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The United States Bankruptcy Court for the Southern District of New York's decision in the ION Media Networks, Inc. ("ION Media") Chapter 11 bankruptcy case Ion Media Networks, Inc., v. Cyrus Select Opportunities Master Fund, Ltd., Bankruptcy Case No. 09-13125, Adversary Nos. 09-01440, 09-01479, WL 4047995 (Bankr. S.D.N.Y. Nov. 24, 2009) addressed the impact of an intercreditor agreement on a subordinated debt holder's challenge of a senior lien on certain FCC broadcast licenses ("FCC Licenses")  held by ION Media, the priority of the subject liens and the second lien lender's standing to object to the Debtors' plan of reorganization.

On May 19, 2009, ION Media, with its affiliate debtors, (together "Debtors") commenced jointly administered cases under Chapter 11 of the bankruptcy code. Prior to ION Media's bankruptcy filing, Cyrus Select Opportunities Master Fund Ltd. ("Cyrus") purchased certain subordinated second lien debt of ION Media subject to an intercreditor agreement (the "Intercreditor Agreement") and a security agreement ("Security Agreement," together with the Intercreditor Agreement, "Agreements") with the first lien lenders, which placed certain restrictions on the second lien lenders' activities.

The first lien lenders also entered into a Restructuring Support Agreement ("RSA") with Debtors in early 2009, prior to the commencement of the bankruptcy. The RSA detailed the financial restructuring, which would result in the first lien lenders receiving "close to 100 percent of the common stock of the Reorganized Debtors." Debtors filed a motion for interim and final DIP financing (the "DIP Proposal") to be provided by the first lien lenders, which was consistent with the RSA.

The Court approved the DIP Proposal, despite Cyrus' objection and its alternative DIP financing proposal. The Debtors' filed a disclosure statement and plan of reorganization (the "Plan"). Cyrus objected to the Plan, on the basis that the FCC Licenses constituted unencumbered "Special Property," which was excluded from the Security Agreement's definition of "Collateral." Hence, Cyrus contended that the second lien lenders should have been entitled to a pro rata share of the recovery from the FCC Licenses. The Court, however, overruled Cyrus' objections to confirmation and held that the Plan met the requirements for confirmation.

The following discussion highlights the Court's decision concerning the impact of the Agreements on the second lien creditor's objections.

Cyrus was barred from challenging the First Lien Lenders liens and the priority of claims

The Court held that Cyrus was barred from asserting that the FCC Licenses were unencumbered, and that the terms of the Intercreditor Agreement prohibited Cyrus from challenging the priority of the first lien lenders' claims. The Court's analysis emphasized three main points. First, the terms of the Intercreditor Agreement prohibited second lien lenders from challenging the first lien lenders' lien on the FCC Licenses; hence, Cyrus' challenge was barred under the Intercreditor Agreement.

Second, even if Cyrus were allowed to challenge the lien, the Intercreditor Agreement clearly granted first lien lenders' claims priority over second lien lenders' claims. The Court emphasized that the Intercreditor Agreement granted first lien lenders a first interest lien in "all Collateral regardless of actual perfection of security interest." It is important to note that the Court enforced the Intercreditor Agreement as written, giving credence to the fact that the parties were sophisticated, well aware of restrictions applicable to FCC licenses, and determined that the effect of subordinating the second lien lenders' position was fully intended and understood. The Court also determined that upholding the plain language of the Intercreditor Agreement reinforced general principles of public policy and gave the parties certainty in the obligations under their agreements.  

The Court also took into consideration the Second Lien Indenture, which required that second lien holders take certain steps before instituting any proceedings against the first lien holders. Since Cyrus did not comply with the Indenture's requirements, the Court held that Cyrus lacked standing to challenge the First Lien Lenders liens. This holding is consistent with the recent 2nd Circuit decision, In re Chrysler, LLC, which has since been vacated by the United States Supreme Court. In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009), vacated, 2009 WL 2844364 (U.S. 2009).

Finally, the Court held that Cyrus' adversary proceeding was improperly filed and was not in accordance with the July 1, 2009, DIP Order. While Cyrus' adversary proceeding was timely, its claims did not constitute a "Lender Claim" since Cyrus "lacked any particularized interest" in the action. In order to have been a properly asserted Lender Claim, Cyrus should have sought derivative standing on behalf of the estate.

For the above reasons, the Court held that Cyrus lacked standing to pose challenges to superior liens and their respective priorities.   

Cyrus was barred from filing an objection to the Plan

The Court found that the Intercreditor Agreement prohibited Cyrus from asserting objections to the Plan. Cyrus argued that its objections were asserted in its capacity as a general unsecured creditor, relying on the premise that the FCC licenses are not collateral under the Intercreditor Agreement.

The Court dismissed Cyrus' argument, holding that while general unsecured creditors may have certain rights and remedies under one section of the Intercreditor Agreement, this section was subject to another section of the Intercreditor Agreement, which placed clear restrictions on the second lien lenders. The Intercreditor Agreement specifically prohibited any second lien lender from objecting to DIP financing or related plans and proposals; therefore, Cyrus was barred from filing its objection.

Notably, in this case the Court took issue with Cyrus' multiple objections and oppositions to the Plan, particularly under its holding that the Intercreditor Agreement prohibited Cyrus from doing so. Judge Peck categorized Cyrus' objection to confirmation as a "breach of the Intercreditor Agreement." The judge also suggested that Cyrus' involvement in this action led to the increase in expense of administration of the case, which may be the "measure of damages to be claimed against Cyrus."

The Court also mentioned on four separate occasions that Cyrus' debt had been purchased at a deeply discounted price and that it was now attempting to capitalize on its investment. While Judge Peck disclaimed that Cyrus' strategies were increasingly familiar and there was "nothing wrong," the Court appears to have taken the "bargain basement" nature of the debt and Cyrus' role as a vulture investor into consideration. This may indicate a trend by the bankruptcy courts to subordinate or to avoid claims and liens that the courts view as one sided. In two recent cases, In re Yellowstone Club, LLC, No. 08-61570-11, 2009 WL 3094930 (Bankr. D. Mont., 2009) and In re TOUSA, Inc. No. 08-10928-JKO, 2009 WL 3261963 (Bankr. S.D. Fla. Oct. 13, 2009), the bankruptcy courts took into account extremely favorable terms in subordinating lenders' claims and avoiding transfers to lenders, respectively. In light of the fact that the parties in ION are sophisticated, and there was no indication that any party was harmed in the transaction, the low price at which Cyrus acquired the second lien debt should not have been a consideration.

As of January 4, 2010, the U.S. Court of Appeals for the 2nd Circuit has stayed the confirmation order, pending appeal. The court is expected to hear the appeal in early 2010.