Remedies Bar Prevented Holders of Subordinated Debt From Suing Debtor

On February 14, 2019, the First Department issued a decision in J-Bar Reinforcement, Inc. v. Crest Hill Capital LLC, 2019 NY Slip Op. 01142, holding that a remedies bar prevented holders of subordinated debt from suing a debtor, explaining:

Plaintiff held a promissory note executed by the respective defendants. The note was executed at a time when defendants had other creditors, and thus plaintiff executed a Subordination Agreement whereby plaintiff's right to payment was subordinated to the senior creditors. Specifically, the Subordination Agreement provided that plaintiff "will not now or hereafter directly or indirectly (i) ask, demand, sue for, take or receive payment of all or any part of the Subordinated Indebtedness or any collateral therefor, and defendants will not be obligated to make any such payment, and the failure of defendants so to do shall not constitute a default by defendants in respect of the Subordinated Indebtedness."

Unlike subordination agreements that merely order the priority of plaintiffs' rights as against other creditors and have no bearing on plaintiffs' rights against defendant, the plain, unambiguous language of the subject Subordination Agreement limited plaintiff's right to demand or sue for payment, or declare a default prior to satisfaction of the senior debt. The commercial reasonableness of this agreement is irrelevant where there is no ambiguity.

(Internal quotations and citations omitted).

Litigating contract disputes is a large part of our practice. Even parties that have no relationship to New York often choose to have their contracts interpreted under New York law because--with a few exceptions--an unambiguous contract between sophisticated business people will be enforced based solely on the terms of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract dispute.