In Bank of New York v. Montana Board of Investments [2008] EWHC 1594 (Ch) the court ruled that a security trustee selling collateral had a discretion over the time, manner and place of sale. That discretion was not, said the court, unfettered, but determined by the purpose for which the collateral existed under the transaction documents. In these circumstances, a security trustee should take care before acting on instructions from any class of creditor unless it can point to clear terms entitling it to do so. However, as Chris Webber explains, this was a ruling on the true construction of particular documents. So it should be possible to draft documents that remove this discretion and require a security trustee to act on a particular creditor’s instructions.


BNY was security trustee for a SIV called Orion Finance Corporation.

Orion missed certain payments, triggering an acceleration of its senior notes. BNY consulted the senior and senior subordinated noteholders about the acceleration. The senior noteholders directed BNY to sell the collateral within 30 days. The senior subordinated noteholders directed BNY not to sell for the moment in the hope asset values would improve.

BNY applied to court for directions on whether, following an acceleration, the security agreement:

  • gave the senior creditors power to direct BNY as to the time, place and manner of sale of the collateral; or 
  • mandated specific timing for selling collateral.

Could the senior creditors dictate the manner of sale?

The court’s answer was no. It distinguished between a duty to enforce security for the senior creditors and how that duty should be performed.

The security agreement did not expressly give the senior creditors power to dictate the time, place and manner of sale. The senior creditors argued that power was implicit from the scheme of the documents in two respects:

  • the security was “collateral for the prompt payment and performance in full when due … of Secured Obligations … ”; and 
  • the subordinated creditors had no rights to enforce any of Orion’s obligations so long as any senior creditors remained unpaid – so that BNY had to enforce the collateral consistently with this “full subordination”.

They argued that a clause allowing the senior creditors to direct BNY “to the extent and in the manner … contemplated by this Agreement and the Transaction Documents” should be read consistently with the above general scheme. The court rejected these arguments for four reasons: 

  • the security agreement expressly gave BNY “exclusive rights” to preserve or sell the collateral as it judged best, acting in a “commercially reasonable manner”; 
  • as the security could be enforced in a range of circumstances, BNY needed flexibility to consider the interests of the different classes of creditor; 
  • New York law and the security agreement were clear that BNY was not just an administrative agent of the creditors, but must exercise discretion; and 
  • if the senior creditors were able to dictate the manner of sale, they would be able to prevent BNY from conducting any sale in a commercially reasonable manner.

Did the security agreement mandate sale timing?

No, ruled the court, but held BNY’s discretion was not unfettered. The security existed expressly to ensure prompt payment of obligations when due; and the security agreement required BNY to conduct any sale of the collateral in a “commercially reasonable manner”. BNY had to exercise its discretion with regard to those considerations.

Relevance to English law

While New York law governed the transaction documents, the court relied on expert evidence that there were no relevant differences between New York and English law in this case. The decision is therefore relevant to English law structures.


While the court found the transaction documents did give the trustee discretions on how it enforced security, it should be possible to remove those discretions by appropriate drafting. This happened in Citibank, N.A. v. MBIA Assurance SA [2006] EWHC 3215 (Ch) (affirmed [2007] EWCA 11). In that case, the court ruled that it was possible to give a “note controlling party” power under transaction documents to direct a security trustee to enforce security without reference to the effect of this on other beneficiaries of the security trust. The court rejected an argument that this would impinge on the “irreducible core” of duties a trustee must have to be a trustee.