The United States Bankruptcy Court for the Southern District of New York recently enforced the terms of an intercreditor agreement against secured trade creditors, which had challenged payments made to various pre-petition lenders.
The plaintiffs that brought the adversary action in Buena Vista Home Entertainment v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 374 B.R. 113 (Bankr. S.D.N.Y. Aug. 24, 2007) sold music CDs, DVDs, and similar merchandise to Musicland on credit for resale at Musicland stores. During restructuring efforts in 2003, Musicland granted Buena Vista a lien on its inventory and proceeds therefrom pursuant to the terms of a Security Agreement, which only was subject to the terms of an Intercreditor and Subordination Agreement (the "Intercreditor Agreement").
Pursuant to the terms of the Intercreditor Agreement, Buena Vista's lien was subordinated to the liens held by Revolving Loan Lenders ("Lenders"), including Wachovia Bank, N.A., to the full extent of the Revolving Loan Debt, as then existing, and as might be subsequently amended. In Fall 2005, Musicland asked its Lenders to increase availability under the Revolving Credit Agreement, but the Lenders refused.
Defendant Harris, N.A., which had a business relationship with one of the Lenders, agreed to make a $25 million term loan to Musicland (the "Harris Loan"), on terms that were materially different from those under the Revolving Credit Agreement. Harris and Wachovia subsequently entered into Amendment No. 8 to the Revolving Credit Agreement, which incorporated the Harris Loan into the Revolving Loan Debt, and accordingly placed the Harris Loan above Buena Vista's lien in terms of the priority of payments. Musicland repaid the Harris Loan and was thrust into a liquidity crisis.
Adversary Action
Buena Vista commenced an adversary proceeding against Wachovia and Harris May 15, 2007. All of the allegations in the complaint were based upon the following theory: the Security Agreement and the Intercreditor Agreement gave Buena Vista a superior lien in the funds used to pay Harris, and Amendment No. 8 and the repayment in full of the Harris Term loan violated those rights, causing them damage in the sum of $25 million.
Countering those allegations, Wachovia and Harris argued that the Intercreditor Agreement permitted amendments and the incorporation of new loans to the Revolving Credit Agreement.
The bankruptcy court viewed the resolution of the issues before it as a question of contract interpretation; if the unambiguous terms of the Intercreditor Agreement gave Wachovia the right to enter into Amendment No. 8, both defendants would be entitled to an order dismissing the complaint. The court held that the provisions of the Intercreditor Agreement were sufficiently broad on their face to encompass the incorporation of the Harris Term Loan, and allowed the parties to amend or supplement the existing definitions and other terms of the Revolving Credit Agreement.
In sum, Buena Vista's opposition was dependent upon their expectation that they "bargained for a lien that was subordinate only to obligations under Musicland's existing revolving credit facility." Finding no support for such a position in the operative documents, the bankruptcy court dismissed the complaint against Wachovia and Harris.
This article is presented for informational purposes only and is not intended to constitute legal advice.