Intercreditor Agreement (Lien Priority) - Enhanced Drafting Workflow

You are tasked with drafting a comprehensive Intercreditor Agreement establishing lien priority between first lien and second lien creditors sharing common collateral. This is a critical transactional document that governs the relationship between senior and subordinated secured creditors and must reflect current market standards while protecting the interests of all parties.

Document Scope and Context

Begin by establishing the foundational context of the agreement. The introduction and recitals should clearly articulate the commercial relationship between the parties, identify the underlying credit facilities (both first lien and second lien), and describe the shared collateral that secures both sets of obligations. Search for and incorporate standard recital language from authoritative sources including the Loan Syndications and Trading Association (LSTA) model First Lien/Second Lien Intercreditor Agreement and American Bar Association (ABA) Commercial Finance Committee resources. These recitals must establish the business purpose for the subordination arrangement and reference the specific credit agreements, security agreements, and other loan documents that govern the parties' relationships with the borrower.

Definitions and Key Terms

Develop a comprehensive definitions section that precisely delineates the scope of obligations and collateral covered by the agreement. At minimum, define "First Lien Obligations," "Second Lien Obligations," "Collateral," "Lien Priority," "Standstill Period," "Discharge of First Lien Obligations," and "Insolvency Proceeding." Search the user's uploaded transaction documents to extract specific details about the obligations, loan amounts, maturity dates, and collateral descriptions that must be incorporated into these definitions. Supplement this document-specific information by researching standard market definitions from legal research platforms such as Lexology, Practical Law, and Thomson Reuters to ensure the definitions align with current market practice and case law interpretations. Each defined term should be drafted with sufficient precision to avoid ambiguity in enforcement scenarios.

Lien Priority and Subordination Framework

Draft detailed provisions establishing the absolute priority of the first lien over the second lien on all shared collateral, regardless of the time, order, or method of attachment or perfection of either lien. This section forms the commercial heart of the agreement and must be unequivocal. Research current market standards for lien subordination provisions by examining LSTA model agreements, ABA Commercial Finance Committee publications, and recent precedent transactions. The subordination must be comprehensive, covering not only the principal amount of the obligations but also interest (including post-petition interest in bankruptcy), fees, expenses, and all other amounts that may become due. Address how the priority operates in various scenarios including voluntary payments, enforcement actions, bankruptcy proceedings, and collateral dispositions. Specify that the subordination is a continuing agreement that remains effective until the first lien obligations are discharged in full according to the agreement's terms.

Enforcement Rights, Remedies, and Standstill Provisions

Articulate the exclusive enforcement rights of the first lien holders and the corresponding restrictions on second lien holder actions during the standstill period. The first lien holders must have the unrestricted right to enforce their remedies against the collateral, accept or reject proposed debtor-in-possession financing, vote on reorganization plans, and otherwise exercise all rights available to secured creditors without obtaining consent from or providing notice to the second lien holders, subject only to limitations expressly stated in the agreement. Conversely, impose a comprehensive standstill on the second lien holders that prohibits them from accelerating their obligations, exercising remedies against collateral, objecting to first lien enforcement actions, or taking any action that would interfere with first lien rights. Research and incorporate best practices from ABA Commercial Finance Committee guidelines, Nolo legal resources, and recent court decisions interpreting standstill provisions to ensure enforceability. Define the standstill period with precision, typically extending for a specified number of days (commonly 180 days) following the occurrence of a payment default or other event of default under the first lien documents, and address what actions, if any, the second lien holders may take after the standstill period expires if the first lien holders have not completed enforcement.

Payment Waterfall, Distributions, and Turnover Obligations

Establish clear rules governing the application of all payments, proceeds, and distributions from the collateral or the borrower. All recoveries from collateral, whether through foreclosure, bankruptcy distributions, or otherwise, must be applied first to discharge the first lien obligations in full before any amount is distributed to second lien holders. Include mandatory turnover provisions requiring second lien holders to immediately remit to the first lien agent any payments or proceeds they receive in violation of the priority scheme, whether such payments come directly from the borrower, from collateral proceeds, or from any other source. Research market standards for waterfall distribution provisions in intercreditor agreements to ensure the payment mechanics align with current practice. Address specific scenarios including cash collateral use in bankruptcy, adequate protection payments, and distributions under confirmed reorganization plans. Specify that turnover obligations apply regardless of whether the second lien holder had knowledge of the priority violation and that turned-over amounts will be held by the first lien holders as proceeds of their collateral.

Representations, Warranties, and Due Authorization

Include mutual representations and warranties from both the first lien holders and second lien holders addressing their due organization, authority to enter into the agreement, absence of conflicts with organizational documents or other agreements, and the validity and enforceability of their respective liens on the collateral. Each party should represent that its security interest has been duly perfected in accordance with applicable law and that it has taken all actions necessary to establish and maintain the priority of its lien as contemplated by the agreement (subject to the subordination provisions). Search authoritative sources including Thomson Reuters Practical Law, National Venture Capital Association (NVCA) model documents, and ABA model agreements to identify standard representations appropriate for intercreditor agreements. Verify that the representations align with the specific transaction structure by reviewing the user's uploaded credit agreements and security documents. Include representations regarding the absence of any side agreements or arrangements that would contradict or undermine the priority scheme established in the intercreditor agreement.

Ongoing Covenants and Operational Provisions

Draft covenants that govern the ongoing relationship between the lien holders and preserve the integrity of the priority arrangement. Require each party to provide prompt notice to the other of any amendments to their respective credit agreements that could materially affect the collateral, the obligations, or the relative rights of the parties. Prohibit amendments to the second lien credit documents that would increase the principal amount of the obligations, accelerate maturity dates, increase interest rates beyond specified thresholds, or impose additional restrictions on the borrower's ability to satisfy the first lien obligations. Address how the parties will coordinate in bankruptcy proceedings, including provisions governing the filing of proofs of claim, voting on reorganization plans, and consent to debtor-in-possession financing or asset sales. Search for best practices in lien priority covenants from commercial finance industry publications and recent market precedents. Include covenants requiring each party to maintain the perfection of its security interest and to cooperate in executing additional documents necessary to effectuate the priority arrangement. Specify notice requirements with precise delivery addresses, methods, and timing.

Bankruptcy and Insolvency Provisions

Address the treatment of the lien priority in bankruptcy and other insolvency proceedings with specificity. Confirm that the subordination is effective before, during, and after any bankruptcy case and constitutes a "subordination agreement" under Section 510(a) of the Bankruptcy Code. Provide that the second lien holders will not oppose any motion by the first lien holders for relief from the automatic stay, for adequate protection, or for use of cash collateral. Grant the first lien holders the exclusive right to propose, vote on, and consent to any debtor-in-possession financing or use of cash collateral, and prohibit the second lien holders from objecting to such proposals or seeking adequate protection for their interests unless the first lien holders are receiving adequate protection. Address the treatment of post-petition interest and the application of the "equities of the case" exception under Section 510(c) of the Bankruptcy Code. Specify that the agreement will be enforceable against any bankruptcy trustee or debtor-in-possession.

Miscellaneous and Boilerplate Provisions

Complete the agreement with comprehensive miscellaneous provisions that address governing law (specifying the jurisdiction whose law will govern interpretation and enforcement), amendment procedures (typically requiring written consent of all parties), severability of invalid provisions, integration (confirming the agreement supersedes all prior understandings), and execution mechanics including counterpart signature pages and electronic delivery. Research standard boilerplate clauses from bar association resources and model intercreditor agreements to ensure completeness. Include provisions addressing successor and assign rights, third-party beneficiary status (or lack thereof), waiver of jury trial, submission to jurisdiction, and service of process. Specify that notices must be in writing and provide detailed delivery instructions for each party. Address whether the agreement may be amended without borrower consent and under what circumstances the agreement terminates.

Document Generation and Quality Control

Once you have gathered all necessary information from the user's uploaded transaction documents, researched applicable market standards and legal authorities, and developed comprehensive content for each section, generate the complete Intercreditor Agreement as a formal legal document. The final document should be professionally formatted with appropriate article and section numbering, defined terms properly capitalized throughout, and all cross-references accurately stated. Ensure internal consistency in terminology, verify that all defined terms are actually used in the operative provisions, and confirm that the priority scheme is clearly and unambiguously established. The document should be suitable for execution by sophisticated commercial parties and their counsel with minimal revision.