Subordination Agreement

Subordination Agreement

Drafts a subordination agreement establishing creditor claim priority, payment waterfall mechanics, and intercreditor rights for debt transactions.

Quick Start

Gather before drafting:

1. Senior Debt instruments — principal, rate, maturity, collateral, default provisions
2. Junior Debt instruments — same details plus any existing subordination or intercreditor arrangements
3. Party information — legal names, jurisdictions, authorized signatories for Senior Creditor, Junior Creditor, and Debtor
4. Security interests — collateral descriptions, lien positions, guarantees, cross-default provisions
5. Commercial terms — complete vs. partial subordination, permitted junior payments (if any), standstill duration

Core Workflow

Draft the following sections in order.

1. Recitals

2. Definitions

• "Senior Debt" — principal, accrued interest, fees, enforcement costs, post-petition interest
• "Junior Debt" — full scope of junior obligations
• "Payment in Full" — treatment of contingent obligations, indemnities, post-petition interest
• "Permitted Junior Payments" — carve-outs from subordination (if partial)
• "Default Period" — trigger for standstill and enforcement restrictions

3. Subordination Mechanics

Waterfall: Senior Debt (principal + interest + fees + enforcement costs) → only after Payment in Full → Junior Debt.

• All Junior Debt payments/distributions/recoveries subordinated to prior Payment in Full of Senior Debt
• Junior Creditor barred from receiving payments except Permitted Junior Payments (if any)
• Standstill: no acceleration, enforcement, or remedy by Junior Creditor without Senior Creditor consent during Default Period
• Turnover: Junior Creditor must immediately remit prohibited payments to Senior Creditor
• Trust relationship: turnover payments received in trust for Senior Creditor

4. Representations & Warranties

All parties: valid existence, enforceability of debt instruments, no existing defaults, accuracy of stated amounts, authority to execute, no conflicts.

Junior Creditor additionally: no prior subordination to other creditors; no other subordination agreements exist.

5. Junior Creditor Covenants

• No amendments to Junior Debt adverse to Senior Creditor without consent
• No additional security interests or liens without consent
• Notice obligations on defaults or amendments
• Cooperation in bankruptcy/insolvency proceedings
• Bankruptcy voting: consistent with Senior Creditor interests or abstain

6. Events of Default & Remedies

Triggers: breach of subordination provisions, unauthorized Junior Debt amendments, enforcement actions violating standstill, Junior Creditor bankruptcy filing.

Remedies: specific performance, injunctive relief, turnover enforcement.

7. Bankruptcy & Insolvency

• Subordination effective before, during, and after any bankruptcy case
• Draft to satisfy 11 U.S.C. § 510(a) enforceability requirements
• Junior Creditor waives right to challenge subordination in bankruptcy
• Junior Creditor to file subordination proofs of claim

8. General Provisions

• Governing law — match Senior Debt governing law or Debtor's state of organization
• Jurisdiction/venue — match Senior Debt forum
• Amendments — written consent of all parties; specify whether Debtor consent required
• Survival — continues until Senior Debt paid in full regardless of Debtor discharge/release
• Assignment — binds successors; Junior Creditor may not assign without Senior Creditor consent
• Severability, integration, jury trial waiver, notice provisions

9. Signature Blocks

• Senior Creditor, Junior Creditor, Debtor
• Corporate attestation lines; seals if required by governing law
• Notarization if subordination relates to real property security interests

Pitfalls & Checks

• Complete vs. partial — confirm with user; if partial, define Permitted Junior Payments precisely (e.g., scheduled interest while no default exists)
• Cross-references — verify alignment with any existing intercreditor agreement, security agreement, or loan document subordination provisions
• Defined terms — audit all cross-references and defined terms for consistency before finalizing
• Recording — check jurisdiction-specific requirements if agreement will be recorded or filed publicly
• UCC — if collateral involved, confirm subordination of lien priority is addressed separately or within this agreement
• Multi-tier debt — if more than two tiers, expand waterfall accordingly
• No placeholders — flag missing information as targeted client questions rather than inserting brackets