Years ago, second lien lenders adhered to the truism about children – they were seen but not heard. As our children have grown more vocal in recent years, so too have second lien lenders. A spate of recent bankruptcy cases demonstrate that second lien lenders have been both seen and heard at many critical junctures in the chapter 11 timeline -- at the sale of the debtor’s assets under section 363 of the Bankruptcy Code, in seeking the appointment of an examiner, when voting on a chapter 11 plan, and in connection with the confirmation hearing.
The judiciary’s response to the louder voice of second lien lenders has been varied and somewhat unpredictable. Recent decisions in In re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y.), however, are of singular mindset -- second lien lenders can be seen and heard in the context of a 363 sale so long as the intercreditor agreement does not specifically provide otherwise. This ruling was made even though, in the words of the court, it "violated the spirit of the subordination scheme" which the first lien lenders and second lien lenders had agreed to pre-petition.
In the memorandum set forth below, attorneys Ancela R. Nastasi and Keith N. Sambur explore the Boston Generating decision, and provide suggestions for secured lenders seeking to ensure that the "spirit" of their intercreditor agreement is enforced by courts.
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