By: Scott B. Riddle, Esq.

Blue Ridge Investors II, LP v. Wachovia Bank, NA and Aerosol Packaging, Inc. (In re Aerosol Packaging, Inc.), Chapter 11 Case No. 06-67096 (December 26, 2006)(Murphy)

Prior to the debtor’s bankruptcy filing, Blue Ridge and Debtor, in connection with a loan made by Wachovia, executed a Subordination Agreement in favor of Wachovia. Pursuant to the terms of the Subordination Agreement, as amended, Wachovia had the right to vote the claims of Blue Ridge in any future Bankruptcy proceeding of the debtor.  The debtor did file a Chapter 11 petition and a proposed plan, and Wachovia voted Blue Ridge’s claim. 

Blue Ridge objected and argued that the Subordination Agreement was unenforceable pursuant to 11 U.S.C. 1126(a).  The Court disagreed.  Section 510(a) provides that a Subordination Agreement is enforceable in a Bankruptcy case to the same extent it would be outside of Bankruptcy.  Blue Ridge provided no evidence that the Agreement was unenforceable under nonbankruptcy law.  Further, § 1126(a) provides as follows:

The holder of a claim or interest allowed under section 502 of this title may accept or reject a plan. If the United States is a creditor or equity security holder, the Secretary of the Treasury may accept or reject the plan on behalf of the United States.

This section does not explicitly or implicitly prohibit the holder of a claim from bargaining away the right to vote.  Further, Federal Rule of Bankruptcy Procedure 3018 and 9010 explicitly permit agents and other representatives from taking action, including voting, on behalf of parties.  Therefore, Wachovia had the right to vote on behalf of Blue Ridge.