In re Coastal Broadcasting Systems, Inc., Case No. 11-10596 (Bankr. D. N.J. July 6, 2012)
At confirmation, the bankruptcy court considered whether the assignment of voting rights in an intercreditor agreement was enforceable. The bankruptcy court noted that various courts had reached differing conclusions, but ultimately found that the voting assignment in the intercreditor agreement before it was enforceable.
In 2008, Coastal Broadcasting, a radio station operator, entered into various agreements to restructure and refinance its business. As part of the restructure, Coastal redeemed the stock of five shareholders in exchange for a secured note. At the same time, Coastal also refinanced its debt with its secured lender, Sturdy Savings Bank. The bank and the redeeming shareholders entered into a subordination and intercreditor agreement, which allowed Coastal to make ongoing payments to the shareholders provided that no event of default had occurred. The intercreditor agreement also provided that in the case of a bankruptcy filing by Coastal, the bank would be entitled to exercise any voting rights the shareholders might have, and the shareholders would not receive any payments from Coastal until the bank was paid in full.
Coastal filed for chapter 11 bankruptcy, and sought confirmation of its reorganization plan. The plan, which was supported by the bank, classified the claims of two of the shareholders who objected to the proposed plan separately from other claimants, and designated their claims as unimpaired. The dissenting shareholders objected, contending that their claims were impaired.
The bankruptcy court agreed with the dissenting shareholders that their claims were impaired because the proposed plan sought to totally extinguish all rights the dissenting shareholders would otherwise have under the subordination agreement, including the right to any recovery after the bank was paid in full. The court then turned to the question of the enforceability of the voting rights assignment provision in the intercreditor agreement.
The bankruptcy court noted that intercreditor agreements are clearly enforceable under section 510 of the Bankruptcy Code insofar as such agreements address payment and the priority of payment. What is less clear, however, is whether clauses waiving or transferring various rights of junior creditors (such as filing a proof of claim or voting on a plan of reorganization) are similarly enforceable. Enforceability of voting rights assignments have been addressed by several bankruptcy courts with varying results, and no circuit court has yet addressed the issue.
In performing its analysis, the bankruptcy court noted that terms of a subordination agreement are enforceable in bankruptcy under section 510(a) to the same extent they are enforceable outside of bankruptcy. The subordination agreement at issue was governed by New Jersey law, which applies the same principles of contract interpretation to intercreditor agreements as it does to other contracts. Under New Jersey law, a clear and unambiguous contract should be enforced in accordance with its terms. Based upon the clear wording of the agreement, the bankruptcy court found that the voting assignment was enforceable and the bank could vote in favor of the plan despite the objections of the dissenting shareholders.
Bankruptcy court decisions are not unanimous in cases that involve the assignment of voting rights. Some courts have held that voting is a fundamental right under the Bankruptcy Code that cannot be assigned, and parties to subordination agreements must be aware that there is a divergence of opinion, yet to be addressed by a Circuit Court.