hard · Private Credit & Debt loan-structures-instruments

In a bankruptcy where the borrower's enterprise value covers 80% of the combined principal, what determines whether the last-out lender can be forced to turn over recoveries to the first-out lender even though both share an identical first-priority lien on the collateral?

1. The turnover is enforced contractually through the AAL's payment waterfall, but its effectiveness against the estate depends on whether courts treat the AAL as an enforceable subordination agreement under Bankruptcy Code §510(a) rather than a lien-priority arrangement
2. The turnover is automatically enforced by the bankruptcy court because the first-out tranche holds a senior perfected security interest that primes the last-out lender's junior lien on the shared collateral
3. The turnover fails because both lenders share one lien of equal rank, so the estate distributes collateral proceeds strictly pro rata and the AAL cannot alter statutory distribution priorities
4. The turnover depends solely on whether the last-out lender voted to accept the plan, since acceptance waives any contractual waterfall rights it held under the AAL outside the plan

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