The question in this case is 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.
This case involves $150 million in notes issued by an Ohio wireless telecommunications company in 2005, set to mature in 2010. The notes were governed by an indenture and several other agreements executed at the same time. Among other things, the indenture states that a noteholder’s right to receive payment “shall not be impaired” without the noteholder’s consent. The indenture also includes several provisions authorizing the trustee to take certain actions in the event of a default, which the parties agree authorize the trustee to foreclose on collateral pledged by the debtor to secure the loan.
Plaintiff bought over $5 million in notes six months before maturity. At maturity, the debtor indicated that it would default on the notes. The noteholders allowed the debtor to pursue refinancing, but those efforts proved fruitless. Ultimately, the debtor proposed a deal in which the noteholders would accept all of the equity and assets of the debtor–in effect foreclosing on the pledged collateral–in satisfaction of their rights as noteholders. Although over 90% of the noteholders consented to this proposal, plaintiffs did not and proposed instead that the debtor file for bankruptcy. Despite plaintiff’s objection, the trustee accepted the deal and distributed the equity to noteholders pro rata. Plaintiff accepted its shares and then filed this action.
Supreme Court dismissed the action. The court rejected plaintiff’s contention that the indenture’s anti-impairment provision prohibited the trustee from accepting the equity swap that occurred in this case. That provision prevented the trustee from agreeing to a deal that would amend the “core payment terms” of the indenture. But it did not prohibit the trustee from agreeing to a deal in a good faith effort to ensure the best recovery for noteholders in the event of a default. In so holding, the court relied on the Second Circuit’s decision by a divided panel in Marblegate Asset Mgmt. v. Education Mgmt. Corp., 846 F.3d 1 (2d Cir. 2017), which interpreted a similar provision of the Trust Indenture Act and concluded that it “prohibits only non-consensual amendments to an indenture’s core payment terms.”
On appeal, the First Department agreed with the motion court’s interpretation of the indenture provision and affirmed dismissal of plaintiff’s action.
The Court of Appeals granted leave to appeal.