44CanalCenterPlaza,Suite400•Alexandria,VA22314•(703)739-0800•Fax(703)739-1060•www.abiworld.org Proskauer;NewYork BankruptcyandRestructuringGroupat RichardCorbiisanassociateinthe rcorbi@proskauer.com ProskauerinNewYork. RichardJ.Corbi J OURNAL A M E R I C A N B A N K R U P T C Y I N S T I T U T E The Essential Resource for Today’s Busy Insolvency Professional ICAs Prevent Bankruptcy Objections Contributing Editor: ment setting forth the rights of the first- About the Author and second-lien lenders to the debtors’ assets, as well as the ICA that governed the relationship between the first- and second-lien lenders. 10 In 2009, the debt- Editor’s Note: For more on this topic, ors and the first-lien lenders entered into order ABI’s Handbook on Second Lien a restructuring support agreement (RSA), Loans and Intercreditor Agreements , 116 place in mega chapter 11 cases. 5 Cyrus which provided the basis for the financ- pages, and is $25 for members. Order at argued that FCC licenses were immune ing of a chapter 11 case and an exit from www.abiworld.org/abistore. from being encumbered under the ICA chapter 11. 11 Pursuant to the RSA, the A s more levels of debt-holders due to their character as a federally- first-lien lenders would receive 100 per- fight for their piece of the bank- regulated right to use the airwaves and cent of the common stock of the debtors rupt estate’s remains, courts because they did not fit the definition of upon exiting chapter 11. 12 have shifted to enforcing prepetition “collateral” as set forth in the ICA and, On May 19, 2009, the debtors filed agreements to sort out the mess. Most thus, should be deemed available for pari for chapter 11, and their debtor-in-pos- recently, in In re ION Media Networks passu sharing by the first- and second- session (DIP) financing motion, consis- Inc. , 1 the U.S. Bankruptcy Court for the lien lenders. 6 tent with the RSA terms, provided that Southern District of New York held that Since the debtors filed for chapter 11, $150 million of the DIP loans would a prepetition intercreditor agreement the first-lien lenders argued that Cyrus convert to 62.5 percent of the reorga- in which second-lien lenders expressly lacked standing to object to confirma- nized debtors as part of the plan of reor- acknowledged the priority of the first- tion of a plan of reorganization based on ganization. 13 Cyrus, as a second-lien lien lenders’ rights to certain collateral, and agreed not to challenge such pri- ority and rights of first-lien lenders in Lien on Me a bankruptcy proceeding, barred such second-lien lenders from asserting that the first-lien lenders’ security interests did not extend to the debtors’ Federal provisions in the ICA. 7 The bankruptcy debt-holder, objected to the DIP financ- Communications Commission (FCC) court noted that in order for Cyrus to pre- ing on the basis that the debtors’ FCC broadcasting licenses. 2 vail in showing that its objections to plan licenses were not receiving value from confirmation were not barred by the ICA, the DIP financing and the DIP financing Facts Cyrus had to prove that the FCC licenses contained an improper roll-up of first- Cyrus Select Opportunities Master were not collateral subject to the provi- lien lender obligations as they related Fund Ltd. (Cyrus), a distressed-debt sions of the ICA. 8 The bankruptcy court to the FCC licenses. 14 Cyrus presented investor, purchased the discounted sec- found that the FCC licenses constituted an alternative DIP financing proposal, ond-lien debt of ION Media Networks “collateral” as the term was used in the which the bankruptcy court did not Inc. (the debtors) for “pennies on the ICA, and as a result, Cyrus breached the approve because of the inclusion of a dollar.” 3 The focal point of contention ICA and lacked standing to object to the due-diligence contingency that would was the intercreditor agreement (ICA) debtors’ plan of reorganization. 9 have allowed Cyrus to walk away from between the first-lien lenders and the the financing arrangement. 15 Cyrus sub- Circumstances Surrounding subordinated second-lien lenders. sequently appealed, but to no avail. Cyrus challenged the first-lien lend- the Chapter 11 Filing and Plan After the failure of Cyrus to obtain ers’ rights as secured creditors to recover In 2005, the debtors entered into a court approval for its alternative DIP the enterprise value of the debtors’ FCC series of agreements (transaction docu- financing, the debtors commenced an broadcast licenses (FCC licenses). 4 The ments) with the first- and second-lien adversary proceeding attempting to court noted that activist strategies by dis- lenders, which included a security agree- tressed investors have become common- 10 Id. at 590-91. 11 Id. at 591. 5 Id. at 589. 12 Id. at 591. 1 419 B.R. 585 (Bankr. S.D.N.Y. 2009). 6 Id. at 589. 13 Id. at 591. 2 Id. at 594-98. 7 Id. at 590. 14 Id. at 591. 3 Id. at 588. 8 Id. at 590. 15 Id. at 591. 4 Id. at 588. 9 Id. at 590.
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