Intercreditor Agreements: How Far Can They Reach?
Can a senior secured lender require, through an inter-creditor agreement, that a junior lender relinquish the juniorâ€™s rights under the Bankruptcy Code vis Ăˇ vis a common debtor?
Though the practice is a common one, the answer to this question is not clear-cut.Â Bankruptcy Courts addressing this issue have come down on both sides, some holding â€śyea,â€ť and others â€śnay.â€ťÂ Late last year, the Massachusetts Bankruptcy Court sided with the â€śnaysâ€ť in In re SW Boston Hotel Venture, LLC,Â 460 B.R. 38 (Bankr. D. Mass. 2011).
The decision (available here) acknowledges and cites case law on either side of the issue.Â It further highlights the reality that lenders employing the protective practice of an inter-creditor agreement as a â€śhedgeâ€ť against the debtorâ€™s potential future bankruptcy may not be as well-protected as they might otherwise believe.
In light of this uncertainty, do lenders have other means of protection?Â One suggested (but, as yet, untested) method is to take the senior lenderâ€™s bankruptcy-related protections out of the agreement, and provide instead that in the event of the debtorâ€™s filing, the juniorâ€™s claim will be automatically assigned to the senior creditor, re-vesting in the junior creditor once the seniorâ€™s claim has been paid in full.