With the current interest being focused on Section 316(b) of the Trust Indenture Act, this may be a good time to examine the differing rights of noteholders under an indenture governed by the TIA and the rights of lenders under credit agreements governed by New York law. As most practitioners in the public finance sector know, Section 316(b) provides “the right of any holder of any indenture security to receive payment of the principal and interest on such indenture security, on or after the respective due dates … shall not be impaired or affected without the consent of such holder ….” Recent cases in the Southern District of New York have expanded the reach of Section 316(b) to include not only legal impediments to the rights of individual holders to collect, but also practical impediments and out-of-court restructurings. In a case decided almost a decade ago, Beal Savings Bank v. Sommer, 8 N.Y. 3d 318 (2007), the Court of Appeals of the State of New York went in a wholly other direction with respect to the rights of individual lenders under credit facility documentation.
In Beal, a lender syndicate originally consisting of 13 institutions extended a $410 million loan in February 1998 to develop Aladdin Resort and Casino in Las Vegas, Nevada. A credit agreement was the primary loan document governing the loan, but the lenders also exacted a keep-well agreement pursuant to which certain affiliates of the borrower, referred to as the sponsors, agreed to make equity contributions to the borrower if a certain financial ratio fell below a certain minimum. The sponsors also agreed to guarantee payment of the loan in the event that the debt under the credit agreement was accelerated.
In July 2000 the borrower obtained a $50 million increase in the loan amount, and the Sommer Trust, one of the borrower’s parent companies, agreed to become a sponsor and to commit itself under the keep-well agreement. The Aladdin Casino commenced operations, but shortly after September 11, 2001, the borrower filed for bankruptcy. Beal’s predecessor in interest held a 4.5% interest in the credit facility after the borrower sought bankruptcy protection and thereafter transferred its interest to Beal. In September 2002 the administrative agent for the facility and 36 out of the 37 lenders, holding 95.5% of the principal amount of the loan, entered into a settlement agreement with the Sommer Trust and two other sponsors. The only holdout was Beal’s predecessor. Under the settlement agreement the lenders directed the administrative agent against enforcing any obligations that the Sommer Trust had under the keep-well. The lenders also agreed to turn over to the Sommer Trust amounts collected from Beal’s predecessor under the sharing clause of the credit agreement. In return, the Sommer Trust transferred to the administrative agent for the benefit of the lenders the trust’s interests in a shopping mall and agreed to facilitate the sale of the borrower’s property.
On April 6, 2005, Beal filed a claim against the Sommer Trust under the keep-well and sought $90 million, which it would share with the other lenders or, the alternative, Beal’s pro rata share of that amount. The Sommer Trust moved to dismiss, contending that Beal lacked standing to enforce the keep-well. According to the Sommer Trust, no individual lender was authorized to enforce the agreements on the occurrence of an event of default, which could only be done by the administrative agent at the direction of a supermajority of the lenders.
The Court’s Analysis
The court conceded that neither the credit agreement nor the keep-well contained an express provision stating that a lender could not take individual action upon the occurrence of an event of default. The court therefore looked to various provisions of the agreements to ascertain the party’s intent, and concluded that “the agreements have an unequivocal collective design.” Among other things, the court considered:
- provisions giving the administrative agent, upon the direction of the required lenders, the ability to accelerate the debt;
- the ability of the administrative agent, upon direction of the required lenders, to exercise any and all rights at law or equity;
- the authorization to the administrative agent to set rates of interest and review financial statements; and
- the title page of the credit agreement that named the administrative agent but not the other lenders.
The court acknowledged the unanimous consent requirements of the credit agreement, providing that “the terms of the loan [could not] be altered [by way of amendment, modification or waiver] in a manner inconsistent with what other lenders originally agreed to.” According to the court, however, the settlement did not release the Sommer Trust of its obligation by way of amending, modifying or waiving any provisions in the agreements. Thus, provisions concerning amendment, modification and waiver of the agreements were inapplicable even if the settlement had a “similar effect to the release.” The court placed considerable reliance on a 1985 case in New York State Supreme Court, Credit Francais Int’l v. Sociedad Fin. de Comerico, 128 Misc. 2d 564 490 N.Y.S. 2d 670 (Sup. Ct. N.Y. County 1985), which this firm successful litigated and which held that a single member of a lending consortium could not proceed against the borrower when the majority banks chose to delay payment.
In vigorous opposition based on his own analysis of the credit documents, the lone dissenter would not have deprived a lender of its right to sue for payment absent express language to that effect.
The takeaway under Beal for credit documentation under New York law is twofold. First, there is a presumption that agented multiparty credit facilities contemplate collective, rather than individual, enforcement of lender rights under the facilities. Second, provisions of a credit facility, whether expressed or implied, that restrict enforcement of remedies to collective action of the lenders will trump provisions that prohibit amendment, modification and waiver without unanimous consent.
The dichotomy between credit facilities governed by New York law and indentures governed by the TIA could not be more stark. The lone wolf creditor holding indenture debt cannot be deprived of its rights of enforcement, either directly or, according to the current case law, indirectly through out-of-court restructurings. In contrast, under credit facilities governed by New York law, the rule of the majority enforcement will be respected, absent express provision to the contrary.