In In re Boston Generating LLC, a New York bankruptcy judge held 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. [2] 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, 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 Aug. 18, 2010, seeking to sell their assets in a § 363(b) auction sale to a stalking-horse bidder [3] after intense pre-bankruptcy marketing efforts. However, the stalking-horse bid totaled slightly less than the face amount of the senior debt. To set the stage for the auction, the debtors moved on the first day of the bankruptcy case seeking court approval of their bid procedures and scheduling the auction within 72 days after the filing date. The first-lien lenders 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 § 363 sales but only to the exercise of remedies by the first-lien lenders. The intercreditor agreement also 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 argued that the intercreditor agreement (1) precluded the second-lien lenders from objecting to any sale of the collateral that the first-lien lenders supported and (2) granted the first-lien lenders the “exclusive right” to make determinations regarding the collateral sales 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 and held that the second-lien lenders could object to the proposed bid procedures because there was no express prohibition against it in their intercreditor agreement with the first lien lenders. The court distinguished Ion Media Networks Inc. v. Cyrus Select Opportunities Master Fund Ltd. (In re Ion Media Networks Inc.), [4] 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, 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 that the second-lien lenders were hopelessly “out of the money.” Rather, in the court’s words, they were on the “cusp of a recovery.” [5] Further, the court found that the second-lien lenders in Boston Generating were not engaging in obstructionist behavior, but rather wanted to ensure that the debtors discharged their fiduciary duty to get the highest price for their assets. The court held that the second-lien lenders “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 exceeded 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 (1) to seek relief from the automatic stay, (2) to contest any request by the first lien lenders for “adequate protection,” (3) to contest any objection by the first-lien lenders to any motion claiming lack of “adequate protection” and (4) to object to any claim by a first-lien lender for post-bankruptcy interest.The extensive waivers did not address the right of the second-lien lenders to object to a § 363 sale 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 § 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). On Oct. 13, 2010, the court approved the bidding procedures, and on Nov. 24, 2010, the court approved the sale to the stalking-horse bidder, which remains subject to review by the Federal Energy Regulatory Commission. The sale order is now subject to an appeal.
1. Lawrence S. Goldberg, a partner in the Finance Department at Schulte Roth & Zabel LLP, contributed to this article.
2. In re Boston Generating LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Oct. 4, 2010).
3. “A ‘stalking horse’ contract is a first, favorable bid strategically solicited by the bankrupt company to prevent low-ball offers.” Contrarian Funds LLC v. Aretex LLC (In re WestPoint Stevens Inc.), 600 F.3d 231, 239 n.3 (2d Cir. 2010).
4. 419 B.R. 585 (Bankr. S.D.N.Y. 2009).
5. See slip op. p. 52; line 6-7.