Intercreditor Agreement

An agreement between creditors, usually secured creditors, with respect to various matters including lien priority, standstill provisions, and waivers by the junior creditor including waivers of various rights in a future bankruptcy case of the borrower—for example, waivers of the right to file or join in an involuntary petition, the right to vote in favor of a plan not approved by the senior creditor, the right to adequate protection, and the right to object to various measures supported by the senior creditor including DIP financing and adequate protection proposals favoring the senior creditor.

The intercreditor agreement has furnished the bedrock upon which the lenders and borrowers in CMBS lending have erected a massive and extraordinarily complex structure of billions of dollars of senior and mezzanine debt. The enforceability of the bankruptcy waivers in the industry-standard agreement are frequently questioned and have not been tested due to the lowdefault environment of the last 15 years (1992-2007).

Section 510(c) requires enforcement of “subordination agreements,” but that could be interpreted narrowly to enforce only the lien priority provisions of the agreement. Most of the courts that have considered them have upheld the waivers, though at least two have refused to enforce provisions that allow the senior creditor to vote on the junior creditor’s claim.

Bankruptcy Code § 510(c). See also A-B Note Structure, Mezzanine Debt, Securitization, Subordination.

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