We’re very excited to present our first experts roundup. This is the first installment of a new feature on the site that will offer commentary about a decision of interest each session by leading practitioners in their areas of expertise.
This session’s commentary is about the Court’s decision in CNH Diversified v. Cleveland Unlimited. As we explained in our decision summary, in that case, a divided Court held that the non-impairment provision in a bond indenture was violated when the indenture trustee, in response to the debtor’s default and with the consent of a majority of noteholders, agreed to a workout deal that foreclosed on the note collateral and cancelled the notes. This decision was somewhat in tension with Marblegate Asset Management, LLC v. Education Mortgage Finance Corp., 846 F.3d 1 (2d Cir. 2017), a recent decision from the Second Circuit interpreting a similar non-impairment provision under the Trust Indenture Act (TIA).
We’re excited to share two comments on CNH Diversified:
Alexander Lees & Sinjini Saha, Court of Appeals Decision “injects uncertainty into a multi-trillion-dollar corporate debt market.”
- Alexander Lees is a partner at Milbank LLP and a member of Financial Restructuring and Litigation & Arbitration Groups in New York. Among other things, he participated in the litigation of the Marblegate case in the Second Circuit. Sinjini Saha is a partner at Milbank LLP and a member of the Financial Restructuring Group in London.
- Lees and Saha conclude that CNH Diversified “represents a significant development in the area of law concerning when minority holders of a note issuance have the right to hold up an out-of-court, majority-approved debt restructuring” and “introduces uncertainty with respect to a now-common tool for raising financing senior to the issuer’s note obligations.”
Harald Halbhuber, Forced Debt for Equity Exchange Outside Bankruptcy Impairs Bondholder Payment Rights.
- Harald Halbhuber is a partner at Shearman & Sterling LLP, in the Capital Markets practice in New York. Among other things, Mr. Halbhuber is the author of Debt Restructurings and the Trust Indenture Act, 25 Am. Bankr. Inst. L. Rev. 1 (2017), a work which the dissent in CNH Diversified said “thoughtfully” set forth the history of the TIA.
- Halbhuber concludes that “[t]ransactions that do not seek to extinguish bondholders’ payment claims are likely to continue to pass muster under the non-impairment provision mandated by, or modeled on, the Trust Indenture Act even if they are ‘coercive’ in the sense that they remove assets, eliminate covenants or otherwise create incentives for bondholders to participate.” But Halbhuber adds that “attempts to forcibly exchange the dissenting minority’s bonds for equity or other non-cash consideration, whether through strict foreclosure or other legal structures, may be subject to challenge for interfering with their payment rights.”
Many thanks to the authors for contributing their thoughts.
Posted on 2020-11-09.