The debate at the heart of U.S. Bank Trustees Limited v Titan Europe 2007-1 (NHP) Limited and otherswas whether a distressed property portfolio should be sold at once or retained in the hope of realising a better price. Such disputes are by no means novel, particularly in times when property values have tumbled, but they can give rise to new issues in cases involving complex financial arrangements with multiple layers of borrowing. The importance of this decision is twofold. It has implications for noteholders who invest on the basis of the information provided to them by issuers as to their rights, and it also has implications for those acting as trustees obliged to enforce those rights.

The facts

In May 2007, Titan issued notes (the Notes) in order to fund the purchase of the senior "A" tranche of a loan originally advanced by Credit Suisse, referred to as the "A Loan". A Note Trustee was appointed in relation to the Notes, which were divided into different classes ranked from A to E in descending order of seniority. The competing arguments heard by the Judge were advanced on behalf of an anonymous "Class A" noteholder, and Anchorage, the holder of "Class E" notes.

The loan acquired by Titan (referred to in the documents as the "A Loan", to distinguish it from subordinate tranches purchased by other lenders) was to be administered by a Servicer under a Servicing Agreement. If breaches of the covenants in the loan took place, then a Special Servicer would take over management and decide whether to take enforcement action. The Special Servicer could be replaced by notice to the Note Trustee from the "Controlling Party".

This power mattered in practice because the existing Special Servicer proposed to sell the portfolio, and Anchorage, which faced a total loss if the portfolio was realised at its current value, objected to the strategy. Anchorage therefore purported to serve notice on the Note Trustee, as the Controlling Party, to replace the Special Servicer with one which would do its bidding. Its position that it was the Controlling Party appeared to be supported by the Offering Circular pursuant to which it had purchased the Notes.

The Class A noteholders asserted that Titan, not Anchorage, was the Controlling Party and that its notice to the Note Trustee was therefore invalid.

The Judge's analysis

The disputed provision as to the Controlling Party's right to replace the Special Servicer was contained in the Servicing Agreement, and it was that agreement which the Judge had to interpret. In doing so, he looked at two other documents which had been executed in the days immediately before the Servicing Agreement: the Intercreditor Deed executed by Titan and the junior lenders; and the Offering Circular.

While the Servicing Agreement and the Intercreditor Deed were consistent in defining the Controlling Party (in the circumstances) as the "Representative for the A Loan", the Offering Circular defined it as the representative of the most junior class of Notes outstanding, in effect Anchorage. 

The Judge's construction of the Servicing Agreement also therefore required him to decide whether there was (as it appeared) a conflict between its provisions and those of the Offering Circular. He decided that:

  • the most natural reading of the relevant contractual provisions meant that Titan was the Controlling Party;
  • this conclusion was consistent with commercial common sense; and
  • there was no compelling evidence to suggest that there was a mistake in the Servicing Agreement (as opposed to the Offering Circular).

Implications for the Note Trustee

This was primarily a blow for Anchorage, but the way in which the arguments unfolded also had implications for the Note Trustee. Anchorage submitted that it was commercially nonsensical for Titan to be the Controlling Party, on the basis that it was an SPV with no independent economic interests. 

The Class A noteholder's response was that this did not matter, as all of Titan's rights, powers and discretions had formed part of a security assignment by it to the Note Trustee. It was the Note Trustee which would therefore take the decisions of the Controlling Party and decide whether to sack the Special Servicer or not. The Judge agreed.

This is a role with which many professional trustees in the position of the Note Trustee might be uncomfortable. Counsel for the Note Trustee stated that it would be "surprised" to find that it had substantive rights and obligations of this nature, and surprise in the world of a fiduciary of this kind is not good. While the existence of discretion within a contractual relationship can be a blessing, it also creates the burden of uncertainty, and, where that discretion is to be exercised by a trustee, it creates a risk of liability to beneficiaries affected by the trustee's decision. It is therefore in a trustee's interests for the scope of its duties to be as precisely delineated as possible.

Trustees generally try to lay off the residual risk of liability to beneficiaries in various ways. One method, of course, is to have the protection afforded by an indemnity. Another is to make sure that any lingering uncertainty as to what a trustee is or is not required to do is capable of resolution by the court, meaning that the trustee has the protection of the court's express approval for its action. 

This description is of course simplistic, but the problem for trustees may be that the type of discretion which the Judge (effectively) held the Note Trustee to have in this case is commercial in nature. In this case, the Note Trustee must consider the competing views of the Class A noteholders and Anchorage (and indeed those of the holders of Classes B to D Notes as well) as to whether (in effect) the property portfolio should be sold or not. It will be rare that a court can bless a decision of this kind, meaning that a trustee may feel more exposed to those of its beneficiaries who are adversely affected by its decision. 

It is worth noting another of the Judge's decisions in this context. The Servicing Agreement provided that the Special Servicer could not be replaced unless and until a replacement was found and "approved" by the Note Trustee. The parties disagreed as to the implications of the requirement for "approval". The Note Trustee (and Anchorage) argued that its duty to approve potential candidates was limited to ensuring that they had experience of servicing mortgages of commercial property, the only matter to which the Servicing Agreement specifically referred. 

The Class A noteholder (and more importantly the Judge) took the view that the Note Trustee's duty of approval was not so limited. This means that in circumstances where there is a proposal to replace a Special Servicer, the Note Trustee might well be required to investigate matters such as the solvency and competence of the proposed appointee. They might also be required (although the Judge declined to come to a view) to consider whether the proposed strategy of the replacement favoured the noteholders generally, or one class in particular.


For trustees, this case shows the need for considerable caution when assuming duties under such agreements. The judgment does not establish any new principle in this regard (it is, after all, about the interpretation of a specific contract). However, it does show that what may appear to be quite anodyne contractual provisions can have a more substantial effect than the trustee may anticipate.

  • In particular, where a trustee has an obligation to "approve" the replacement of any entity, it would be prudent to consider carefully all of the circumstances of the situation in order to determine precisely what "approval" might mean, and how much independent investigation is required.
  • Similarly, where a lender delegates its powers to a trustee, such powers may include the right to exercise discretion as to which of a number of competing courses to pursue. Where the trustee has accepted delegation of such a discretion, it will need to consider carefully what factors to weigh up, and indeed what other expert advice it may need in order to reach a conclusion.

A trustee's burden in all these respects is, of course, likely to be more easily borne with the benefit of a robust indemnity. The drafting of an indemnity will only be improved, however, by understanding thoroughly the circumstances which it might need to cover.

There seems little which prudent noteholders can do to save themselves from predicaments like this one, which should be the exception rather than the rule. It is worth noting though that effect may well be given to provisions which state that the terms of prospectus material are subordinate to underlying contractual documents, even where that effect fundamentally alters the rights which an investor expected to have in a particular set of circumstances. The judgment is to be appealed. If that appeal fails, it will be interesting to see whether the subordinate holders of the Notes take further action in respect of the contents of the Offering Circular.