Vol 18 (2021) - Issue 4

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Your Subordination Agreement Need Not Be Enforced Strictly in a Cram-Down Plan, Says the Third Circuit Court of Appeals

Synopsis
The US Third Circuit Court of Appeals, in the latest decision stemming from lengthy chapter 11 bankruptcy cases of the Tribune Company ('Tribune'), provided guidance on the enforceability of intercreditor agreements in the context of a 'cramdown' plan of reorganisation (where the plan is binding on a dissenting class of creditors) under the US Bankruptcy Code (the 'Bankruptcy Code'). The Court held that subordination provisions, like those found in many intercreditor agreements, 'need not be strictly enforced' under the terms of cram-down plans, provided that the other statutory requirements for approval (referred to as 'confirmation') of cramdown plans are met, including that such plans do not 'unfairly discriminate' against dissenting classes of creditors. The Court further held that courts are not required, when conducting an analysis of unfair discrimination, to compare recoveries under a plan of reorganisation on a class-to-class basis, but rather, in certain circumstances, may compare the desired recovery of the dissenting class to its actual recovery.