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Beyond the Signed Agreement: Intercreditor Dynamics in Bankruptcy

BY John D. Fredericks
June 30, 2009

When a creditor enters the realm of bankruptcy, lenders often find that the many detailed provisions of an extensively negotiated intercreditor agreement are no longer controlling. On the contrary, the intercreditor agreement may have little influence on the outcome of many critical matters that arise in bankruptcy. Questions regarding enforceability of bankruptcy-related waivers limit their effectiveness. Moreover, the exigent circumstances created by bankruptcy oftentimes mean that the written agreement is but one of many factors affecting outcome of intercreditor disputes in bankruptcy. Valuation, inter-facility claims trading, alignment of other claims and interests, among other things, further impact resolution of intercreditor issues. A considered strategy that accounts for all these various matters, coupled with flexible execution, is the key to maximizing position when the intercreditor relationship is subsumed by the bankruptcy of the borrower.

In anticipation of a bankruptcy proceeding, careful review of the particular terms of the intercreditor agreement is necessary to establish the parameters of the likely disputes, but the specific circumstances of the debtor should be incorporated in the strategies and responses that will affect the outcome of bankruptcy-related issues.

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