DE Bankruptcy Court Enforces 'X-Clause'

Recently, in Kurak v. Dura Automotive Sys., Inc., the United States Bankruptcy Court for the District of Delaware enforced subordination provisions against certain out-of-the-money subordinated noteholders. The latter had asserted that the so-called 'x-clause' in the indenture provided them with a right to recovery under the plan of reorganization despite the fact that the senior noteholders would not be paid in full. The decision is significant for several reasons, including the fact that its holding is consistent with other cases that have considered different x-clauses, and that its pragmatic result recognized the significance to the commercial markets of enforcing these kinds of subordination provisions. The discussion that follows covers the specific ruling in Dura, as well as describing the way practitioners should expect courts to decide issues concerning x-clauses in general in subordination agreements.