ASSIGNMENT OF VOTING RIGHTS IN INTERCREDITOR AGREEMENTS
Gregory E. Spitzer 1
Paul, Hastings, Janofsky & Walker LLP
191 North Wacker Drive
Chicago, Illinois 60606
Intercreditor agreements are normally enforced, pursuant to section 510 of the
Bankruptcy Code, 2 insofar as they address payment and priority of payment. The enforceability
of other types of provisions, however, is less clear. Clauses waiving or transferring various rights
of a junior creditor—to file a proof of claim, to receive adequate protection, or to vote on a plan
of reorganization—have met with varying responses from the bankruptcy courts. At the same
time, written decisions that touch on intercreditor agreements are less than plentiful, because
differences between parties must be settled quickly in the fast-moving bankruptcy process. 3 All
of this leaves substantial uncertainty concerning even very common terms in intercreditor
The assignment of voting rights is one of the issues that courts and commentators
continue to disagree over. Whether a provision in a subordination agreement transferring the
junior creditor’s voting rights to the senior creditor should be enforced is a question yet to be
fully resolved. In an effort to sort out some of the confusion, this paper examines the status of the
law on assignability of voting rights, and suggests several possibilities for practitioners looking
to ensure enforceability of such provisions.
II. Competing Views on Enforceability
A. Early Cases
One of the earliest decisions on assignability of voting rights was In re Itemlab, Inc., 4 a
case decided under the former Bankruptcy Act. Itemlab arose out of an intercreditor agreement
between Dutch-American Mercantile Corp. (“Dutch-American”) and Blanmill Realty Corp. (the
“Junior Lender”) in connection with loans to the debtor. 5 The agreement contained general
Appreciation is expressed to Bradley V. Ritter and Kate L. Steffy of Paul, Hastings, Janofsky & Walker LLP and
Charles Maule of the University of Michigan Law School for their substantial efforts in preparation of this paper.
“A subordination agreement is enforceable in a case under this title to the same extent that such agreement is
enforceable under applicable nonbankruptcy law.” 11 U.S.C. § 510 (2006).
In fact, the cases examined in this paper appear to represent all the written decisions dealing with voting rights in
In re Itemlab, Inc., 197 F. Supp. 194 (E.D.N.Y. 1961).
Id. at 195-96.
provisions subordinating the Junior Lender’s claim to that of Dutch-American, but was “silent as
to voting of claims.” 6 Nevertheless, when the debtor entered bankruptcy and Dutch-American
and the Junior Lender disagreed over a proposed plan of arrangement, the court found that as a
“complete subordination agreement” the parties’ agreement gave Dutch-American “complete
control over the claim,” including the right to vote. 7 The Itemlab decision thus held that voting
rights transfers not only could be enforced, but could even be inferred where an intercreditor
agreement did not explicitly address the issue at all. Indeed, in the view of many commentators,
it remains “the most far-reaching decision giving a senior creditor the right to vote the claim of a
subordinated creditor.” 8
The first decisions on voting rights following the enactment of the Bankruptcy Code in
1978 did not go quite so far as Itemlab, but maintained the general proposition that a voting
rights transfer provision in an intercreditor agreement would be enforced. In In re Davis
Broadcasting, Inc., a junior lender moved to reopen a chapter 11 case to “correct an error” in the
order confirming the plan of reorganization. 9 The plan had been pushed through by the senior
lender, relying on the terms of a subordination agreement allowing it to vote both its own and the
junior lender’s claims. 10 The junior lender voiced no objection at the time of confirmation, but
eight months later filed its motion to modify the plan confirmation order. 11 The court refused,
observing that the junior lender “freely entered into the Subordination Agreement that put it into
this situation,” and “is now ingeniously attempting to find a new way to appeal the confirmation
Echoing the same sentiment, the court in In re Curtis Center Ltd. Partnership held that a
junior creditor that willingly contracted away its voting rights must be held to its bargain. 13 “The
language of the subordination agreement is plain and unambiguous,” the court explained, and
“the terms of this prepetition agreement are fully enforceable in this Bankruptcy case pursuant to
[section 510 of the Bankruptcy Code].” 14
An alternative rationale for enforcement was articulated in In re Inter Urban
Broadcasting of Cincinnati, Inc. 15 In that case, the debtor had borrowed funds from both
Id. at 197.
Alan N. Resnick, Subordination Agreements Shifting Chapter 11 Voting Rights: Can the Seniors Disenfranchise
the Juniors?, 118 BANKING L.J. 297, 305 (2001).
In re Davis Broadcasting, Inc., 169 B.R. 229, 230-31 (Bankr. M.D. Ga. 1994), rev’d on other grounds, 176 B.R.
290 (M.D. Ga. 1994).
Id. at 234.
In re Curtis Center Ltd. P’ship, 192 B.R. 648, 660 (Bankr. E.D. Pa. 1996).
In re Inter Urban Broadcasting of Cincinnati, Inc., No. 94-2382, 1994 WL 646176 (E.D. La. Nov. 16, 1994).
Barclays Business Credit, Inc. (“Barclays”) and Firstmark Credit Corp. (the “Junior Lender”). 16
In connection with the loans, all three parties executed a subordination agreement giving
Barclays the right to vote the Junior Lender’s claim. 17 After the debtor entered chapter 11,
Barclays filed a plan of reorganization and voted both its own and the Junior Lender’s claim to
accept the plan. 18 The debtor moved to disqualify Barclays’ votes, and the bankruptcy court
denied the motion. 19 On appeal, the district court upheld the decision. The court explained that
under the intercreditor agreement, the Junior Lender “held no claim or interest and could not do
so unless and until Barclays was paid in full.” 20 Because Barclays had a superior interest in the
Junior Lender’s claim, Barclays could be considered the holder of the claim for voting purposes:
“Barclays’ vote of [the Junior Lender’s] claim was proper and in accord with the law.” 21
Thus, nearly all of the early case authority supports enforceability of voting rights
transfer provisions. At least one decision, however, came out the other way. The case In re Hart
Ski Mfg. Co. asserted (albeit in dicta) that “[t]he Bankruptcy Code guarantees each secured
creditor certain rights, regardless of subordination . . . includ[ing] the right to participate in the
voting for confirmation or rejection of any plan of reorganization.” 22 In this court’s view, a
junior creditor could not waive or transfer its right to vote on a plan, even by express agreement.
B. The 203 North LaSalle Decision
The enforceability of voting rights transfer provisions was dramatically challenged by the
2000 case In re 203 North LaSalle Street Partnership. 23 The 203 North LaSalle case had a
considerable impact on the academic discussion of voting rights assignability, and, as at least one
commentator has suggested, may also have affected practitioners’ approach to the issue.24
Because it called into question what had seemed to be more or less settled law surrounding
voting rights transfers, 203 North LaSalle captured the interest—and also some ire—of those in
At issue in 203 North LaSalle was an intercreditor agreement between Bank of America
(the “Bank”), which held a $93 million first mortgage on a commercial property in downtown
Chicago, and North LaSalle Street LP (the “Junior Lender”), general partner of the debtor and
also a secured creditor.25 In a “Consent and Subordination Agreement,” the Junior Lender agreed
Id. at *1.
Id. at *2.
Id. at *3.
Beatrice Foods Co. v. Hart Ski Mfg. Co. (In re Hart Ski Mfg. Co.), 5 B.R. 734, 736 (Bankr. D. Minn. 1980)
Bank of Am. v. N. LaSalle St. Ltd. P’ship (In re 203 N. LaSalle St. P’ship), 246 B.R. 325 (Bankr. N.D. Ill. 2000).
Paul Baisier, Second-Lien Financing—More Good, Bad, and Ugly: A Decision at Last, AM. BANKR. INST. J., Apr.
2007, at 50, 51.
203 N. LaSalle, 246 B.R. at 327-28.