A junior lender should request a waiver for a certain class of collateral that a priority lender has not included in its asset base. As soon as it has been agreed that there is a personal guarantee from the borrower`s originate or a guarantee in favour of the junior lender, the junior lender should ensure that the established rights are properly reflected in the interconnection agreement and that they are not tied up. The decision of the third circuit panel in Energy Future recalls that interconnection agreements only apply in accordance with their conditions. Although the parties were able to design the interconnection agreement in Energy Future in order to obtain all the consideration received either by the 2007 bondholders or by TCEH`s bondholders in 2011, they did not do so. Therefore, the interconnection agreement did not apply to reasonable protection payments and distributions to bondholders. Creditors have recently learned similar lessons in other cases. See in re MPM Silicones LLC, 518 B.R. 740 (Bankr. S.D.N.Y. 2014) (ordinary shares in reorganized debtors, junior secured creditors under Chapter 11 were not “joint guarantees” or revenues within the meaning of the Intercreditor Agreement and the Uniform Commercial Code, since neither older nor younger secured creditors were pledging old or new shares and there was no “sale” or “assignment”, aff`d, 596 B.R. 416 (S.D.N.Y.
2019). The third panel of the circuit concluded that, for several reasons, the determination of waterfalls does not apply to protection payments and distributions of appropriate plans. First, it found that no guarantee was guaranteed. The distributions were made from assets over which the bondholders had no collateral rights. With respect to appropriate collateral, the Tribunal found, while it appeared that, for the most part, all of TCEH`s assets served as collateral for the 2007 and 2011 bonds, that: (i) “the payment of guarantees reduces the amount of money owed for a debt”; and (ii) that the appropriate safeguards did not reduce the amount of money that TCEH owed on the bonds, because TCEH made such payments “in exchange for the creditors` agreement to have the collateral used for other purposes”. An inter-creditor agreement between the bondholders contained a provision relating to waterfalls. It provided that security rights or proceeds obtained in connection with the sale or assignment or forfeiture of such collateral in the exercise of security document remedies by the security officer shall be used in the order established in the agreement, pursuant to insolvency or liquidation proceedings commenced by or against the borrower or any other party to the loan. To the extent that an interconnection agreement provides for a subordination of debts or security, the agreement is generally applied in the event of bankruptcy in accordance with Article 510(a) of the Bankruptcy Code, which provides that a bankruptcy subordination agreement is applicable to the extent that it would be applicable under current bankruptcy law. . . .