Finally, the bankruptcy court was not persuaded by the junior lender`s argument that it should be allowed to investigate whether the lead lender fraudulently induced Argon to enter into the secured credit facility and related subordination agreement by promising a $75 million line of credit that the lead lender never wanted to provide. According to the court, Delaware law (which governed) does not allow the non-execution of an agreement negotiated between sophisticated commercial actors if a party claims that fraud has occurred. Although a subordination agreement may be set aside as a remedy under Delaware law in certain circumstances, Junior Lender did not seek termination in this case. Thus, in the event of Argon`s bankruptcy, the subordination agreement would be applied until a court decides otherwise in appropriate proceedings. In such a proceeding, the court wrote, the junior lender might be entitled to the discovery of the lead lender “under the usual rules of civil law.” However, the declaration of applicability of paragraph 510(a) must be understood in the context of the Code`s additional reference to subordination agreements in paragraph 1129(b)(1). This provision, which allows for the so-called piling up of a Chapter 11 regime because of the objection of a class of non-consensual claims, provides that individuals and businesses turn to credit institutions when they need to borrow funds. The lender is compensated if it receives interest payments on the loan amount, unless the borrower defaults on its payments. The lender could require a subordination agreement to protect its interests if the borrower places additional privileges on the property, such as if .B they were to take out a second mortgage. With respect to the first question—the relationship between paragraph 510(a) and paragraph 1129(b)(1)—the Third Circuit noted that “the text of paragraph 1129(b)(1) replaces the strict application of subordination agreements.” Tribune, 2020 WL 5035797, at *1. Citing the “clear meaning” of the term “notwithstanding” – defined as “defying” or “without preventing or impeding” – the court read the chapeau of Section 1129(b)(1) so that “despite the rights conferred by Section 510(a)” cramdown is permitted as long as the plan is not unfairly discriminated against, fair and equitable.
Id. at *6 (emphasis added). Thus, the Third Circuit rejected the alternative interpretation of the lead creditors, who had argued that the “regardless” clause meant that a plan could still be considered non-discriminatory (and fair and equitable) even if it applied a subordination agreement. Specifically, the court held that the junior lender could not rely on either the discovery provision or the 2004 bankruptcy rule to obtain advance communication against the lead lender. The clear text of the subordination agreement, the court wrote, prevents the junior lender from “asserting claims against the lead lender in any way.” According to the court, any act by the junior lender to obtain a discovery regarding the principal debt is “a calculated, albeit intermediate, act to assert” its claims against Argon. “It simply cannot be assumed,” the court wrote, “that [the junior lender] is seeking discovery without cause; [it] cannot be considered irrational. If the claims of a creditor or group of creditors are subordinated under a valid and enforceable agreement, section 510(a) of the Bankruptcy Code provides that the subordination agreement is enforceable in the event of bankruptcy to the same extent as it would be enforceable under applicable bankruptcy law. The two usual types of subordination agreements are listed below: the bankruptcy court held that the reservation clause of the subordination agreement was “an explicit and explicit second provision aimed at preventing `obstructive behaviour` [and] went beyond simply maintaining the `hierarchy of privilege priorities`” in a subordination agreement (citing In re MPM Silicones, L.L.C., 2019 WL 121003, at *11 (S.D.N.Y. 4 January 2019)). According to the court, the clause prevented the junior lender from “using the insolvency proceedings to obtain a discovery from the principal lender” with respect to the senior debt.
[3] Although not discussed in detail in this article, the Third Circuit has spent a lot of time articulating a set of eight general principles that define the standard of unjust discrimination that will undoubtedly be relevant to future cases. See Tribune, 2020 WL 5035797, at *9-11. The tribunal, although not formally or exclusively in favour of it, applied a version of the “rebuttable presumption” test of unjust discrimination and concluded that the bankruptcy court had chosen to apply this test (against other alternatives) and that the parties had not challenged this position. See id. at *9 & n.16. Subordination agreements are the most common in the mortgage field. When a person takes out a second mortgage, that second mortgage has a lower priority than the first mortgage, but these priorities can be disrupted by refinancing the original loan. I am a software developer who has become a lawyer with over 7 years of experience in drafting, reviewing and negotiating SaaS and other technology agreements.
I am a partner at Freeman Lovell PLLC, where I lead the legal outsourcing process for routine commercial contracts. We offer a strong alternative to the traditional attitude by providing you with the power of a team for the price of a temporary lawyer. It may be tempting for some to read the view that subordination agreements do not have to be respected. In fact, senior duty holders cautioned against such an eventuality, noting that enforcement policy under paragraph 510(a) would be toothless if it could be avoided in cramdown, and that enforcement is not at all an “application” solely by consent. However, there is reason to believe that the judgment of the Third Circle is more limited. While noting that the Bankruptcy Code “does not require courts to review Cramdown`s plans to strictly enforce subordination agreements,” she further cautioned that “this does not necessarily have to comply with the restrictions set out in the Cramdown provision.” Tribune, 2020 WL 5035797, at *12 (emphasis added). Depending on the circumstances, in other words, a plan may be considered unfairly discriminatory if it does not give due weight to a subordination agreement. See e.B. id. in the case of *6 (stating that part of the purpose of Section 1129(b)(1) is to verify “whether the involuntary reallocation of subordinate amounts under a plan unfairly discriminates against the deviant category” and that the provision “is intended to ensure that debtors and courts do not have carte blanche to disregard pre-bankruptcy contractual arrangements as long as the game remains in the joints”). The lead lender argued that the reserve clause in the subordination agreement prevented the junior lender from requesting the requested discovery. Junior Lender responded, among other things, that the subordination agreement did not prevent him from obtaining a discovery: (i) on behalf of the trustee and/or estate; or (ii) with respect to the alleged fraud of the primary lender in obtaining Argon to incur the senior debt.
Notwithstanding any breach by [Argon] of the omission … Under the [Junior Debt Agreement], the [Junior Lender] may not, at any time or in any manner, close, possess or attempt to enforce any security or in any way enforce any claims it has or may have against [Argon] or any other debtor, unless the obligations to the principal lender have been paid and fully fulfilled in full and immutably. The signed agreement must be recognized by a notary and registered in the official county registers to be enforceable. Pico & Kooker provides practical legal advice in structuring, drafting, negotiating, interpreting, managing and applying complex, high-value business transactions. Jonathan is familiar with complex environments and has extensive expertise in advising clients on a variety of long- and medium-term cross-border and financial commitments, including participation in public tenders, PPPs, export sales agreements and policy and regulatory formulation. Jonathan and his co-founder Eva Pico have represented lenders, global companies and other market participants in a number of industries, including financial services, infrastructure and transportation, and have acted on behalf of lenders. As an external consultant, Pico & Kooker has established a strong relationship and working relationship with its clients and works appropriately with its internal teams to increase consistency, processes and procedures. The company takes a unique approach as a practical, business-oriented external legal advisor who believes in proactively partnering with clients to achieve desired results while managing and engaging key stakeholders. .