TCI 2 revolved around competing plans of reorganization for Trump Entertainment Resorts, Inc.'s Atlantic City casinos. A plan filed by Beal Bank, as first lien lender, and Icahn Partners (Beal/Icahn Plan) sought to convert all first lien debt into 100% ownership of the reorganized debtors and provided the second lien noteholders with no recovery (TC1 2, at 131). An ad hoc committee of second lien noteholders and the debtor filed a competing plan (AHC/Debtor Plan) pursuant to which, among other things, US$225 million in cash from a rights offering would be contributed in exchange for 70% of the common stock in the reorganised debtors. Holders of second lien notes and general unsecured claims could subscribe for this stock (another 20% was set aside as a fee for the investors backstopping the rights offering). The AHC/Debtor Plan proposed to pay the first lien lenders a combination of cash and a restructured secured loan bearing a market interest rate.

The class of first lien lenders voted against the AHC/Debtor Plan, meaning that it could not be confirmed unless the first lien lender class could be crammed down under section 1129(b) of the Bankruptcy Code. The first lien lenders objected on the grounds, among other things, that the AHC/Debtor Plan violated the intercreditor agreement between the first lien lenders and second lien noteholders. They argued that section 1129(a)(1) of the Bankruptcy Code (11 U.S.C. §1129(a)(1) ("The court shall confirm a plan only of all of the following requirements are met: (1) The plan complies with the applicable provisions of this title.")) prohibits confirmation of a plan that does not comply with the Bankruptcy Code, and that "Bankruptcy Code section 510(a) specifically provides that contractual subordination agreements, such as those commonly found in intercreditor agreements, are enforceable to the same extent as it would be under applicable nonbankruptcy law" (In re TCI 2 Holdings LLC, Case No. 09-13654 (Bankr. D.N.J.), Objection to Confirmation of Plan, Docket No. 1238 at p. 88). They alleged that the intercreditor agreement did not allow the second lien noteholders to receive any proceeds of shared collateral unless the first lien lenders were paid in full in cash. The AHC/Debtor Plan allegedly violated this provision of the intercreditor agreement because the first lien lenders would be paid over time, meaning that the second lien noteholders would receive distributions before the first lien lenders were paid in full in cash (TCI 2, at 139). The first lien lenders also argued that the AHC/Debtor Plan recharacterised adequate protection payments as principal payments on the first lien debt, thereby violating a provision of the intercreditor agreement that prohibited second lien noteholders from objecting to or contesting adequate protection payments made to the first lien lenders (TCI 2, at 139).

Several days before the confirmation hearing, the first lien lenders sued the second lien lender plan proponents in New York state court seeking a declaratory judgment and damages for alleged breach of the intercreditor agreement (TCI 2, at 140). The proponents of the AHC/Debtor Plan removed the action to federal court and sought to transfer it to the Bankruptcy Court, while Beal sought remand to state court.

Section 1129(a) of the Bankruptcy Code sets out the requirements for chapter 11 plan confirmation. Section 1129(b) of the Bankruptcy Code applies only when the relevant provisions of section 1129(a) have been satisfied, except that a class has voted (or has been deemed to vote) against a chapter 11 plan. Section 1129(b) requires that the plan not "discriminate unfairly" and be "fair and equitable" with respect to the non-accepting class.

The TCI 2 court began its analysis by citing the introductory phrase of Bankruptcy Code section 1129(b), "[n]otwithstanding section 510(a) of this title." The court had not located any decision analyzing this phrase, which "arguably subverts a prepetition subordination agreement between creditors" (TCI 2, at 140). The court concluded that in light of the meaning of the word "notwithstanding", the only logical reading of the provision was the following:

In other words, section 1129(b) overrides any requirement that a consensual plan, confirmed under section 1129(a), honor the provisions of an intercreditor agreement. The court made no determination of whether the intercreditor agreement was violated "but even if such a violation occurred, it would not impede the confirmation of the AHC/Debtor Plan as proposed" (TCI 2, at 141).

The TCI 2 court did not, though, leave Beal/Icahn without a remedy. The court sustained Beal's objection to the provisions of the second lien noteholder plan that would have released the first lien lenders' rights under the intercreditor agreement, including the claims asserted in the lawsuit pending in New York.

It was not lost on the TCI 2 court that its ruling could create an "anomalous result", whereby senior creditors could be prevented from agreeing to something under section 1129(a) that could be imposed on them under section 1129(b) (TCI 2, at 140-41 (citing Kenneth N. Klee, Adjusting Chapter 11: Fine Tuning the Plan Process, 69 Am.Bankr.L.J. 551, 561 (1995))).

As noted above, sections 510(a) and 1129(a)(1) of the Bankruptcy Code, taken together, appear to require enforcement of a subordination agreement outside the context of cramdown. But a plan of reorganisation could alter the rights of a creditor group under an intercreditor agreement and that creditor group could vote, as a class under Bankruptcy Code section 1122, to accept such a plan. With respect to that class, cramdown would not be necessary. But, an individual member of that accepting class could object to the plan as violating the intercreditor agreement and, therefore, unconfirmable under sections 1129(a)(1) and 510(a).

Accordingly, a class of senior creditors may not be able to waive enforcement of an intercreditor agreement in a plan they accept over the objection of a non-accepting member of that class.

But the inclusion of the words "notwithstanding section 510(a) of this title" in section 1129(b) suggests that an entire class of senior creditors that rejects a plan because it does not respect an intercreditor agreement may nonetheless find that plan forced upon them via cramdown. This could create the result that a majority, accepting class of creditors cannot voluntarily override an intercreditor agreement in a consensual plan under section 1129(a) even though that result can be imposed on that class, despite their unanimous opposition, under section 1129(b). The TCI 2 court "understood" this possibility, but Congress had not amended the Bankruptcy Code "to specifically permit a consensual plan to override § 510(a), nor deleted the reference to § 510(a) in § 1129(b)(1)" (TCI 2, at 141). Accordingly, the phrase "[n]otwithstanding section 510(a) of this title" in section 1129(b)(1) must be given meaning.

The TCI 2 decision, therefore, imposes potentially significant limits on senior lenders' rights. TCI 2 deals primarily with the questions of subordination, but there is reason to believe that its reasoning will be cited, where a cramdown plan is proposed, to challenge adequate protection payments, 363 sales or other basic bankruptcy rights asserted by senior lenders. Under this reasoning, senior lenders bear an increased risk that in a cramdown a plan may violate their intercreditor agreements. This may, in turn, lead to junior creditor groups challenging exclusivity under Bankruptcy Code Section 1121(d) in order to pursue cramdown plans that alter an intercreditor agreement.

It also is not clear whether the remedy that the Beal/Icahn group had left (pursuing an action in a non-bankruptcy court to enforce the intercreditor agreement) would succeed. Under the Supremacy Clause of the US Constitution (U.S. Const. article V1 clause 2 ("The Constitution, and the Laws of the United States…shall be the Supreme Law of the Land; …anything in the Constitution or Laws of any state to the contrary notwithstanding.")) and the doctrine of pre-emption, the question of whether section 1129(b) overrides the intercreditor agreement has not been resolved. The TCI 2 court did not address whether section 1129(b) of the Bankruptcy Code, a federal statute, would pre-empt the senior lenders' rights to enforce that agreement.