An “intercreditor agreement” is a form of agreement between secured creditors of a common debtor that defines the priority, remedies and rights among such creditors as they pertain to their common debtor. Typically, an intercreditor agreement confirms or modifies the preexisting priority rankings of the senior and junior lienholders relative to each other and, additionally, modifies, waives or assigns various contract, statutory or common law rights or remedies against the debtor to which the junior lienholder otherwise would be entitled to assert. In the past, understandings between a debtor’s creditors were more frequently governed by a subordination agreement due to the predominance of companies who financed their operations using both secured indebtedness and unsecured bond debt. In other words, the holders of the bond indebtedness agreed to condition their right of payment upon the prior repayment of the secured indebtedness. However, over the last 15 years, companies have utilized first/second lien debt structures with increasing frequency in order to take advantage of the lower borrowing costs that such structures afford and, therefore, the use of intercreditor agreements has become much more prevalent.
Intercreditor agreements are used not only to set forth the relative priorities of the debtor’s creditors, but also to limit the remedies that would otherwise be available to the junior lienholder in the event of a default or a bankruptcy by the debtor. Indeed, intercreditor agreements often include a sundry of bankruptcy-related waivers, limitations and prohibitions both on the junior lienholder’s rights to enforce its claims until the senior lienholder is paid in full, and on the junior lienholder’s ability to interfere with the senior lienholder’s exercise of various rights to collect its payment ahead of the junior lienholder. 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.”1 Despite this rather straightforward edict, courts have varied in their willingness to enforce waivers, limitations and prohibitions on a junior lienholder’s ability to act in a bankruptcy proceeding. The purpose of this article is to explore the extent to which intercreditor agreement waiver provisions are enforceable in bankruptcy and, if so, the type of conduct by a junior lienholder that may be prohibited. In other words, what are the limits on a junior lienholder’s ability to act in the bankruptcy case to protect its lien rights without running afoul of the waivers, limitations and prohibitions contained in an intercreditor agreement?
