The U.S. Bankruptcy Court’s recent decision highlights the pitfalls of ambiguous intercreditor agreements for senior creditors.

Why the Momentive case is important -

Intercreditor agreements among secured creditors with respect to common collateral are often limited to lien subordination, so as to govern each secured creditors’ rights over the common collateral, without imposing claim subordination that would require junior creditors to subordinate their claims and turn over all of their recoveries, whether or not derived from proceeds of collateral. Intercreditor agreements that provide only for lien subordination typically include a reservation of rights for junior creditors to retain all of their rights as unsecured creditors; however, the formulation of this reservation varies from agreement to agreement, and as discussed below, the exact language used can be critical in a court’s analysis.

The recent decision in In re MPM Silicones, LLC, Case No. 14-22503 (RDD) (Bankr. S.D.N.Y. Sept. 30, 2014) (Momentive) reflects the emerging trend of courts narrowly interpreting restrictions on junior creditors in these intercreditor agreements, where the restrictions are ancillary to the distribution of the common collateral’s value. In Momentive, the bankruptcy found that the general reservation of rights as unsecured creditors serves to “ameliorate obligations that [junior secured creditors have] undertaken elsewhere in the agreement.”