March 17, 2015
Corporate Trust Alert
Two recent pre-trial rulings interpreting the Trust Indenture Act of 1939 may potentially place trustees between the interests of minority and majority bond holders. This alert discusses the issues raised and their impact on indenture trustees.
Recently, in pre-trial rulings, two federal judges in New York held that the Trust Indenture Act of 1939 (“TIA”) may require unanimous bond holder consent for amendments that release a guarantor of the bonds, even though the bond indentures themselves either permitted or did not require unanimous consent for those amendments. Both judges broadly interpreted the TIA’s prohibition against impairing or affecting bondholders’ right to payment of principal and interest without their consent to cover releases of the bonds’ guarantor, because the guarantor’s release could potentially affect bond holders’ practical right to receive principal and interest in the future. While these decisions interpret the TIA broadly and arguably strengthen the rights of minority bond holders, this comes at the cost of introducing uncertainty into future out-of-court bond restructurings. These recent decisions will, at least until a final decision settles the scope of Section 316(b) of the TIA, likely embolden minority and holdout bond holders and result in tougher negotiations for out-of-court restructurings. In addition, even past non-unanimous amendments that resulted in the release of a guarantor, or otherwise indirectly adversely affected bond holders’ recovery of principal and interest, may now be open to challenge by minority bondholders.
On January 15, 2015, in Meehancombs Global Credit Opportunities Fund, LP et al. v. Caesars Entertainment Corp., et al. U.S. District Court Judge Shira Scheindlin denied a motion to dismiss non-consenting minority bond holders’ claims that amendments releasing the bond issuer’s parent’s guarantee of the bonds may have violated the TIA because less than 100% of the bondholders consented. By allowing the case to proceed, the court made clear its view that indenture modifications that might potentially lead to a future loss of principal and interest to bond holders could give rise to an actionable claim under the TIA. Judge Scheindlin’s Caesars decision relies, in part, on a recent similar decision in Marblegate Asset Mgmt. v. Education Mgmt. Corp., in which U.S. District Court Judge Failla held that minority bond holders, who objected to an out-of-court restructuring of their notes, may have had a claim under the TIA, even though the indenture expressly provided for a release of a parent guarantee if approved by a majority of holders. While these two decisions are striking, and jointly lay a road map for dissenting holders to potentially assert claims in similar situations, neither decision represents a final judgment on the merits. Rather, both opinions were issued in connection with pre-trial litigation.
In light of these decisions, and other recent focus on the boundaries of the TIA’s protections for minority holders, issuers, bond holders and trustees should carefully consider the possible impact of these preliminary rulings when addressing proposed amendments that would release a guarantor, and possibly others that would modify the indenture in a way that potentially would reduce the likelihood of bond holders receiving 100% of the principal and interest payments. Unless and until a final decision settles the issue, these rulings arguably open the door to potential challenge by dissenting bondholders. In addition, it may be advisable to consider their impact on past amendments. At this stage it is unclear how long after a restructuring transaction minority bond holders may bring a legal action challenging the transaction as being in violation of the TIA. While under New York law, which governs most bond indentures, the statute of limitations for a breach of contract action is six years, the TIA does not itself contain a statute of limitations and minority holders might assert that amendments in violation of the TIA are “void” because they were not properly authorized.
Trustees may, once again, potentially be caught in the middle between the interests of minority and majority bond holders and should seek guidance from their own counsel to navigate the amendment process in any out-of-court bond restructuring.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.