg. Corp., 36 B.R. 303 (Bankr. N.D. Ohio 1984) (holding subordination agreement unenforceable against trustee); see also Brighton & Berman, Second-Lien Financings: Enforcement of Intercreditor Agreements in Bankruptcy, Am. Bankr. Inst..J., Vol. XXV, No. 1, Feb (noting the disconnect between those negotiating intercreditor agreement provisions and their understanding of how such provisions will play out in a bankruptcy filing).

18 360 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] 10. See Robert Polenberg, 4Q10 Second-Lien Lending Review, Standard & Poor s. 11. See cases cited in note In re 203 North LaSalle Street Partnership, 246 B.R. 325, 35 Bankr. Ct. Dec. (CRR) 219, 43 Collier Bankr. Cas. 2d (MB) 1463 (Bankr. N.D. Ill. 2000) North LaSalle, 246 B.R. at Section 1126(a) of the Bankruptcy Code provides, in relevant part, that [t]he holder of a claim or interest allowed under section 502 of this title may accept or reject a plan. 11 U.S.C.A. 1126(a) North LaSalle, 246 B.R. at 331. In reaching this conclusion, the court cited to a number of cases involving waivers by a debtor of rights affirmatively granted under the Bankruptcy Code. In particular, the 203 North LaSalle court analogized the allocation of plan voting rights among lenders to agreements through which a debtor contract[s] away the right to a discharge, which are generally held to be void as against public policy. 203 North LaSalle, 246 B.R. at 331 (citing Klingman v. Levinson, 831 F.2d 1292, 1296 n.3, 16 Bankr. Ct. Dec. (CRR) 1151, Bankr. L. Rep. (CCH) P (7th Cir. 1987); In re Cole, 226 B.R. 647, 652 n.7, 33 Bankr. Ct. Dec. (CRR) 478 (B.A.P. 9th Cir. 1998) (collecting cases refusing to enforce waivers by debtors of bankruptcy rights in addition to discharge)). 16. See note 4 and accompanying text. 17. See 203 North LaSalle, 246 B.R. at 330 (citing In re Time Sales Finance Corp., 491 F.2d 841, 844 (3d Cir. 1974)); see also In re Ionosphere Clubs, Inc., 134 B.R. 528 (Bankr. S.D.N.Y. 1991). The enactment of 510(a) enforcing subordination agreements to the same extent enforceable under applicable nonbankruptcy law subsumes the pre-code Rule of Explicitness given that state contract law generally requires waivers of rights to be explicit and unambiguous. See Collier on Bankruptcy ( While once a principle of federal law, [the Rule of Explicitness] did not survive the enactment of the Section 510 [sic] and may be found, if at all, only in principles of state law applicable generally to nonbankruptcy cases. (citing In re Bank of New England Corp., 364 F.3d 355, 42 Bankr. Ct. Dec. (CRR) 243, 51 Collier Bankr. Cas. 2d (MB) 1634, Bankr. L. Rep. (CCH) P (1st Cir. 2004) and In re Southeast Banking Corp., 156 F.3d 1114, 33 Bankr. Ct. Dec. (CRR) 302, 40 Collier Bankr. Cas. 2d (MB) 1238, Bankr. L. Rep. (CCH) P (11th Cir. 1998), certified question accepted, 92 N.Y.2d 945, 681 N.Y.S.2d 468, 704 N.E.2d 221 (1998), certified question answered, 93 N.Y.2d 178, 688 N.Y.S.2d 484, 710 N.E.2d 1083, 34 Bankr. Ct. Dec. (CRR) 326 (1999)). 18. Bankruptcy Rule 3018(c) provides, in relevant part, that [a]n acceptance or rejection [of a plan] shall be in writing, identify the plan or plans accepted or rejected, be signed by the creditor or equity security holder or an authorized agent, and conform to the appropriate Official Form. Fed. R. Bankr. P. 3018(c) (emphasis added) North LaSalle, 246 B.R. at 332 (internal citations omitted). 20. See 203 North LaSalle, 246 B.R. at 331 ( [Section] 510(a), in directing enforcement of subordination agreements, does not allow for waiver of voting rights under 1126(a) Subordination affects the order of priority of payment of claims in bankruptcy, but not the transfer of voting rights. ). 21. See note 2 and accompanying text. 22. In re Aerosol Packaging, LLC, 362 B.R. 43 (Bankr. N.D. Ga. 2006). 23. Aerosol Packaging, 362 B.R. at 47 ( Section 510(a) renders a subordination agreement enforceable to the extent enforceable under applicable nonbankruptcy law. ). 24. As the second-lien loan market expanded, creative practitioners continued to explore avenues to allocate secured lenders rights while maximizing the likelihood of enforceability if tested in court. Although the Aerosol Packaging decision and the general trend towards enforcement of negotiated allocations of creditor rights lend important support for the notion that a provision like the ones at issue in 203 North LaSalle and Aerosol Packaging would be enforced in many courts, recent intercreditor agreements take notice of the risk that 203 North LaSalle could be used against senior lenders and therefore some practitioners have included provisions that prohibit the subordinated lender from voting in favor of a plan unless it is supported by the senior lender. Because such provisions do not strip the subordinated lender

19 Enforcement of Intercreditor Agreements in Bankruptcy 361 of the right to vote or cause the senior lender to act on the subordinated lender s behalf, a court persuaded by the reasoning of 203 North LaSalle may find this distinction persuasive. 25. Aerosol Packaging, 362 B.R. at See Mark N. Berman & Jo Ann J. Brighton, Handbook on Second Lien Loans & Intercreditor Agreements 85 (2009) ( The Aerosol Packaging decision is likely a precursor of many decisions to come regarding the enforceability of intercreditor agreements because it states that courts will broadly enforce provisions of an intercreditor agreement that go beyond traditional lien/subordination issues and that affect statutory rights that arise solely due to a bankruptcy proceeding. ). 27. In fact, the Ion Media Networks court acknowledged, in dicta, the uncertainty created by these cases. See In re Ion Media Networks, Inc., 419 B.R. 585, 595 & n.12, 52 Bankr. Ct. Dec. (CRR) 140 (Bankr. S.D. N.Y. 2009) (distinguishing dispute before it by noting that [n] othing in the Intercreditor Agreement infringes on [the second-lien lender s] right to vote ); see also In re Erickson Retirement Communities, LLC, 425 B.R. 309, 315, 63 Collier Bankr. Cas. 2d (MB) 1577 (Bankr. N.D. Tex. 2010) (noting that the waivers at issue, which the court found enforceable, contained no provision that the senior secured lenders are entitled to vote the claims of the Subordinated Creditors ). Furthermore, while not dispositive, one of the reasons cited by the Boston Generating court for its ruling in favor of the second-lien lenders right to object to a sale process was that a sale of substantially all of the debtors assets under section 363 of the Bankruptcy Code deprived the second-lien lenders of the opportunity to vote, in an economically meaningful way, on a plan of reorganization. In re Boston Generating, LLC, 440 B.R. 302, 320 (Bankr. S.D. N.Y. 2010). As a result, any provision that implicates voting rights is not without risk. 28. Few courts have expressly cited Aerosol Packaging on this point. See, e.g., Ion Media, 419 B.R. at 595 n.12 (citing Aerosol Packaging as a case enforcing the provisions of an intercreditor agreement, in contrast to Hart Ski and 203 North LaSalle). Most cases assume its conclusion without citation or significant discussion. See, e.g., Erickson, 425 B.R. at 314 (noting that intercreditor agreements are enforceable under 510(a) and Maryland law). 29. Ion Media, 419 B.R Specifically, the second-lien lender argued that the FCC licenses constituted Special Property, defined as any license agreement or other personal property held by Grantor to the extent that any Requirement of Law applicable thereto prohibits the creation of a security interest therein. Ion Media, 419 B.R. at 593 n.10. Under the security agreement, such Special Property was included in the definition of Excluded Property, which was excluded from Collateral. However, the specific definition of Collateral in the security agreement expressly included all FCC Licenses. See Ion Media, 419 B.R. at 593 n Ion Media, 419 B.R. at 594 (emphasis added). 32. Ion Media, 419 B.R. at Ion Media, 419 B.R. at Ion Media, 419 B.R. at Ion Media, 419 B.R. at Ion Media, 419 B.R. at 590, 595. An aggrieved lender s right to commence litigation for breach of an intercreditor agreement is discussed further below at footnotes and accompanying text. 37. In re Erickson Retirement Communities, LLC, 425 B.R. 309, 315, 63 Collier Bankr. Cas. 2d (MB) 1577 (Bankr. N.D. Tex. 2010). 38. Erickson, 425 B.R. at Erickson, 425 B.R. at Erickson, 425 B.R. at 314. As previously noted, this short reference, without significant analysis, to the enforceability of subordination agreements suggests an implicit adoption of the Aerosol Packaging court s conclusion that any provision of a subordination agreement is enforceable in a bankruptcy proceeding under 510(a) to the extent that it would be enforceable under applicable nonbankruptcy law.

20 362 Norton Journal of Bankruptcy Law and Practice [Vol. 20 # 3] 41. Erickson, 425 B.R. at Erickson, 425 B.R. at 314 (citing In re Ion Media Networks, Inc., 419 B.R. 585 (Bankr. S.D.N.Y. 2009)). 43. Erickson, 425 B.R. at 315 ( The Examiner Motion in the context of these cases at this time (where no allegations of fraud, dishonesty, misconduct, mismanagement and the like are involved) is unmistakably aimed at slowing down the confirmation process and gaining leverage to enhance or create recoveries for the Subordinated Creditors. ); see also Erickson, 425 B.R. at 315 n.9 ( The court simply holds that the pursuit of the Examiner Motion (particularly in the context of these cases at this time where the apparent goal of the subordinated creditors is to challenge value being allocated to senior, secured creditors) is the type of action or remedy prohibited by the Subordination Agreement. ). 44. In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D. N.Y. 2010); see also Transcript of Chapter 11 Hearing at 54, In re Boston Generating, LLC, No (Bankr. S.D.N.Y. Oct. 4, 2010). 45. Boston Generating, 440 B.R. at 316; Transcript of Chapter 11 Hearing at 53, In re Boston Generating, LLC, No Transcript of Chapter 11 Hearing at 54, In re Boston Generating, LLC, No A similar dispute resulted in the same conclusion in the Delaware bankruptcy case of In re American Safety Razor Company, LLC. See Order Establishing Revised Bid and Auction Procedures and Adjourning the Sale Hearing, In re American Safety Razor Company, LLC, Case No (Bankr. D. Del. Oct. 6, 2010) (holding that the second-lien lenders had standing to object to sale procedures under an intercreditor agreement). 47. Boston Generating, 440 B.R. at The intercreditor agreement did not define the term exercise of remedies, but expressly provided that each Second Lien Secured Party agrees not to take any action that would hinder any exercise of remedies under the First Lien Documents or is otherwise prohibited hereunder including any sale, lease, exchange, transfer or other disposition of the Collateral, whether by foreclosure or otherwise. Boston Generating, 440 B.R. at Section 363(f)(2) of the Bankruptcy Code authorizes the sale of a debtor s assets free of interests, including liens, with the consent of the affected lienholders. If the first-lien lenders consent pursuant to 363(f) (2) constituted an exercise of remedies under the terms of the intercreditor agreement, the second-lien lenders sale objection would hinder the first-lien lenders exercise of remedies, in direct violation of the intercreditor agreement. 49. Boston Generating, 440 B.R. at 320 ( [T]he Court finds no provision which can be read to reflect a waiver of the Second Lien Agent s right to object to a 363 sale motion. ). 50. Boston Generating, 440 B.R. at Transcript of Chapter 11 Hearing at 54-55, In re Boston Generating, LLC, No Transcript of Chapter 11 Hearing at 55, In re Boston Generating, LLC, No ; see also Boston Generating, 440 B.R. at Aurelius Capital Master, Ltd. v. Tousa Inc., Nos CIV, CIV, 2009 WL (S.D. Fla. Feb. 6, 2009). 54. Tousa, 2009 WL at * Tousa, 2009 WL at *4, *6. The second-lien lenders also objected to the use of the cash collateral to fund a committee fee cap in an amount greater than the second-lien fee cap, but this objection was withdrawn prior to entry of the cash collateral order. Tousa, 2009 WL at * See Tousa, 2009 WL at *5 (noting that the bankruptcy court made reference to the intercreditor agreement on numerous occasions in the order and that the parties referenced it several times during the cash collateral hearings). 57. Tousa, 2009 WL at * Tousa, 2009 WL at *5. Sometimes creditor expectations may be difficult to divine. In the Delaware bankruptcy proceedings of Centaur LLC, an intercreditor agreement prohibited the second-lien lender from contesting the priority, validity, perfection, or