The Bankruptcy Court for the District of Massachusetts recently issued an opinion in In re SW Boston Hotel Venture, LLC1 in which it found, among other things, that the assignment of voting rights from a junior creditor to a senior creditor pursuant to an intercreditor agreement was unenforceable. The opinion was rendered in connection with the court’s decision to confirm the plan proposed by the debtor, the owner of the W Hotel in Boston.
SW Boston Hotel Venture LLC (SW) and a group of related entities filed a chapter 11 petition in April of 2010. Prior to SW’s filing, Prudential Insurance Company of America and the City of Boston (SW’s two largest creditors) had entered into an intercreditor agreement pursuant to which the City agreed to subordinate its rights to payment to those of Prudential under its senior loan. The intercreditor agreement further provided that, in the event of a bankruptcy, the City would assign certain of its voting rights to Prudential.
On June 27, 2011, SW filed a modified and amended plan of reorganization that purported to provide payment in full of all allowed claims. Other than Prudential, all classes voted in favor of this plan. Despite the fact that the City had cast its own vote in favor of the plan, Prudential, relying on the intercreditor agreement’s voting assignment provision, submitted a ballot rejecting the plan on behalf of the City. Both the City and SW opposed Prudential’s attempted exercise of the City’s voting rights, arguing that, because Prudential was the only objecting creditor, the plan should be confirmed as a so-called “cramdown” plan.
Judge Feeney’s Confirmation Decision
Judge Joan N. Feeney overruled Prudential’s objections and held that SW’s plan should be confirmed. With regard to Prudential’s attempt to vote on behalf of the City, Judge Feeney held that the City’s assignment of voting rights to Prudential was not enforceable. Judge Feeney acknowledged that subordination agreements are generally enforceable under section 510(b) of the Bankruptcy Code, but reasoned that such agreements cannot go so far as to nullify substantive rights (such as plan voting rights) otherwise found in the Bankruptcy Code. Along these lines, and despite certain authority to the contrary,2 Judge Feeney concluded that because Congress did not intend to permit creditors to alter substantive provisions of bankruptcy law, a creditor cannot waive plan voting rights.
Judge Feeney went on to find that the plan could be confirmed as a cramdown plan under section 1129(a)(10) of the Bankruptcy Code. Under the plan, Prudential will retain a lien on its collateral and will receive interest at a rate of 4.25 percent per annum on the fixed amount of its claim.
Conclusions and Observations
Judge Feeny’s decision nullifying the assignment of voting rights is one of a small number of cases that have invalidated so-called “bankruptcy waiver” provisions granted by junior lenders in connection with second lien financings.3 Judge Feeny’s recent opinion serves as a reminder to senior lenders that so-called bankruptcy waivers negotiated during the height of the second lien financing market may not survive judicial scrutiny, particularly if such waivers are relatively unrelated to payment subordination schemes among the senior and junior lenders.
It is worth noting, however, that these cases often deal with waivers of the right to vote on a reorganization plan, or with ambiguous language in intercreditor agreements. Other bankruptcy courts still appear willing to enforce many provisions commonly found in intercreditor agreements. For instance, the Bankruptcy Court for the Southern District of New York recently upheld bankruptcy waivers that prohibited junior lenders from challenging lien priority and objecting to plans of reorganization,4 the Bankruptcy Court for the Southern District of Florida recently enforced a second lien lender’s waiver of its right to object to the use of cash collateral,5 and the Bankruptcy Court for the Northern District of Texas recently decided to strictly enforce a standstill provision in certain subordination agreements by denying a junior lender’s motion seeking the appointment of an examiner.6