Intercreditor deed prevents junior creditor challenging priority arrangements

Legal issue

The Intercreditor Deed stated: Neither Lender shall challenge or question … the validity or enforceability of any Security constituted by a Security Document.

The junior lender claimed that the obligations under the senior lender’s loan agreement failed due to misrepresentations by the senior lender, and that therefore the senior lender’s right to repayment arose outside of the senior security documents, under an implied loan or a restitutionary claim. The junior lender argued that they weren’t questioning the validity or enforceability of the senior security documents, but rather that the senior security documents did not secure any obligations, therefore the senior debt was not within the scope of the Intercreditor Deed and consequentially ranked behind the junior lender in priority.

The senior lender’s security document stated:

• i)  “Secured Liabilities” means “all present and future monies obligations and liabilities of the Borrower to the Beneficiaries whether actual or contingent and whether owed jointly or severally, as principal or surety or in any other capacity together with all interest (including without limitation default interest) accruing in respect of those monies obligations or liabilities pursuant to any Finance Document.”
• ii)  “Finance Documents” means “the Loan Agreement the Security Documents and all other agreements entered into between …[the senior lender]…and [Arboretum].”

The junior lender argued that if the senior debt payment obligations arose outside of a written security document, then they did not come within the definition of Finance Documents and therefore did not constitute Secured Liabilities, and were therefore not secured by the senior lender’s security document and consequentially were not regulated by the Intercreditor Deed.