Can a syndicated lender control its own destiny in a bankruptcy? According to Rosewood, the answer is no. As background, the bankruptcy court explained that multi-lender loans can be structured as syndications – where multiple lenders each make loans to the borrower, but designate one lender to be agent for the others, or as participations – where only one lender has a relationship with the borrower. In this case, Branch Banking & Trust Company (BB&T) was a member of a syndicate of lenders that financed development of a condominium project.
Under the loan agreement, the lenders’ administrative agent had exclusive authority to file proofs of claim on behalf of the lenders, and was authorized to consent to a plan of reorganization with the approval of lenders holding a majority of the loan commitments. Section 8.9 of the loan agreement also included typical provisions limiting the administrative agent’s ability to amend the loan agreement or to waive or consent under specified circumstances, including releasing the liability of the borrower or guarantor, or transferring or releasing any lien on collateral, without unanimous lender consent.
The debtor proposed a plan of reorganization that provided for transfer of its remaining condominium units into an newly formed limited liability company, with the lenders receiving membership interests in the LLC in full satisfaction of their debt. In addition, one of the lenders was to provide exit financing secured by a first priority lien in the remaining units, with the exit financing to be assumed by the new LLC.
The administrative agent voted in favor of the plan of reorganization. Notwithstanding the loan agreement provisions regarding the agent’s authority, BB&T independently filed a proof of claim, objected to confirmation, and cast its own vote against the plan.
BB&T made various arguments that it was entitled to do so notwithstanding the provisions described above, starting with the argument that it had a right to vote since it held a secured claim. Even conceding that it voluntarily bargained away the right to vote on a plan, BB&T contended that the administrative agent could not accept a plan without unanimous lender consent as required by Section 8.9 because the plan would result in the transfer of collateral, release of liens and release of guarantors.
The court rejected BB&T’s arguments, finding that it was bound by the administrative agent’s vote in favor of the plan. In response to arguments that the plan modified the loan in ways that were not permitted without unanimous consent, the court decided that this was a case of a specific provision (dealing with the “specific set of narrowly defined circumstances – the agent’s authority to act in the event of Debtor’s bankruptcy”) prevailing over a more general provision. (Shades of Justice Scalia’s opinion in RadLAX) Namely, the specific authorization to vote on a plan with the consent of a majority of the lenders was not affected by the limits in Section 8.9, which the court read as dealing with amendments to the loan agreement.
Thus, the vote that BB&T cast against the plan did not count, and BB&T was counted as having voted in favor of the plan for purposes of determining whether the plan met confirmation requirements.
Note that the result in this case is not a foregone conclusion. Bankruptcy courts will take a very close look at rights granted to parties under the Bankruptcy Code. For example, in the context of subordination agreements between senior lenders and subordinated lenders, there are cases where courts have not been willing to enforce provisions in a subordination agreement that permit a senior lender to vote a subordinated lender’s claims on a plan of reorganization.