As we explained in our case summary, the question in this case was whether plaintiff noteholder’s rights were violated when the indenture trustee, in response to the debtor’s default, agreed to a workout deal with the consent of a majority of noteholders, but without plaintiff’s consent. In a 4-3 decision, the Court (Garcia, J.) held that plaintiff’s rights were violated and remitted the matter to Supreme Court for a trial on damages.
The indenture governing plaintiff’s notes contained a non-impairment provision stating that “[n]otwithstanding any other provision of this Indenture, the right of any Holder to receive payment . . . on a Note . . . or to bring suit for the enforcement of any such payment . . . shall not be impaired or affected without the consent of such Holder.” After the issuer defaulted, the trustee, with the consent of a majority of the noteholders, foreclosed on the collateral securing the notes and distributed it to noteholders in a workout deal that purported to cancel the notes and extinguish the holders’ rights thereunder. A noteholder that had not consented to the workout sued, claiming that the deal violated the non-impairment provision of the indenture, and a majority of the Court of Appeals agreed.
Writing for the majority, Judge Garcia agreed with plaintiff that the plain terms of the non-impairment provision prohibited the purported cancellation of plaintiff’s notes. The majority drew support for its conclusion from the Trust Indenture Act, which requires the inclusion of similar non-impairment provisions in the deal documents for notes covered by federal law. In the majority’s view, those federal provisions also would have prevented the cancellation of plaintiff’s notes.
This conclusion required the majority to address Marblegate Asset Management, LLC v. Education Mortgage Finance Corp., 846 F.3d 1 (2d Cir. 2017), where the Second Circuit held that the non-impairment provisions of the TIA were not violated by a workout deal unless the deal made a “formal amendment[]” to the “core payment terms” of an indenture. The majority observed that, “when read correctly,” Marblegate supported its conclusion because the workout deal in this case formally extinguished plaintiff’s legal rights, whereas in Marblegate the workout deal left the minority noteholder’s rights legally (if not practically) in tact.
The majority also rejected defendants’ argument that the workout deal was authorized by a separate document–the collateral trust agreement–that accompanied the indenture. The majority noted that noteholders were not parties to that separate agreement. And in any event, the majority held that the relevant provisions of the collateral trust agreement did not override the non-impairment provision of the indenture and thus did not alter the fact that the non-impairment provision was violated in this case.
Judge Fahey dissented in an opinion that was joined by Judge Wilson and Judge Rivera. In the dissent’s view, the majority failed to adequately account for the provisions of the collateral trust agreement, which the dissent understood to authorize the foreclosure that occurred in this case. In the dissent’s view, the non-impairment provision was not violated because plaintiff (like all noteholders) had consented to the foreclosure when it acknowledged that its notes would be subject to the collateral trust agreement. This meant that the workout deal in this case was not inconsistent with Marblegate, since that decision had “prohibited only formal indenture amendments to core payment rights” and the indenture in this case, read together with the collateral trust agreement, remained unaltered.
For more information detailed consideration of this case, check out the analysis we’ve hosted.