Avondale Gateway Center Entitlement, LLC v. National Bank of Arizona, et al. (In re Avondale Gateway Center Entitlement, LLC), 2011 WL 1376997 (D. Ariz. Apr. 12, 2011)

CASE SNAPSHOT

A junior and senior lender’s respective loans were secured by the same piece of land. The lenders were parties to a subordination agreement, which contained a subrogation clause that subrogated the senior lender to the junior lender’s rights, liens and interests with respect to the debtor’s assets. The junior lender voted to approve the debtor’s reorganization plan, and the senior lender voted on behalf of itself and on behalf of the junior lender to reject the debtor’s plan. The junior lender objected, arguing that the subrogation clause did not expressly provide for the senior lender to vote in its place. The District Court held that the subrogation clause implicitly encompassed voting rights, and allowed the senior lender to vote on behalf of junior lender.  

FACTUAL BACKGROUND

Avondale borrowed $30 million from the National Bank of Arizona, and $18 million from MMA Realty Capital, LLC. Each loan was secured by trustee deeds in vacant land. NBA held the senior lien, and MMA held the junior lien. Avondale, NBA and MMA entered into a subordination agreement, which included a subrogation clause. In relevant part, this clause provided: “[MMA] agrees that [NBA] shall be subrogated to [MMA] with respect to [MMA’s] claims against Borrower and [MMA’s] rights, liens, and security interests, if any, in any of the Borrower’s assets and the proceeds thereof…” Subsequent to the execution of these documents, Avondale filed a chapter 11 petition.

MMA argued that, because there was no express grant of voting rights in the clause, NBA was not subrogated with respect to voting, and it was not entitled to cast a vote for MMA on the debtor’s plan. NBA argued that subrogation clause subrogated all of MMA’s claims to NBA, including MMA’s voting rights.  

COURT ANALYSIS

The court held that, under the Bankruptcy Code, the definition of a “claim” does not include a right to vote. The right to vote, however, is a derivative right of the holder of a claim, under section 1126(a).

Subrogation places one party (the subrogee) completely in the shoes of another party (the subrogor). Quoting an Arizona Supreme Court case, the court stated that, “[s]ubrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.” The court concluded that NBA did step into MMA’s shoes with respect to MMA’s claims against Avondale, and since the Bankruptcy Code recognizes that voting is a derivative right of a claim holder, NBA did acquire MMA’s right to vote.  

The court then turned to the debtor’s argument that the right to subrogation would not arise until NBA paid MMA’s claims in full. The court held that this may be so under an equitable subrogation analysis, but this was not so where contractual subrogation became effective upon execution of the agreement. Here, NBA was subrogated to MMA’s claims from the execution of the subordination agreement through the date of payment of NBA’s claims.  

Finally, the court rejected the debtor’s argument that voting rights are not assignable in a bankruptcy case. While there was no Arizona precedent, the court found the reasoning of other decisions to be persuasive, and concluded that voting rights are assignable in a bankruptcy case. The District Court upheld the Bankruptcy Court’s approval of the vote.  

PRACTICAL CONSIDERATIONS

Subrogation clauses often expressly include voting rights, but even where they do not, voting rights, and potentially, other rights defined as rights derivative to a “claim” under the Bankruptcy Code, may be subrogated pursuant to a general subrogation clause. Such rights should be expressly provided for in the agreement, and if a junior creditor wishes to exclude such voting rights, it should expressly do so in any agreement containing subrogation clauses.