In the ongoing RadioShack (RS) bankruptcy case, a Delaware bankruptcy court took a first look at the enforceability of Agreements Among Lenders (AALs), the contracts governing the often-times complicated relationships among lenders with different risk and yield appetites yet which reside in one credit agreement. While the RS bankruptcy court provided long-awaited guidance on some aspects of AALs in its recent oral ruling, much has been left to the continued imaginations of those who dream of buy-out rights, waivers of voting rights and the other power-shifting mechanisms in AALs.
RadioShack entered bankruptcy with a prepetition split-collateral debt structure, consisting of a $585mm ABL credit facility (the ABL Facility), secured by a first lien on the liquid assets of RS and a second lien on most of RS’s other assets, and a $250mm term loan credit facility (the TL Facility), secured by a second lien on liquid assets of RS and a first lien on most of RS’s other assets. Each of the ABL Facility and the TL Facility was structured as a unitranche facility.
Threshold Question: Does a Bankruptcy Court have Jurisdiction to Hear and Resolve Disputes Among Lenders?
AALs are similar to their older, more well-known cousin, the intercreditor agreement, in that they govern the relationships between and among lenders, and generally do not directly impose additional obligations on the borrower. However, AALs differ in several aspects from intercreditor agreements, including the fact that a borrower is generally party to an intercreditor but not to an AAL. Thus, one fascinating question in the unitranche context is whether, if the debtor is not a party to an AAL, adjudication of disputes arising out of the interpretation of that AAL is properly decided by a bankruptcy court? Arguments in favor of bankruptcy court jurisdiction include the inclusion in most AALs of provisions which directly impact the bankruptcy case, including which lenders control voting on things like use of cash collateral, provision of DIP financing, 363 sales and plans of reorganization. Those opposed to bankruptcy court jurisdiction argue that disputes arising out of a contract among lenders can be resolved outside of the context of the bankruptcy case. In the intercreditor context, bankruptcy courts have generally taken the view that, as intercreditor agreements affect the bankrupt estate and the disposition of assets among creditors to the estate, intercreditor agreements are within the court’s purview pursuant to 28 U.S.C. §157(b)(1), which provides that a bankruptcy judge “may hear and determine all…core proceedings arising under title 11…and may enter appropriate orders and judgments, subject to review.” Prior to RadioShack (and as we will see, after RS as well), no court to the author’s knowledge has weighed in on the jurisdictional question in the unitranche/AAL context.
The RadioShack court did not address this issue through statutory interpretation; rather, the court established its jurisdiction by noting that the parties to the AAL had acknowledged and consented to the court’s jurisdiction over disputes involving the AAL. The court, therefore, did not delve deeply into a statutory or case-law justification for this jurisdiction. Thus, citable legal authority for or against the jurisdiction of a bankruptcy court to hear AAL disputes will have to come elsewhere.
Is a Waiver of the Right to Object to a 363 Sale Enforceable?
The RS Term Facility AAL contained a provision, common to AALs, whereby the last-out term lenders agreed not to object to any Section 363 sale or similar disposition if such disposition was approved of by the first-out term lenders. Significantly, the AAL did, however, preserve the right of the last-out term lender to object on any grounds which could be raised by a creditor lacking security interests in the collateral supporting the term loan obligations. In the RS case, a last-out lender in the ABL Facility submitted a bid to acquire approximately half of the RS stores via a credit bid. The first-out term lenders supported this sale, but despite the provisions of the AAL, the last-out term lenders objected on several grounds, including the fairness of the sale process, the fairness/adequacy of the amount of the bid, Bankruptcy Code Sec. 363(f) and the “free and clear” sale provision thereof, and lack of adequate protection.
The RS court parsed the various objections, classifying them into one of two buckets; those which can only be raised by a secured creditor (the “free and clear” objection and the adequate protection objection) and those objections which, as the court noted, are “objections otherwise available to an unhappy, unsecured creditor” (fairness of the sale process, fairness of the valuation of assets). The court dismissed the objections in the former bucket as prohibited by the terms of the term AAL, and permitted those in the latter to proceed. This outcome is probably well-aligned with the realistic expectations of most parties to AALs, and will hopefully serve as good precedent for upholding these limited contractual waivers of statutory rights to object to 363 sales.
Final Analysis: Helpful, if Limited, Judicial Guidance.
While the RS court relied on the consent of the parties rather than addressing the threshold jurisdictional issue, the precedents for finding intercreditor agreements within a bankruptcy court’s jurisdiction are consistent, and the similarities between intercreditor agreements and AALs strong enough, that lenders and legal practitioners should have reason to continue to expect that AAL disputes involving debtors in bankruptcy will be heard by the relevant bankruptcy court.
The RS court likewise did not find reason to overrule the contractual agreement among the various lenders to waive statutory rights to object to a 363 sale or on adequate protection grounds, as some bankruptcy courts have done in the intercreditor context on public policy concerns. This, too, should provide some comfort to parties to AALs that their contracted-for compromises will be held enforceable.
However, we are left to continue wondering whether negotiated waivers of statutory rights, such as those regarding use of cash collateral, plan voting and other rights afforded creditors under the Bankruptcy Code, will be found enforceable. Bankruptcy courts have been somewhat split on these issues in the intercreditor context, often finding such provisions enforceable but occasionally holding the waivers unenforceable. Generally, the analyses underlying the latter series of cases have been fact-specific, focusing either on the perceived lack of specific awareness of the waiving party (generally, the junior creditor) concerning the nature and scope of the waiver, or the extent to which the waiver eviscerates the junior creditor’s statutorily-created rights under the bankruptcy code, limiting somewhat their guidance as precedent.