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Junior Creditor’s Assignment of Voting Rights Enforceable in Bankruptcy

The United States District Court for the District of New Jersey upheld the Bankruptcy Court’s ruling that a junior creditor’s assignment of voting rights to a senior creditor under an intercreditor agreement is enforceable in bankruptcy. In In re Coastal Broadcasting Systems, Inc., 2013 U.S. Dist. Lexis 91469 (June 28, 2013), the junior creditors, who were debtor’s former shareholders, argued that their Subordination and Intercreditor Agreement’s grant of voting rights to Sturdy Savings Bank was not enforceable, and the plan of reorganization should not be confirmed under 11 U.S.C. 1129(a). The Court found that the agreement was enforceable in accordance with its terms under applicable nonbankruptcy law, and thus enforceable under 11 U.S.C. 510(a). The court also held that the assignment of voting rights did not violate public policy, dismissing appellant’s analogy to a debtor’s pre-petition waiver of the automatic stay. Finally, the Court dismissed the argument that the assignment conflicted with Bankruptcy Rule 3018, reasoning that Sturdy was a “creditor” for voting purposes, and, even if it did not qualify as a creditor, Sturdy would qualify as an authorized agent. Based upon this reasoning, and Sturdy’s deemed acceptance of the plan of reorganization, the Court affirmed the Bankruptcy Court’s confirmation of the plan under 11 U.S.C. 1129(a).

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