A newly enacted New York statute will ease the transition from U.S. Dollar LIBOR to the Secured Overnight Financing Rate (SOFR) while reducing the uncertainty and litigation risk posed by agreements that cannot be amended to adequately address the cessation of U.S. Dollar LIBOR. Such “tough legacy” contracts reference U.S. Dollar LIBOR, extend beyond its cessation date and either lack any post-cessation fallback provision or include a fallback that itself relies on LIBOR or on polling banks for interbank lending rates. The new legislation nullifies such provisions and in some circumstances replaces them by operation of law with SOFR plus a spread adjustment. It also provides a “safe harbor” from litigation where SOFR is selected as a replacement rate for U.S. Dollar LIBOR. The new statute does not, however, prohibit parties from agreeing to a non-SOFR replacement rate or affect the enforceability of contracts providing for non-LIBOR alternatives such as the “prime” or “base” rate.
On April 6, 2021, New York Governor Andrew Cuomo signed into law the LIBOR transition bill (Senate Bill 297B/Assembly Bill 164B) promoted by the Alternative Reference Rates Committee (ARRC), a group of private market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York. The New York statute addresses a significant problem identified by regulators: legacy U.S. Dollar LIBOR contracts whose terms continue after LIBOR rates cease to be published – immediately after June 30, 2023 for most U.S. Dollar LIBOR “tenors” or maturities (and immediately after December 31, 2021 for the less frequently referenced one-week and two-month rates) – yet either lack any fallbacks or contain only impracticable fallback provisions. Absent the legislative solution just enacted in New York, some floating rate instruments might be converted to fixed rate instruments, the legal status and effect of various types of legacy contracts would be called into question, and litigation involving attempts to judicially enforce or reform such agreements would likely proliferate.
ARRC has developed recommended fallback provisions that (if adopted by the parties as amendments to their existing legacy agreements) would, when U.S. Dollar LIBOR is no longer available, replace that benchmark with a SOFR-based rate. ARRC and U.S. regulators have for many months promoted the adoption of such provisions in order to facilitate a smooth transition from U.S. Dollar LIBOR to SOFR. Although great progress has been made, and undoubtedly will continue to be made, in amending LIBOR-based instruments to incorporate fallbacks that adequately address the cessation of U.S. Dollar LIBOR, a significant number of legacy contracts governed by New York law nevertheless may fail to be amended – for example, because it is not feasible to obtain the necessary consents to amendments (as in many bond issuances) or because the parties are unable to negotiate an amendment.
What the New York legislation does
The new legislation addresses this situation. It amends New York’s General Obligations Law to provide that once a “LIBOR Discontinuance Event” has occurred:
A party to a legacy contract governed by New York may not refuse to perform its contractual obligations, declare a breach of contract or recover damages as a result of the discontinuance of U.S. Dollar LIBOR;
- SOFR is presumptively recognized as an appropriate replacement for U.S. Dollar LIBOR;
- The use of SOFR in place of U.S. Dollar LIBOR may not be deemed to have a material or adverse effect on any person’s rights under the contact; and
- Where a person with contractual discretion to select a replacement rate (a “Determining Person” as defined in the statute) has chosen SOFR as the replacement rate, that decision is protected from litigation by a statutory safe harbor.
What the New York legislation does not do
Although its effects will undoubtedly be significant, the New York statute does not override contracting parties’ freedom to amend their legacy agreements to incorporate non-SOFR replacement rates, either bilaterally through bespoke negotiated documentation or through adherence to industry-wide protocols, such as the ISDA LIBOR Protocol for derivatives. Parties modifying existing contracts for the purpose of addressing the cessation of U.S. Dollar LIBOR – and parties entering into new contracts – remain free to incorporate benchmark rates other than SOFR, such as a “prime” or “base” rate, so long as they are not based on U.S. Dollar LIBOR or on a polling of banks. And where an existing contract vests in a party the authority to unilaterally select a replacement rate, that party may choose a non-SOFR rate – but the statute only confers immunity from liability if it selects SOFR. Also, attempts to invoke the New York legislation to provide for a fallback for bond issuances governed by the federal Trust Indenture Act of 1939 (the TIA) could raise preemption issues. Unless Congress were to amend the TIA, the utility of the New York legislation for such bond issuances may be limited.
Potential constitutional challenges
It is possible that parties aggrieved by the New York legislation’s effects on their contracts may challenge the constitutionality of that enactment on various grounds – e.g., under the Contracts Clause, Takings Clause or Due Process Clauses of the U.S. Constitution and the Takings Clause, Due Process Clause and the Nondelegation Doctrine of the New York State Constitution. A March 2021 report of the New York City Bar addressed these potential challenges, and concluded that they are not likely to succeed.
Given the significance of New York law-governed instruments in the U.S. and globally, the enactment of the New York LIBOR transition legislation is an important step. Many legacy agreements incorporating U.S. Dollar LIBOR may, however, be governed by the laws of other states. Proponents of the New York legislation hope that it prompts other state legislatures, and most significantly the U.S. Congress, to enact similar legislation. Both Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen have recently expressed support for such federal legislation, and a subcommittee of the House Committee on Financial Services has scheduled a hearing on LIBOR transition for April 15, 2021. We will, of course, continue to monitor developments across the U.S. and in Washington, D.C.