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Bankruptcy Litigation

Are Voting Rights Provisions In Subordination Agreements Enforceable?

Subordination agreements often contain an agreement by the subordinated creditor that, if the issuer is a debtor in a bankruptcy case, the senior creditor can vote the claim of the junior creditor on any proposed Chapter 11 plan. If given effect, such a voting provision can give a senior creditor significant power, relative to both the subordinated creditor and other creditors, to support or oppose confirmation of a plan.

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Subordination agreements among creditors have an obvious purpose — to consensually reorder payment priorities among two or more creditors. For example, Creditor A and Creditor B could enter into a subordination agreement providing that, if the borrower lacks the money to pay them both in full, Creditor A gets paid 100% of its debt before Creditor B receives anything. In return for agreeing to subordinate its debt, Creditor B will typically receive some form of consideration, such as a higher interest rate from the company that issued the debt.

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