legal notes
clauses have been widely used in upstream
guaranties for decades. Apart from a brief
mention in the Exide case a few years ago,
Tousa is the first decision to address them.
According to the Bankruptcy Court,
the savings clause was an unenforceable
effort to contract around the protections
afforded the bankruptcy estate under
Section 548 of the Bankruptcy Code. In
addition, because the two term loan
agreements contained identical savings
clauses, each purporting to reduce the
Conveying Subsidiaries’ liability only
after giving effect to the other, the Bankruptcy Court concluded that the savings
clauses created a circular problem having
no answer. These arguments, along with
a number of others put forth by the Bankruptcy Court in support of its ruling, are
clearly incorrect. Although a detailed response to these arguments is beyond the
scope of this article, it should be noted
that such savings clauses are part of the
same tradition as other clauses, such as
usury savings clauses, that are routinely
enforced as attempts to operate within
the law, and not to circumvent it.
Having found that the Conveying
Subsidiaries did not receive reasonable
equivalent value in the Transactions,
and that the Conveying Subsidiaries
were insolvent both before and after the
Transactions, the Bankruptcy Court held
that the Transactions were avoidable as
fraudulent transfers under Section 548
of the Bankruptcy Code. The Bankruptcy
Court then “unwound” the Transactions
and required the Transeastern lenders
to repay to the Conveying Subsidiaries’
bankruptcy estates approximately $403
million (which represented the amount of
the settlement payment attributed to the
Conveying Subsidiaries).
The lenders have appealed the Tousa
decision to the United Stated District
Court for the Southern District of Florida.
The Commercial Finance Association intends to seek leave to file an amicus brief
in support of the lenders. Stay tuned......
In re ION Media Networks, Inc., — B.R.
—, 2009 WL 4047995 (Bkrtcy. S.D.N. Y. Nov.
24, 2009) (Court upholds the terms of an
intercreditor agreement to prohibit a
subordinated creditor from challenging
the debtor’s plan of reorganization.)
Cyrus Select Opportunities Master
Fund Ltd. purchased certain subordinated debt of ION Media Networks, Inc.
at a deep discount and then used what
the court characterized as “aggressive
bankruptcy litigation tactics” to “gain
negotiating leverage or obtain judicial
rulings that [would] enable it to earn
outsize returns on its bargain basement
debt purchases” at the expense of the
senior secured lenders. In re ION, 2009
WL4047995 at 1.
The Cyrus subordinated debt was sub-
ject to an intercreditor agreement among
certain first lien lenders and second
lien lenders which, among other things,
prohibited the second lien lenders from
challenging the priority of the first lien
lenders’ claims. The intercreditor agree-
ment stated that:
Each of the Secured Parties acknowl-
edges and agrees (x) to the relative
priorities as to the Collateral (and the
application of the proceeds there-
from) as provided in the Security
Agreement…and acknowledges and
agrees that such priorities (and the
application of the proceeds from the
Collateral) shall not be affected or
impaired in any manner whatsoever
including, without limitation, on
account of … (iii) any nonperfection
of any lien purportedly securing any
of the Secured Obligations (includ-
ing, without limitation, whether any
such Lien is now perfected, hereafter
ceases to be perfected, is avoidable
by bankruptcy trustee or otherwise
set aside, invalidated, or lapses. (em-
phasis added.)
Id. at 5. Even though Cyrus was a sec-
ond lien lender bound by the intercredi-
tor agreement, it sought to challenge
ION’s plan of reorganization on the
ground that the priority treatment from
the sale of certain valuable FCC licenses
was improper.
