Intercreditor Priority of Payments Not Applicable to Adequate Protection Payments and Plan Distributions

July 2, 2019

In a non-precedential ruling, a Third Circuit appeals panel rejected the appeal by Delaware Trust Company, as first lien indenture trustee (the “Appellant”), of the dismissal of its action against Wilmington Trust, N.A., as first lien collateral agent (the “Collateral Agent”) and first lien administrative agent, in connection with the allocation and priority of adequate protection payments pursuant to a bankruptcy court order and distributions pursuant to a bankruptcy plan, in each case, made to two groups of creditors under an intercreditor agreement.

In its appeal, the Appellant argued, among other things, that the priority of payments provision set forth in the intercreditor agreement governing the relationship between the two groups of creditors applied to the allocation of payments and distributions in connection with the bankruptcy plan. The Appellant argued that such application would result in a greater share of such payments and distributions being allocated to it on behalf of its creditors. However, the panel rejected the Appellant’s argument that the priority of payments provision set forth in the intercreditor agreement is applicable to the adequate protection payments and plan distributions.

The panel noted that the priority of payments provision in the intercreditor agreement applied solely to collateral or proceeds of a sale of collateral conducted by the Collateral Agent. In the first instance, the panel determined that (i) the adequate protection payments did not constitute payments of collateral because they did not reduce the amount of money owed on the debts and (ii) the plan distributions were not distributions of collateral because they were made from assets on which the creditors had no liens.

The panel further noted that, in order for the adequate protection payments and plan distributions to constitute proceeds subject to the intercreditor agreement priority of payments provision, the payments and distributions must be (1) from a sale, collection or disposition of collateral and (2) that sale, collection or disposition must be part of a remedy implemented by the Collateral Agent. The panel stated that the adequate protection payments cannot meet the first prong because there was no sale, collection or disposition of collateral that resulted in those payments. Although the panel noted that the plan distributions might meet the first prong, the panel stated that the restructuring was not a remedy implemented by the Collateral Agent, given that the creditors – not the Collateral Agent – voted on the restructuring and the bankruptcy court approved it.

Ultimately, the panel held that because the payments and distributions are neither collateral nor proceeds under the intercreditor agreement priority of payments provision, the provision was not applicable. In making its determination, the panel made clear that the scope of coverage of the intercreditor agreement was limited as expressly set forth pursuant to its terms and that the priority of payments provision did not govern every asset that creditors receive.

For more information regarding this case, see In re: Energy Future Holdings Corp. a/k/a TXU Corp., a/k/a Texas Utilities, et al., case number 18-1957, in the U.S. Court of Appeals for the Third Circuit.


Related Attorneys
Global Bank and Institutional Finance & Restructuring Practice Group Partner Kalyan Das
Kalyan Das

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das@sewkis.com