In In re SW Boston Hotel Venture, LLC, the debtor's two largest creditors had entered into an intercreditor agreement before the debtor's Chapter 11 filing. In the agreement, the junior lender agreed to:

Following the debtor's Chapter 11 filing and submission of a plan of reorganization, the senior lender voted against the plan on behalf of itself and the junior lender. The junior lender voted in favor of the plan on its own behalf and challenged the enforceability of the voting rights assignment provision in the intercreditor agreement.

The Bankruptcy Court held that while subordination agreements are generally enforceable under section 510(b) of the Bankruptcy Code, they cannot nullify provisions of the Bankruptcy Code. The Bankruptcy Code provides creditors with certain substantive rights, such as the right to vote on a plan and these rights are not assignable.

The Bankruptcy Court noted that though there is contrary authority, it found as more persuasive the cases holding that Congress did not intend to permit creditors to alter substantive provisions of the Bankruptcy Code through subordination agreements. In particular, it relied on the reasoning as reached in Bank of America v. North LaSalle Street Ltd. Partnership, which held that a provision in a subordination agreement that assigned the subordinated creditor's voting rights in future Chapter 11 cases to the senior creditors violated section 1126(a) of the Bankruptcy Code. Section 1126(a) of the Bankruptcy Code grants the right to accept or reject a plan to the holder of a claim or interest allowed under section 502. The assignment of the right to vote on a plan would alter this provision and is, therefore, unenforceable.

Although the senior lender rejected the plan, the Bankruptcy Court confirmed it as a cramdown plan because it was approved by three impaired classes and therefore met the requirements of section 1129(a)(10) of the Bankruptcy Code which requires that at least one impaired class accepts the plan.

This decision is the latest in a series of recent decisions that have analyzed the enforceability of waivers of bankruptcy rights in otherwise enforceable subordination or intercreditor agreements (see Legal Updates, Bankruptcy Court Upholds Second Lien Lenders' Waivers in Intercreditor Agreement and Bankruptcy Court Upholds Second Lien Lenders' Right to Propose Cramdown Bankruptcy Plan in TCI 2 Holdings, LLC). It serves as a reminder to senior lenders that some courts may more carefully scrutinize waivers of bankruptcy rights that are unrelated to subordination and the priority of payment among lenders.

To learn more about bankruptcy provisions in intercreditor agreements and the Chapter 11 plan process, see Practice Notes, Bankruptcy Provisions in Intercreditor Agreements, Intercreditor Agreement Between First and Second Lien Lenders: Overview and Chapter 11 Plan Process: Overview.