A New York bankruptcy judge held on October 4, 2010, that second lien lenders could object to a debtor’s bid procedures approved by the first lien lenders despite the terms of an intercreditor agreement in In re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Oct. 4, 2010).1 The intercreditor agreement provided the first lien lenders with the “exclusive right to…make determinations regarding the…sale” of the collateral. According to the court, however, the agreement did not expressly preclude the second lien lenders from objecting to bid procedures.

Pre-Bankruptcy Marketing and Proposed 363 Sale

The debtors, owners and operators of power plants in Massachusetts, filed chapter 11 petitions on August 18, 2010, seeking to sell their assets in a section 363(b) auction sale to a “stalking horse” bidder2 after intense pre-bankruptcy marketing efforts. The stalking horse bid, however, totaled slightly less than the face amount of the senior debt. To set the stage for the auction, the debtors promptly moved for court approval of their bid procedures, scheduling an auction within 72 days. The first lien lenders supported and approved the bid procedures.

Second Lien Lenders Object to Bid Procedures

The second lien lenders objected to the debtors’ proposed bid procedures, asserting, among other things, that the intercreditor agreement did not specifically prohibit objections by the second lien lenders to section 363 sales but only to the exercise of remedies by the first lien lenders. In addition, the intercreditor agreement permitted any objection available to an unsecured creditor. The accelerated sale schedule would impair the estate’s ability to achieve the highest or best price for the assets, the second lien lenders argued. Moreover, the proposed stalking horse bid protections would chill bidding. In response, the first lien lenders supported the sale and the proposed bid procedures, arguing that the intercreditor agreement with the second lien lenders (i) precluded the second lien lenders from objecting to any sale of the collateral supported by the first-lien lenders, and (ii) granted the first lien lenders the “exclusive right” to make determinations regarding the sale of collateral until the first lien debt was repaid. The intercreditor agreement did not specifically prohibit the second lien lenders from objecting to “bid procedures,” but the first lien lenders argued that any second lien lender objection was barred by the agreement’s intent to limit the second lien lenders’ rights until the first lien lenders were repaid.

Court’s Ruling

The court permitted the second lien lenders to object to the bid procedures. The court held that the second lien lenders could object to the proposed bid procedures because there was no express prohibition against it. The court distinguished Ion Media Networks , Inc. v. Cyrus Select Opportunities Master Fund, Ltd. (In re Ion Media Networks, Inc.), 419 B.R. 585 (Bankr. S.D.N.Y. 2009), where the court denied a junior lender (who was “hopelessly” out of the money) the right to object to a reorganization plan based on the senior lenders’ asserted lack of a lien on certain collateral. In Ion Media, however, the junior lender had expressly waived its right to object to a reorganization plan in its intercreditor agreement. In Boston Generating, there was no express bar to a junior lender objecting to bid procedures. Nor was it clear the second lien lenders were hopelessly “out of the money.” Rather, in the court’s words, they were on the “cusp of a recovery.” See Slip Op. p. 52; line 6-7. Further, the court found that the second lien lenders in Boston Generating were not engaging in obstructionist behavior. They wanted to ensure that the debtors discharged their fiduciary duty to get the highest price for their assets and thus “have standing to be heard.” Finally, the court limited its decision to the second lien lenders’ bid procedures objection, explaining that it would address any sale objections when and if the second lien lenders made them.

The intercreditor agreement in Boston Generating was more than 65 pages and included waivers by the second lien lenders of certain bankruptcy rights customarily found in “Wall Street”-style intercreditor agreements, including waiver of any right (i) to seek relief from the automatic stay, (ii) to contest any request by the first lien lenders for “adequate protection,” (iii) to contest any objection by the first lien lenders to any motion claiming lack of “adequate protection” and (iv) to object to any claim by a first lien lender for post-bankruptcy interest. The extensive bankruptcy waivers did not, however, address the right of the second lien lenders to object to a section 363 sale supported by the first lien lenders or to object to bid procedures supported by the first lien lenders. The Boston Generating decision highlights an additional set of intercreditor issues that will be subject to negotiation. Significantly, the recent ABA Model First Lien/Second Lien Intercreditor Agreement expressly provides that second lien lenders waive any right to contest a section 363 sale consented to by the first lien lenders (subject to the reservation of the right to object to the extent available to unsecured creditors). The intercreditor agreement in Boston Generating (consistent with the ABA model) included a carve-out allowing the second lien lenders to exercise rights as unsecured creditors. Although the parties briefed whether that carve-out allowed the second lien lenders to oppose the bid procedures, the court did not address that point in its ruling.