A recent decision of an Illinois appeals court in Republic Bank of Chicago v. FBOP Corp. (Ill. App. April 29, 2016) addressed the effect of an indenture provision, commonly referred to as a negation clause, that denies the benefits of an indenture other than to its parties.


Using a typical trust-preferred financing structure, United Financial Holdings Inc., an Illinois bankholding company, created United Financial Holdings Trust I, a Delaware statutory trust (the “Trust”). United Financial owned 100% of the Trust’s common equity, while the Trust’s preferred equity in the amount of approximately $6 million was sold to Republic Bank of Chicago, the plaintiff in the action. The Trust in turn used the proceeds of the issuance of the preferred equity to acquire junior subordinate debentures from United Financial, issued pursuant to an indenture under which Wilmington Trust Co. served as trustee. The indenture was governed by New York law, although the court and the parties assumed that New York and Illinois law were the same for the purposes of the case, and the court cited both New York and Illinois precedents. United Financial was later merged into FBOP Corp., which assumed the obligations of United Financial under the indenture. Two years later, FBOP was placed into receivership by the FDIC, and FBOP’s subsidiary banks were closed. Republic Bank commenced an action based upon Section 5.1(e) of the indenture, which enumerated as an event of default the consent of the issuer to the appointment of a receiver.

Republic Bank maintained that as a third-party beneficiary of the indenture — the structure was essentially a pass-through financing between Republic Bank and United Financial — it had the right to assert remedies upon the occurrence of an event of default. Indeed, under Section 5.8 of the indenture, holders of the trust-preferred equity had the right to sue the issuer directly to enforce payment of principal and interest on the debentures in the event of a payment event of default.

The Court’s Analysis

Beginning with the oft-stated premise that indentures are contracts that, absent ambiguity, must be enforced in accordance with their terms, the court focused on the negation clause of the indenture. That clause, titled “Benefits of Indenture,” provided that nothing in the indenture either “express or implied shall give to any person other than the parties thereto and their successors or assigns … any legal or equitable right, remedy or claim under this Indenture.” Exception was made for provisions such as Section 5.8 that expressly provided to holders of the trust-preferred equity rights to pursue certain claims under the indenture. The court observed that while the indenture expressly afforded a holder of the debentures rights upon the occurrence of a payment event of default, there was no express provision affording the same rights upon the occurrence of an insolvency event of default. Strictly construing the negation clause, the court held that only the Trust, and not a holder of the trust-preferred equity, could act upon an insolvency. Republic Bank, as a holder of the preferred equity issued by the Trust, simply had no standing. The appellate court therefore reversed and remanded the lower court’s grant of summary judgment in favor of Republic Bank.


Like many boilerplate provisions of indenture documentation, negation clauses are often glossed over in the negotiation phase of a financing. But, as is often the case, boilerplate provisions can be of critical importance when it comes to enforcement of rights and remedies. Given the breadth of the negation clause in this case, and the distinction — whether or not intentional and whether or not rational — that the drafters made between payment defaults and insolvency defaults, it is not particularly surprising that the appellate court declined to take an equitable view of the plaintiff’s position.

While the case provides a general lesson on the power of negation clauses, it should also focus investors in double-tiered financing structures, such as trust-preferred transactions, on their remedies. Without recourse against the ultimate credit, investors may be left out in the cold should the financing take a turn for the worse. In this case, the court’s decision does not explain why Republic Bank chose to sue directly rather than instruct the trustee under the indenture to take action on behalf of the Trust. Apparently, there was a reason, and as a result of the negation clause, Republic Bank came up empty-handed on its direct claim as well.