In In re TCI 2 Holdings, LLC the first lien lenders and second lien noteholders entered into an intercreditor agreement (Agreement) before TCI's Chapter 11 bankruptcy. The first lien lenders sought to enforce the Agreement to block confirmation of a proposed cramdown plan of reorganization jointly filed by the debtors and the second lien noteholders.

TCI 2 Holdings, LLC and nine subsidiaries (together, the Debtors) filed for Chapter 11 bankruptcy on February 17, 2009. The Debtors owned three hotel casino properties in Atlantic City, New Jersey, and owed about $488 million on first lien debt to the first lien lenders, $1.25 billion in second lien notes bearing interest at 8.5% per year and $39.3 million in general unsecured claims. Beal Bank and Icahn Partners held the first lien debt. A group of nine lenders holding about 61% of the second lien notes formed the Ad Hoc Committee of Second Lien Note holders (AHC).

Before the bankruptcy, the first lien lenders had entered into the Agreement with the second lien noteholders, which provided, among other things, that until the first lien obligations are paid in full, no proceeds of the shared collateral are payable to the second lien noteholders. The Agreement also prohibited the second lien noteholders from objecting to or contesting the payment of any adequate protection payments to the first lien lenders or challenging the status of their secured claims.

On February 23, 2010, the first lien lenders filed their final proposed plan of reorganization. Under their proposed plan, the first lien debt would be equitized into 100% of the equity of the reorganized Debtors . The second lien noteholders and trade creditors would receive no distribution.

On March 9, 2010, the AHC and the Debtors filed their competing final proposed plan of reorganization. Under their proposed plan, the first lien lenders would receive deferred cash payments up to the value of their secured claims, including a $125 million cash payment on the effective date of the plan and a new $334 million secured loan at market rate of interest. The second lien noteholders would receive the right to participate in a backstopped rights offering for up to 70% of the equity in the reorganized Debtors. The rest of the equity would be distributed to certain noteholders who agreed to backstop the rights offering and Donald Trump, who entered into a settlement agreement with the second lien noteholders to retain a minority ownership in the casinos.

The first lien lenders argued that the Agreement precluded the second lien noteholders from filing a plan. The first lien lenders also argued that under the Agreement, they had to paid in full in cash before any proceeds of the shared collateral could be paid to the second lien noteholders. Under the AHC/Debtor plan, the first lien lenders would be paid over time, amounting to a breach of the Agreement because the second lien noteholders would receive distributions before the first lien lenders were repaid in full.

On April 12, 2010, the Court issued an order ruling that both plans were confirmable, but confirmed the AHC/Debtor plan because it enjoyed greater creditor support. The Court avoided the question of whether the AHC/Debtor plan violated the Agreement because it held that section 1129(b)(1) of the Bankruptcy Code requires the court to confirm a nonconsensual plan if it meets the requirements for a cramdown, despite the terms of an otherwise enforceable intercreditor agreement.

The Court examined the language of section 1129(b)(1) which provides that "notwithstanding section 510(a)," a plan that meets the Bankruptcy Code's cramdown requirements shall be confirmed. This basically removed section 510(a) from the Court's consideration of the AHC/Debtor plan. The Court, in analyzing section 1129(b)(1), held that "even though" section 510(a) requires the enforceability of subordination agreements to the same extent that the agreement is enforceable outside of bankruptcy, a nonconsensual plan will be confirmed if it meets the cramdown requirements of section 1129.

The first lien lenders have appealed the decision.

Although the decision is pending appeal, if upheld it will set significant precedent about the enforceability of intercreditor agreements in bankruptcy. If the Court's decision stands, intercreditor terms prohibiting junior lenders from proposing a Chapter 11 plan may not be enforceable to block the confirmation of an otherwise confirmable cramdown plan. This decision runs counter to recent court decisions upholding second lien lenders' waivers in intercreditor agreements (see Legal Update, Bankruptcy Court Upholds Second Lien Lenders' Waivers in Intercreditor Agreement).

Also, by the Court's refusal to decide whether the second lien noteholders violated the intercreditor agreement, the first lien lenders must engage in further litigation in state court if they wish to pursue a contractual claim for damages.