## Facts

- Envirodyne Industries, Inc. filed for Chapter 11 reorganization with three unsecured debt tiers: Senior Discount Notes (most senior), 14% Senior Subordinated Debentures, and 13.5% Subordinated Notes (most junior).
- The 13.5% notes indenture expressly subordinated those notes to “Superior Indebtedness,” including both the Senior Discount Notes and the 14% debentures.
- The indenture contained an “X clause” stating that superior indebtedness must be paid in full before junior noteholders could retain any assets, except certain consideration in reorganization, including “shares of stock of the Company, as reorganized or readjusted” and certain subordinated securities provided by the plan.
- Envirodyne’s plan provided equity distributions with substantially different values: the 14% noteholders (owed about $200 million) would receive common stock valued around $121 million; the 13.5% noteholders (owed about $100 million) would receive stock valued around $20 million.
- The 13.5% noteholders objected to confirmation, arguing the X clause did not subordinate them with respect to stock distributions and that the plan therefore violated their contractual rights.
- The bankruptcy court confirmed the plan over the objection; the district court affirmed; the 13.5% noteholders appealed without obtaining a stay pending appeal.

## Issues

1. Whether the indenture’s X clause subordinated the 13.5% noteholders to the 14% noteholders with respect to distributions of stock in the reorganized company.
2. Whether the plan’s disparate stock allocation to the 14% and 13.5% tranches was permissible under the parties’ subordination agreement as enforced in bankruptcy.

## Decision

- The Seventh Circuit affirmed the order confirming the Chapter 11 plan.
- The court held the X clause subordinated the 13.5% noteholders to the 14% noteholders even as to stock distributed under the plan.
- The court rejected the junior noteholders’ grammar-based and “payment” usage arguments as inconsistent with the commercial purpose of the subordination arrangement.
- Because the plan’s stock distributions respected the contractual priority scheme, the objection to confirmation failed.

## Legal Principles

- Subordination provisions in sophisticated debt instruments are interpreted to preserve the intended creditor priority structure, especially in reorganization contexts where distributions often take non-cash forms.
- Courts favor commercially sensible readings of indenture language over hyper-literal parsing that would negate subordination’s practical effect.
- References to “payment” in a reorganization setting may include satisfaction of obligations through stock or other securities, not only cash.
- Bankruptcy enforces contractual subordination agreements according to their terms under 11 U.S.C. § 510(a), including priority effects on plan distributions when the agreement so provides.

## Conclusion

The Seventh Circuit held that Envirodyne’s indenture subordinated the 13.5% noteholders to the 14% noteholders for equity distributions, so the Chapter 11 plan’s larger stock allocation to the senior tranche complied with the parties’ contractual priority and was properly confirmed.


In re Envirodyne Indus., Inc., 29 F.3d 301 (7th Cir. 1994)