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Cerberus Dealt Loss in Lien Subordination Fight

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July 06, 2022, US Bankruptcy Court for Delaware – The Delaware Bankruptcy Court holds the subordination of lien of minority note holders fair and reasonable in the bankruptcy case of TPC Group, Inc (“Debtor”). The adversary proceeding was filed by two minority note holders Bayside Capital, Inc. (“Bayside Capital”) and Cerberus Capital Management, L.P. (“Cerberus”) against the Debtor. 

In August 2019, Debtor TPC Group raised $930 million by issuing senior secured notes bearing interest at 10.5 percent. Defendants Bayside Capital and Cerberus collectively hold approximately 10 percent of these notes. These notes are secured by a first lien on substantially all of the debtors’ assets. The 2019 indenture for this loan provided the majority note holders the right to seek any remedy against TPC under the indenture. Subject to some exceptions, the majority note holders were given the right to amend or allow TPC or the guarantors to amend the 2019 indenture. The indenture allows majority holders to waive any default or non-compliance of the indenture by the Debtor.

The Court found that the indenture sets out certain “sacred rights” that may not be amended or waived without the consent of each note holder affected thereby. The sacred right in issue in this case provided that without the consent of each affected party “an amendment, supplement or waiver may not … make any change in the provisions in the Intercreditor Agreement or this Indenture dealing with the application of proceeds of Collateral that would adversely affect the Holders.” The indenture also provided that the proceeds of the collateral shall be distributed among the holders ratably without preference or priority of any kind. Moreover, the “no-action clause” of the 2019 indenture imposed limitations on the ability of an individual holder to bring suit to enforce the indenture’s terms. It required consent by the holders of 25 percent of the outstanding notes to pursue the claim.

The dispute begins with the issuance of $204.5 million new notes by TPC during 2021-22 bearing interest at 10.875 percent. These 2021 notes were secured by the same collateral as 2019 notes, but with a lien that would become senior to the lien securing the 2019 notes thus necessitating various amendments to the 2019 Indenture and the 2019 Intercreditor Agreement. The holders of the 2021 notes also held a majority of more than 67 percent of the then outstanding 2019 notes and had the power to amend the 2019 indenture.

The adversary proceeding was filed by the objecting holders of 2019 notes who had no participation in the 2021 notes. They claimed that 2021 notes should be junior to the 2019 notes. The Debtor filed a counterclaim that the adversary proceeding is barred by the “no-action clause”. The objecting note holders argue that the complaint was filed in exercise of their “sacred rights”. The Court agreed with the objecting note holders concluding that the no-action clause does not bar a claim by a minority lender to enforce its consent rights (sacred rights).

The objecting note holders further claimed that the 2021 intercreditor agreement was a violation of their sacred rights alleging that the changes it made in the 2019 indenture dealt with the “application of proceeds of Collateral that would adversely affect the Holders”. The objecting noteholders read the provision’s language fairly broadly, saying that a change that would put new debt ahead of them with respect to the right to recover out of the collateral “deals with the application of proceeds of Collateral.”

The Court observed that the 2019 indenture required a majority consent of two-thirds to release all or substantially all of the collateral. The Court found it difficult to believe that the indenture on one hand, would require a two-thirds majority for releasing the whole of collateral and, on the other hand, would require a 100 percent majority for subordination of its lien over the collateral. 

The Court noted that the language – “the application of proceeds of Collateral” is consistent with the pro rata distribution of the proceeds of collateral among the note holders. The Court concluded that the 2021 transactions did not violate the letter of the applicable agreements since it did not deny pro rata distribution of the proceeds of collateral.

Bayside Cap. Inc. v. TPC Grp. Inc. (In re TPC Grp. Inc.), 2022 Bankr. LEXIS 1856

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