The Outer Fringes of Chapter 11: Nonconsenting Senior Lenders’ Rights Under Subordination Agreements in Bankruptcy

This Note focuses on the options a senior creditor in Frugal’s position may have when a reorganization plan provides for payments in violation of a subordination agreement that the creditor wishes to enforce. Part I explains the different types of subordination agreements and discusses their treatment under pre-Code bankruptcy law and under the Bankruptcy Code. Because of the dearth of case law regarding nonconsenting senior lenders and subordination agreements, Part II considers a question in a related area of bankruptcy law where more authority exists: whether a reorganization plan may release a nonbankrupt guarantor from its obligations under the guaranty agreement. Part II examines the split in authority on this issue. Part III considers how bankruptcy courts should treat plans containing provisions that violate subordination agreements, using the guarantor-release case law for guidance. This Note concludes that when a senior creditor wishes to enforce a subordination agreement that a reorganization plan purports to violate, the bankruptcy court should refuse to confirm the plan even if the senior creditor is outvoted by its class.