Franchise Group First Lien Agent Sues OpCo 2L Agent For Breach of Intercreditor By Pursuing $158M Admin Expense Claim

Relevant Document:
Complaint

Wilmington Trust NA, the successor administrative and collateral agent under the Franchise Group’s first lien credit agreement, filed an adversary complaint Sunday night, March 23, against Alter Domus (US), the administrative and collateral agent under the OpCo second lien credit agreement. The complaint alleges the OpCo 2L agent breached the first lien/second lien intercreditor agreement, violating the rights of the first lien secured parties.

Specifically, the OpCo 2L agent breached the agreement by filing with the Freedom Lender group a motion for a super priority administrative expense claim on account of alleged diminution in value of the second lien secured parties’ collateral from the petition date forward.

The action seeks a declaration of the first lien agent’s rights under the intercreditor agreement, including that the defendant is prevented from receiving any payment on account of its administrative expense priority claim and must turn over any such payment it may receive. The complaint also requests the court compel the OpCo 2L agent to specifically perform its obligations under the intercreditor agreement and enjoin the OpCo 2L agent from committing further breaches.

The OpCo 2L agent and Freedom Lender group’s motion requests allowance of a $158.4 million superpriority administrative expense claim on account of their collateral value being completely wiped out during the chapter 11 proceedings. The second lien lenders attribute the diminished collateral value in part to the debtors’ $100 million new money DIP financing, the proceeds of which they contend were used to pay junior creditors.

The complaint says that motion violates the OpCo 2L agent’s “clear and unambiguous obligations” under the intercreditor agreement: not to take or receive any collateral or proceeds from collateral until the first lien obligations have been paid in full in cash, to turn over any proceeds to the first lien secured parties and to commence or maintain an action to recover from the collateral until the first lien obligations have been fully satisfied.

The first lien agent contends that the OpCo 2L agent’s “continuing violation” of the intercreditor agreement has injured the first lien parties and “threatens to further delay and substantially increase the administrative cost and burden of these proceedings.”