Opinion ID: 659
Heading Depth: 2
Heading Rank: 1

Heading: The Debtor's Secured Creditors

Text: The Debtor's creditors consist of, among others, the First Lien Lenders and the Second Lien Lenders. The First Lien Lenders are senior secured creditors who have liens on the Debtor's assets having a value of approximately $488 million. The Second Lien Lenders are junior secured creditors who have liens on the same assets having a value of approximately $165 million. The Contrarians hold a majority share of the liens held by the First Lien Lenders, approximately 54%, but hold none of the liens held by the Second Lien Lenders. Aretex holds a minority share of the liens held by the First Lien Lenders, approximately 40%, and also holds a majority of the liens held by the Second Lien Lenders, approximately 51%. Beal Bank is the administrative agent and collateral trustee of the First Lien Lenders, and Wilmington Trust is the administrative agent for the Second Lien Lenders. Before the commencement of bankruptcy proceedings, on June 29, 2001, the First and Second Lien Lenders entered into an Intercreditor and Lien Subordination Agreement (the Intercreditor Agreement), which provided, inter alia, that [u]ntil all First Lien Indebtedness has been paid in full in cash ... the Second Lien Lenders shall not be entitled to ... exercise any rights or remedies with respect to the Second Priority Liens or the Collateral.... The Intercreditor Agreement provided for several exceptions, two of which were that the Second Lien Lenders might receive (1) adequate protection payments and (2) permitted mandatory prepayments. In particular, the Intercreditor Agreement defined permitted mandatory prepayments as including payments to the Second Lien Lenders occurring as a result of [the Debtor's] sale ... of the Collateral ... to the extent that ... any net proceeds of such sale ... remain after application to the First Lien Indebtedness to the extent required by the Senior Credit Agreement. Shortly after the commencement of bankruptcy proceedings, on June 18, 2003, the Bankruptcy Court entered an order granting adequate protection payments to both the First and Second Lien Lenders (the Adequate Protection Order). This order was entered contemporaneously with the Bankruptcy Court's authorization to permit post-petition lenders, who are unrelated to either the First or Second Lien Lenders or any other pre-petition creditors, to obtain priming liens on the Debtor's assets. [2] In return for the priming liens, the Debtor received financing from the post-petition lenders, thus allowing the Debtor to maintain its business as a going concern and avoid an imminent dissolution before a plan of reorganization could be confirmed. The Adequate Protection Order sought to provide protection to the pre-petition secured creditors by ordering the Debtor to pay them amounts relating to the diminution in value of the collateral being used by the Debtor to maintain its business as a going concern. Neither the First nor the Second Lien Lenders initially objected to the Adequate Protection Order, which provided protection for both classes of pre-petition secured creditors. In a motion dated July 22, 2004, however, a member of the First Lien Lenders group, supported by the Contrarians and therefore representing a substantial majority of the First Lien Lenders (the Objecting First Lien Lenders), moved for a grant of additional adequate protection to the First Lien Lenders through the termination of the adequate protection payments to the Second Lien Lenders. The Objecting First Lien Lenders claimed that they had been misinformed about the Debtor's value at the time the Adequate Protection Order was entered and argued that, having been properly informed of the status of the Debtor's business, there was insufficient value in the Debtor to justify adequate protection payments to the Second Lien Lenders. On August 18, 2004, the Objecting First Lien Lenders and the Second Lien Lenders entered into a stipulation providing for the deposit of the Second Lien Lenders' adequate protection payments into an escrow account until the occurrence of certain events relating to the reorganization or sale of the Debtor's business (the Escrow Stipulation). In return, the Objecting First Lien Lenders agreed to withdraw their motion to terminate adequate protection payments to the Second Lien Lenders. The Escrow Stipulation expressly provided, [f]or avoidance of doubt, that the adequate protection payments held in escrow shall not constitute... payments made ... as adequate protection to the Second Lien Lenders ... unless and until [the court] authorizes the release of funds ... to the Second Lien Agent for application to claims held by the Second Lien Lenders. (internal quotation marks omitted).