COURT ADDRESSES INTERCREDITOR DISPUTE IN TPC AND ENFORCES PLAIN LANGUAGE OF INDENTURE

On July 6, Delaware Bankruptcy Court Judge Craig T. Goldblatt issued a memorandum opinion in the bankruptcy cases of TPC Group, Inc., growing the corpus of recent court decisions tackling “uptiering” and other similar transactions that have been dubbed by some practitioners and investors as “creditor-on-creditor violence.” This topic has been a hot button issue for a few years, playing out in a number of high profile scenarios, from J.Crew and Travelport to Serta Simmons and TriMark, among others.

In TPC, an ad hoc group of minority noteholders challenged pre-petition debt transactions that saw secured notes of $930 million (the “10.5% Notes”)—in which they held ~10% of the issue—primed by over $200 million of new bond debt (the “New Notes”) issued to a majority of, but not all, secured noteholders. The New Notes were granted senior liens over collateral shared with the 10.5% Notes. The New Notes were to be rolled-up into DIP financing, leading the court to prioritize this litigation early in the bankruptcy case.

The court ruled against the dissenting noteholders, granting summary judgment and declaring that the indentures and related agreements permitted the challenged transactions based on majority noteholder support. The objecting noteholders have appealed the decision and their request for a stay pending appeal has been denied.

Some key takeaways from the court’s decision:

• The court did not care whether an investor was “opportunistic” or acquired the debt after the contested transactions. Distressed investors can rest easier knowing that the timing of their investments will not be held against them in these litigations.
• The indenture’s “No-Action Clause” did not preclude an individual holder from challenging a transaction based on what it believed were sacred rights subject to affected holder consent.
• Subordination of liens to facilitate new financing is not the same as release of collateral. As such, since the Indenture permitted release of collateral with a 2/3 consent, the Court reasoned there was no basis to hold that subordination of liens to permit a new money priming financing required affected holder consent. As a result, in future analyses, it seems relevant to consider the relationship of non-unanimous amendment limitations against those that require unanimous approval.
• Trimark and, to a lesser extent, Serta Simmons were spotlighted in this opinion. The court invoked Trimark to show a court that was open to the dissenting noteholders’ argument about how to read a provision limiting an amendment’s ability to alter the application of proceeds absent unanimous approval. There, the court found it plausible that subordinating old debt to newly issued debt would count as altering the application of proceeds, thus defeating a motion to dismiss.
• Nonetheless, here, the court looked to “customs and usages,” finding express anti-subordination clauses sufficiently commonplace that a lack of one meant that the application of proceeds under these indentures would refer to those “within a class” (i.e., to 10.5% note holders), not to subordination between classes (i.e., the 10.5% Notes and New Notes). On this point, the opinion points to Serta Simmons, where the U.S. District Court for the Southern District of New York reached a similar conclusion about how the “sacred right” to pro rata payments applied “within the class” (i.e., to first lien lenders).
• On top of the broader view on contract interpretation, the court also found it telling that the supplemental indenture incorporated an express anti-subordination provision.
• The court noted that this transaction was not like other “uptier” transactions that involved non pro rata roll ups of existing debt positions.