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Note: Marathon Asset Management LP, Polygon Convertible Opportunity Master Fund, and Polygon Distressed Opportunities Master Fund (Lenders) loaned USD1,250,000,000 to a fund which was used as a Deposit LC Credit Facility as part of a larger line of credit given to Texas Competitive Holdings Co. LLC (Borrower/Applicant). Included in the agreements associated with this credit facility were documents setting forth priority should Borrower/Applicant become insolvent. Included in the documents was a provision specifically aimed at the Deposit LC Credit Facility (“Deposit LC Waterfall”).When, Borrower/Applicant eventually filed for bankruptcy, Lenders sought to establish priority with regards to the Deposit LC Waterfall, claiming that priority four of the Deposit LC Waterfall must include Lenders as it would be redundant in the face of priorities one through three if issuers were also included.

Lenders moved to dismiss the suit. The United States Bankruptcy Court for the District of Delaware, Sontchi, J., dismissed. On Appeal, the United States District Court for the District of Delaware, Andrews, J., affirmed.

The Appellate Judge determined there was no ambiguity with regards to the priority of creditors that when read in the context of the entire agreement. The Judge also rejected the Issuers’ argument that Lenders should be given priority four. The Appellate Judge noted that priority four claims all were supposed to have equal priority, and stated that including Lenders in priority four would upset the supposed equality of claims.

Text of Deposit LC Waterfall Clause in Contract:

“(b) with respect to Deposit L/C Collateral:

first, on a pro rata basis, to the payment of all amounts due to the Deposit Letter of Credit Issuer under any of the Financing Documents, excluding amounts payable in connection with any unreimbursed amount under any Letter of Credit;

second, on a pro rata basis, to the payment of all amounts due to the Deposit Letter of Credit Issuer in an amount equal to 100% of the Unpaid Drawings under any Deposit Letter of Credit;

third, on a pro rata basis, to any Secured Party which has theretofore advanced or paid any fees to the Deposit Letter of Credit Issuer, other than any amounts covered by priority second, an amount equal to the amount thereof so advanced or paid by such Secured Party and for which such Secured Party has not been previously reimbursed;

fourth, on a pro rata basis, to the payment of all other Deposit L/C obligations; and

last, the balance, if any, after all of the Deposit L/C obligations have been indefeasibly paid in full in cash, as set forth above in section 4.1(a).”

[ARB]

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