As credit markets tighten and capital structures grow more complex, intercreditor agreements (ICAs) have assumed an increasingly critical role in commercial finance. These agreements — defining the relative rights, priorities and risks among lenders who share a common borrower or collateral pool — can significantly influence outcomes in both performing loans and distressed scenarios. In today’s environment, where senior lenders are demanding greater protections and mezzanine or subordinate creditors are under increasing pressure, understanding the importance of issues relating to drafting, negotiating and enforcing ICAs is essential for sound credit practice and risk mitigation.

This article outlines key considerations for navigating ICAs in a shifting market landscape, with a focus on drafting considerations, risk allocation, enforcement mechanisms and common sources of conflict. By appreciating the evolving dynamics between senior and subordinate lenders, bankers and legal professionals can better position themselves to mitigate risk and resolve disputes efficiently — whether at the outset of a deal or later in a scenario that involves distress.

The Function and Structure of Intercreditor Agreements

At their core, ICAs are contracts between two or more classes of creditors who have extended financing to the same borrower. These agreements define the relative rights, remedies and priorities among secured creditors — most often between senior and subordinated lenders — and are instrumental in managing the risks that arise from multi-tiered capital structures.

A well-drafted ICA serves as a private ordering mechanism: It contractually limits the actions that junior creditors can take, thereby reducing uncertainty, curbing inter-lender litigation and promoting orderly enforcement. These agreements are particularly consequential when the borrower becomes insolvent, where the tensions due to competing interests between creditor classes are often magnified.

In the context of bankruptcy, ICAs often restrict the extent to which subordinated creditors can participate in the case. These agreements typically prohibit junior creditors from contesting senior liens and debt, objecting to debtor-in-possession (DIP) financing, opposing asset sales favored by the senior lender, supporting a plan of reorganization not favored by the senior lender or even voting on a plan altogether.

ICAs reflect a calculated trade-off: In exchange for predictability and reduced enforcement costs, subordinated creditors agree to cede substantial control to senior lenders, particularly in times of default. These contracts, often negotiated between sophisticated parties, streamline enforcement and reduce bargaining costs when defaults or bankruptcies occur — primarily by limiting the participation rights and remedies available to subordinated creditors. At the same time, they often give senior lenders significant control over the borrower’s fate, both in and out of bankruptcy, raising questions about fairness, leverage and strategic behavior in distressed situations.¹

Core Provisions in Intercreditor Agreement

A typical ICA addresses the following key issues:

• Establishment of Relative Priority: Specifying the ranking of liens among creditors and setting the expectations for lien perfection to ensure enforceability and clarity of priority.
• Payment Subordination and Waterfall: Establishing the order and timing of payments, ensuring senior creditors are paid first before junior creditors receive any distribution.
• Exercise of Remedies: Dictating how and when junior creditors may enforce their rights and access collateral — often requiring the passage of a standstill period or senior lender consent.
• Collateral Proceeds: Detailing how proceeds from collateral sales or recoveries are distributed among creditor classes.
• Turnover Obligations: Requiring junior creditors to turn over proceeds received in violation of the specified priority scheme to the senior lender.
• Voting and Consent Rights: Allocating decision-making authority among creditors, including rights to approve amendments, waivers and enforcement decisions.
• Bankruptcy Participation: Defining the rights and limitations on creditor actions during a borrower’s insolvency proceeding, including restrictions on voting, adequate protection, financings, bankruptcy sales and plan treatment.²

These common provisions can provide senior creditors with influence that exceeds their economic stake the borrower’s capital structure, often to the detriment of creditors who are not party to the ICA.

Why Intercreditor Agreements Matter More Today

As capital structures grow more complex and constrained credit availability becomes the new norm, ICAs have become central to lender coordination and recovery outcomes. Recent distressed activity and litigation have increased the stakes. Lender-on-lender litigation has underscored this reality.³

Lenders, borrowers and legal professionals must now approach these agreements not as mere boilerplate to be addressed as a final step to a loan closing, but as critical instruments of credit protection, enforcement strategy and litigation risk management.

Notable Court Rulings

Over the past several decades, the enforcement of ICAs has taken on increasing significance in bankruptcy proceedings. While the Bankruptcy Code provides that “subordination agreements” are enforceable in bankruptcy to the same extent such agreements are enforceable under applicable non-bankruptcy law (see 11 U.S.C. § 510(a)), disputes among creditors frequently arise as junior lenders often seek to participate and protect value. Courts have not been entirely consistent in their treatment of these agreements, and outcomes often turn on the specific language of the ICA. As a result, case law continues to evolve, shaping creditor expectations and strategies in both distressed and non-distressed lending environments.

1. In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010):
   Issue: Whether a second-lien lender could object to bankruptcy sale under § 363 even though the ICA contained a waiver of such rights.
   Ruling: The bankruptcy court enforced the ICA and the waiver and barred the junior lender from objecting to the proposed sale.
   Lesson: The court reinforced that clear and express waivers in an ICA will generally be upheld as a matter of contract in bankruptcy, especially in sophisticated lending transactions.⁴

2. In re MPM Silicones, LLC (Momentive), 2014 WL 4436335 (Bankr. S.D.N.Y. 2014):
   Issue: Whether a loosely-worded lien subordination clause could bar junior lienholders from objecting to confirmation of a plan.
   Ruling: The court narrowly interpreted the ICA and held that vague drafting fails to silence junior lienholders and eliminate their standing; to enforce a “silent second,” ICAs must use precise, restrictive language.
   Lesson: Courts may limit the scope of ICA waivers in favor of bankruptcy’s policy of creditor participation unless the language is unambiguous.⁵

3. In re Tribune Co., 472 B.R. 223 (Bankr. D. Del 2012):
   Issue: Whether restrictions in an ICA that impact a junior creditor’s right to vote on a plan of reorganization be enforced.
   Ruling: The bankruptcy court found that bankruptcy law and policy does not override a right granted by Congress in the Bankruptcy Code to creditors to vote their claims.
   Lesson: The Bankruptcy Code’s enforcement of subordination agreements does not permit a court to authorize a junior creditor’s disenfranchisement and voice in all cases.
4. In re NESV Ice, LLC, 661 B.R. 427 (Bankr. D. Mass. 2024):
   Issue: Whether senior lender, as an assignee, could exercise voting rights of a junior creditor based upon prepetition ICA in bankruptcy.
   Ruling: Enforceable only if used in good faith; using claims strictly for litigation strategy would subvert the bankruptcy.
   Lesson: Assignments of voting rights in ICAs generally cannot override the right of a creditor to vote on a Chapter 11 plan as guaranteed by the Bankruptcy Code. Similarly, assignment of voting rights to a senior lender have been found by courts to be unenforceable because subordination agreements address payments — not voting.⁶

5. Del. Trust Co. v. Wilmington Trust, N.A. (In re Energy Future Holdings Corp.), 546 B.R. 566 (Bankr. D. Del. 2016):
   Issue: Whether amounts received by junior lenders were required to be turned over under ICA as “proceeds of collateral.”
   Ruling: Adequate protection and plan payments were designed to protect creditors from diminution in value of their collateral and were not required to be turned over to senior lender.
   Lesson: Courts will strictly enforce the express provisions of ICAs in favor of the subordinated creditor and against the senior creditor seeking payment priority, particularly when the payment is not attributable to proceeds of collateral. The parties’ intent must be clearly manifested and consistent in the ICA.

Bottom Line

Courts repeatedly remind bankers and other deal-makers — vague clauses in ICAs will not withstand scrutiny. If you want to silence junior lienholders, draft “silent second” provisions with crystal-clear, specific wording. These agreements must be drafted (and they are interpreted by courts) with exacting precision — particularly when attempting to limit junior rights in the event of financial distress or bankruptcy. Courts will protect statutory voting rights afforded by the Bankruptcy Code and reject broad language that attempts to silence junior creditors without precise drafting.

Facing Distress: Practical Steps for Lenders

1. Due Diligence: Verify existing intercreditor terms before joining complex capital stacks and understand implications for distress and bankruptcy.
2. Understand Consequences: ICAs simply can not be relegated in mind or in practice as ancillary loan documents. It is imperative that bankers and counsel appreciate the significance of these agreements at the front end of any transaction.
3. Inter-Creditor Review: Review existing ICAs for ambiguities or enforcement gaps. Understand how “silent” the “silent-second” lien is under the ICA.
4. Crisis Coordination: In a restructuring, align credit and legal teams to interpret and enforce terms. A senior lender has two primary remedies in the event of a breach by a junior lender under an ICA: (i) seeking judicial involvement, typically in a bankruptcy case compelling enforcement and enjoining prohibited conduct; and (ii) addressing the consequences of breach of contract.
5. Update Templates: Reflect on the lessons from case law in standard documentation.
6. Consider Exit and Dispute Resolution Mechanisms: Include termination, buy-out provisions and pay-down triggers. Consider choice of law, venue and other dispute resolution issues on the front end of any transaction — it is often “boilerplate” … until it’s not.

Conclusion

As volatility rises in credit markets, well-formulated ICAs become critical defense mechanisms for lender portfolios. The importance of clearly drafted, well-negotiated ICAs cannot be overstated, particularly as credit tightens and market uncertainty grows. These agreements not only guide creditor conduct in distress scenarios but also serve as critical tools for anticipating and managing conflict. Legal and finance professionals must approach them with a sharp understanding of both their strategic implications and their practical enforceability in bankruptcy and beyond.