Intercreditor Agreement Waterfall

Creditors seeking adequate protection under a cash guarantee or a request for financing should seek such protection in the form of payments, substitute privileges or other facilities expressly governed by the cascading provisions of the inter-creditor agreement. When disputes arise as to whether adequate protection is a guarantee payment or protection against the mitigation of guarantees, creditors may still have strong arguments that adequate protection payments are a guarantee payment. [7] Whatever their form, the right and adequate level of protection are always determined by the extent of the expected or actual amortization of the secured creditor`s collateral during the bankruptcy proceedings. [8] Therefore, adequate protection can be considered a substitute for coverage, similar to insurance proceeds in the destruction of coverages typically included in cascading provisions. Two recent decisions of the influential United States. The Delaware District Bankruptcy Court discusses the interaction of agreements between creditors in the event of bankruptcy and the importance of careful development. Both decisions stem from a contradictory lawsuit between lenders in connection with the massive bankruptcy of Energy Future Holdings Corp., filed in 2014. In interpreting the validity, applicability and application of a subordination agreement, Article 510(a) requires the bankruptcy court to refer to the applicable bankruptcy law – usually the law of the State – as well as to the terms of the agreement itself. See Collier On Bankruptcy ¶ 510.03 (16th ed. 2019).

If the agreement is unclear on the terms or scope of the subordination, a bankruptcy court may refuse enforcement. See In re Bank of New England Corp., 364 F.3d 355, 367 (1st Cir. 2004) (pre-trial detention proceedings in bankruptcy court to determine, under New York law, whether the subordination agreement actually provided for the payment of post-application interest on senior debts, prior to payment of subordinated debts), in pre-trial detention, 404 B.R. 17 (Bankr. D. Mass. 2009) (Finding that the parties did not intend to subordinate claims on the basis of competition interest), aff`d, 426 B.R. 1 (D. Mass. 2010), aff`d, 646 F.3d 90 (1St Cir.

2011). The decision of the third circle brings the third circle into line with the decision of Judge Drain de Momentive in the second circle. There is a more definitive roadmap for the future, and creditors of the pledge should carefully review applicable inter-creditor agreements and security documents to determine the applicability of the treatment and cascade provisions for Chapter 11 plan distributions. The parties should also take these issues into account when agreeing on adequate protection payments at the beginning of the proceedings. If the cascading provisions are restrictive and have significant financial implications, creditors may attempt to steer a debtor in a direction of assignment or asset management in a manner that either complies with the cascading provisions of the creditor agreement or not, depending on the creditor`s position in relation to those provisions. Finally, although subordinated creditors expressly recognized the existence and priority of first-ranking privileges, the agreement could also have included a strict ”gag clause” prohibiting subordinated creditors from challenging the validity or priority of first-ranking privileges. [6] Article 552(b)(1) of the Insolvency Code provides: Except as provided in Articles 363, 506(c), 522, 544, 545, 547 and 548 of this Title, where the debtor and an enterprise have entered into a security arrangement before the commencement of proceedings and the security right created by such a security arrangement extends to the assets of the debtor acquired before commencement of proceedings and to proceeds. Proceeds, descendants or profits of such assets, then such security extends to proceeds, proceeds, descendants or profits acquired by the estate after the commencement of proceedings, to the extent provided for by such creation of security and in the applicable bankruptcy law, unless the court, after notification and hearing and on the basis of the facts of the case, otherwise. An inter-creditor agreement is an agreement between creditors that determines in advance how their competing claims against the borrower will be treated in terms of priority, receipt of payment, use of assets and other related rights. These agreements sometimes include a cascading provision that establishes the order in which the parties receive payments from a set of assets from the borrower when a default or other specific event occurs. Nor did the bankruptcy court agree with the bondholders that the scheme`s distributions were the product of guarantees. Instead, the bankruptcy court found that the wording of the security agreement limited proceeds to: (i) any consideration arising from the sale or sale of assets, (ii) the value that TCEH receives as a result of the possession of the security, or (iii) the proceeds of the insurance, none of which apply to plan distributions.

In both cases, the court complied with the provisions of the ICA by recognizing that section 4.1 was enforceable if the threshold requirements were met. The court held that the clear wording of the ICA, particularly Article 4.3, required four elements to activate the cascade: In addition, the third circuit concluded that distributions to creditors were not collateral because the cascade had two requirements: ”First, the proceeds must come from a sale, collection, or sale of security. On the other hand, the sale, collection or assignment must be part of an appeal brought by the guarantor []. The Third Circuit concluded that neither the plan`s distributions nor the adequate coverage payments met both requirements. The Third Circuit held that, although the scheme`s distributions could satisfy the first requirement (a sale or assignment), they did not meet the second (part of a guarantee agent`s claim) because the restructuring of the company under the plan was ”far from the typical remedy of a guarantee agent: sell the warranty in a foreclosure sale.” The Third Circuit also concluded that adequate protection payments did not meet the two-party requirement because no sale, collection or sale of security had been recognized by the creditors of the first lien and the proceeds could not have come from a sale where there had been no sale. The Third Circuit also stated that creditors of the first lien were correct that each creditor`s share should not include interest after the application. Therefore, the cascading provision does not apply and each creditor is entitled to adequate payments and distributions of protection based on what was due at the time of bankruptcy. .