On May 11, 2016, the Delaware Bankruptcy Court granted the senior revolving lender's motion to dismiss in In Re RadioShack Corp., holding that a pre-petition restructuring of the senior lenders' revolving credit facility was permissible under the terms of an intercreditor agreement governing the respective rights of the senior revolving lenders and the term loan lenders under a separate term loan facility (550 B.R. 700 (Bankr. D. Del. 2016)). As a result, the restructuring of the pre-petition revolving credit facility did not impair or waive the rights of the senior revolving lenders in their collateral.

The intercreditor dispute was between Salus Capital Partners, LLC, Cerberus Levered Loan Opportunities Fund II, LP, Cerberus NJ Credit Opportunities Fund, L.P., and Cerberus ASRS Holdings LLC ("SCP Lenders") and a group of lenders led by General Electric Corporation ("ABL Lenders"). RadioShack had separate lending agreements with the SCP Lenders and the ABL Lenders, and the lenders had an intercreditor agreement between them.

The SCP Lenders claimed that the ABL Lenders' restructuring of their pre-petition loan with RadioShack violated the intercreditor agreement, and therefore that the ABL Lenders unjustly received payments which should have been paid to the SCP Lenders. The bankruptcy court denied the SCP Lenders' argument, holding that the intercreditor agreement allowed for the restructuring and continued first priority of the ABL Lenders' claims, and granted the ABL Lenders' motion to dismiss.

On December 10, 2013, RadioShack entered into separate lending agreements with the SCP Lenders and the ABL Lenders. The SCP Lenders' agreement was a $250 million term loan secured by a first priority lien on RadioShack's fixed assets and a second priority lien on RadioShack's liquid collateral, including receivables, inventory, and deposit accounts. The ABL Lenders' loan was a $535 million revolving asset based credit facility (revolving credit loan) and a $50 million term loan secured by a first priority lien on liquid collateral and a second priority lien on fixed assets.

That same day, the SCP Lenders and ABL Lenders entered into an intercreditor agreement that governed their rights and priorities in their shared collateral. The intercreditor agreement between the SCP Lenders and ABL Lenders provided that the ABL Lenders' claims to be paid from the proceeds of the liquid collateral ranked ahead of the SCP Lenders' claims.

On October 3, 2014, ABL Lenders sold their interests to new lenders, funds administered by Cantor Fitzgerald Securities LLC. RadioShack subsequently executed an amendment to the ABL Lenders' agreement to restructure the original $535 million revolving loan, which was refinanced as follows:

On February 5, 2015, RadioShack and its affiliated debtors filed for voluntary relief under Chapter 11 of the Bankruptcy Code. On October 8, 2015, the Debtors' First Amended Joint Plan of Liquidation went into effect. The ABL Lenders received over $232 million in payments from the proceeds of sale and liquidation of their collateral.

The dispute between the SCP Lenders and the ABL Lenders concerns whether the ABL Lenders were entitled to these payments or whether these payments should have been paid to the SCP Lenders. The SCP Lenders claimed that the amended ABL Lenders' agreement reclassified the ABL Lenders' loans from senior claims to third priority claims that were junior to the SCP Lenders' claims. The intercreditor agreement included a specified debt cap on the amount of ABL Lenders' loans that could rank ahead of the SCP Lenders' claims, with amounts exceeding the cap to rank as third priority claims behind the SCP Lenders. The SCP Lenders claimed that there were two permanent reductions made by the restructuring of the ABL Lenders' agreement:

The ABL Lenders argued that the reclassification of the loans was permitted under the intercreditor agreement and therefore did not change any of their collateral rights. They claimed that the broad amendment provisions in the intercreditor agreement permitted the restructuring, and that the new $140 million of revolving credit commitments were not illusory.

The bankruptcy court granted the ABL Lenders' motion to dismiss the SCP Lenders' claims, holding that the intercreditor agreement unambiguously permitted the changes made to the ABL Lenders' loan agreement. Therefore, the ABL's senior lien rights were not impaired or otherwise changed by the restructuring. Furthermore, the SCP Lenders had junior rights in the ABL Lenders' priority collateral regardless of the restructuring and failed to show that their position was unfairly changed.

In granting the ABL Lenders' motion to dismiss, the bankruptcy court's decision highlights the importance of clear and unambiguous drafting of amendment and debt cap provisions in intercreditor agreements.

For more details on intercreditor agreements, see:

For additional background on the RadioShack case, see: