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Chief Judge Shannon Dismisses Complaint in Dispute Over Lien Priority Pursuant to an Intercreditor Agreement

By Charlene D. Davis

On May 11, 2016, Chief Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued a Memorandum Opinion and Order granting a motion to dismiss, with prejudice, a complaint brought by Salus Capital Partners, LLC, as Agent (“Salus”) for certain lenders (the “SCP Lenders”) against other lenders (the “ABL Lenders”) in the Radioshack Corporation, et al. (the “Debtor”) chapter 11 case. Concluding that the unambiguous provisions of an intercreditor agreement (the “Intercreditor Agreement”) allowed the ABL Lenders to enter into an amended ABL credit agreement (the “Amended ABL Credit Agreement”) with the Debtors, the Court held that the ABL Lenders did not breach the Intercreditor Agreement, were not unjustly enriched, did not tortuously interfere with the SPC Lenders’ contractual rights, and did not convert the SPC Lenders’ collateral.

Roughly 14 months prior to filing a chapter 11 petition, the Debtor entered into an $835 million financing arrangement with two distinct sets of lenders consisting of (i) a $235 million term loan from the SPC Lenders and (ii) a $585 million credit facility from the original ABL Lenders, comprised of a $50 million term loan and a $535 million revolving loan. All of the obligations were secured by substantially all of the Debtor’s assets. An intercreditor agreement between the SCP Lenders and the original ABL Lenders (the “Intercreditor Agreement”) provided that the original ABL Lenders held a first lien on Liquid Collateral and a second lien on Fixed Assets and the SCP Lenders held a first lien on Fixed Assets and a second lien on Liquid Collateral. Subsequently new parties replaced the original ABL Lenders and the original ABL Credit Agreement was restructured. As amended, it refinanced the $535 million revolving facility into (i) a credit facility in the amount of $275 million, (ii) a letter of credit facility in the amount of $120 million (the “LOC Facility”) and (iii) a revolving credit facility in the amount of $140 million.

During the Debtor’s chapter 11 case, a portion of its business was sold as a going concern and the balance shut down and liquidated. Proceeds from the sale and liquidation were distributed in accordance with the provisions and priorities in the Intercreditor Agreement. The ABL Lenders received over $232 million on account of the disposition of the Liquid Collateral on which they claimed a first lien. Salus brought suit on behalf of the SCP Lenders alleging various causes of action; all premised on the contention that the ABL Lenders lost or reduced their rights in the Liquid Collateral when they entered into the Amended ABL Credit Agreement which permanently reduced the ABL Lenders’ Revolving Loan Commitments in two ways: first by refinancing revolving loans as term loans and second by structuring an illusory $140 million revolving facility; each allegedly in violation of the Intercreditor Agreement.

Applying the law of New York, applicable to the Intercreditor Agreement, the Court found that the relevant terms of the Intercreditor Agreement were unambiguous. They included relatively board (and commercially standard) rights to amend “any or all of the ABL Loan Documents”, without prior consent of the SCP Lenders so long as that refinancing did not encroach on or directly affect the SCP Lenders’ exposure as a subordinated lender to the Debtor. Moreover the Court concluded that Salus has failed to demonstrate that its position was unfairly changed as a result of the Amended ABL Credit Agreement. The SCP Lenders held junior right in the Liquid Collateral both before and after the restructuring.

A copy of the Court’s opinion is available here.

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