language of the 2019 indenture , and held that Section 9.02 ( d )( 10 ) of the indenture prohibited neither subordination of the 10.50 % notes nor the adoption of the supplemental indenture .
Key to the bankruptcy court ' s analysis was the language in Section 9.02 ( d )( 10 ) requiring the consent of all affected noteholders on actions " dealing with the application of proceeds of collateral ."
The bankruptcy court eschewed the plaintiffs ' broad interpretation — that any change that would put new debt ahead of the 10.50 % notes with respect to the right to recover out of their collateral would implicate this section — in favor of the debtors ' narrow interpretation , that the only provision of the 2019 indenture " dealing with the application of proceeds of collateral " was Section 6.10 , addressing the waterfall for how the trustee under the 2019 indenture should ratably distribute the proceeds it receives .
Diverging from the Supreme Court of the State of New York ' s approach in Audax Credit Opportunities Offshore Ltd . v . TMK Hawk Parent Corp . in August 2021 ,[ 7 ] in which the court denied a motion to dismiss a similar action after looking solely at contractual language without reference to commercial norms , the bankruptcy court noted that
[ i ] n the context of an indenture , the Court believes that the inclusion of express anti-subordination clauses are sufficiently commonplace that , under the customs and usages that are common in the trade , a provision providing for ratable distribution ( in the absence of an express anti-subordination clause ) would more naturally apply to distributions within a class , and not prohibit subordination of an entire class to another , different class .[ 8 ]
Further , the bankruptcy court found that the hierarchy of consents laid out in the 2019 indenture to be instructive , pointing out the absurdity of elevating subordination to a sacred right while the release of all collateral securing the 10.50 % notes — a more drastic action in the bankruptcy court ' s view — merely required a two-thirds vote under Section 9.02 ( e ) of the 2019 indenture .[ 9 ]
On July 8 , the plaintiffs appealed the bankruptcy court ' s order [ 10 ] and filed an emergency motion for stay pending appeal ,[ 11 ] arguing that the plaintiffs would be irrevocably harmed absent a suspension of the DIP proceedings . On July 11 , the bankruptcy court entered an order and opinion denying the plaintiffs ' requests for the stay , with the bankruptcy court reiterating its analysis from the opinion and inviting the plaintiffs to seek and obtain a stay from the U . S . District Court for the District of Delaware .[ 12 ]
The Delaware district court subsequently issued a temporary stay through July 25 , when it will rule on whether a more substantive stay is warranted . If the district court determines that no further stay is necessary , a final hearing on the DIP will take place on July 29 .
Considerations
The bankruptcy court ' s opinion creates several considerations for lenders and noteholders seeking to maintain the priority of their liens due to an uptier transaction .
First and foremost , these parties should include specific provisions in their debt documents that elevate subordination to a sacred right requiring the affirmative vote of every lender or noteholder affected .
Without it , minority noteholders or lenders may find themselves subordinated to a subgroup of