In the final chapter of the long-running saga in Cortlandt St. Recovery Corp. v. Bonderman, --- N.E.3d ---, 2018 WL 942335, at *4 (N.Y. Feb. 20, 2018), the New York Court of Appeals, issued a landmark opinion holding that an indenture trustee has standing to pursue “all remedies available at law and in equity” to collect the payment of outstanding amounts owed under the notes governed by an indenture, provided such remedies are sought for the benefit of all noteholders. In so ruling, the Court affirmed the Appellate Division’s decision reversing the Trial Court’s grant of summary judgment in favor of defendants on the basis that the indenture trustee did not have standing to assert fraudulent conveyance claims. The Court of Appeal’s decision solidifies the trustee’s authority under the indenture to assert claims against an issuer, or its affiliates and third-parties on behalf of bondholders. Importantly, this decision establishes binding precedent for all courts interpreting indentures governed by New York law.
The dispute in Cortlandt began in 2005, when a consortium of private equity investment funds and their individual partners (collectively, the PE Defendants) executed a scheme to raid TIM Hellas Telecommunications, the then third largest mobile phone company in Greece, of its value. Id. at *2. In late 2005, at the direction of Apax Partners, L.L.P. and TPG Capital Management, the PE Defendants acquired Hellas through a series of shell companies (collectively, the Hellas Shells). Largely debt free at the time of the acquisition, by mid-2006 Hellas’ long-term debt had ballooned to nearly €2 billion. Despite this sizeable debt, in December 2006 the PE Defendants caused €200 million in payment-in-kind notes to be issued and guaranteed by the Hellas Shells. These PIK notes are governed by the indenture at issue in this case. Simultaneously, the PE Defendants also caused the Hellas Shells to redeem Convertible Preferred Equity Certificates held by the PE Defendants for approximately €973.7 million (the Certificates’ Redemption), which the PE Defendants pocketed. Id.
Following the Hellas Shells’ default on the PIK notes in 2009, Wilmington Trust Company, in its capacity as indenture trustee, brought an action in the New York Supreme Court in Manhattan (the Trial Court) seeking, among other relief, the recovery of principal, interest, and fees owed under the PIK notes and fraudulent transfer claims in connection with the alleged fraudulent conveyance of the proceeds from the Certificates’ Redemption to the PE Defendants. In 2014, the Trial Court granted the PE Defendants’ motion for summary judgment, due to the Court’s finding that the fraudulent conveyance claims belonged to the noteholders, and that WTC lacked standing to bring such claims on their behalf. In a short decision published in late 2016, the New York Supreme Court, Appellate Division, New York’s intermediate appellate court, reversed the Trial Court’s grant of summary judgment holding that section 6.03 of the Indenture authorized WTC to bring the fraudulent conveyance claims on behalf of the bondholders against the PE Defendants. The PE Defendants appealed the Appellate Court’s decision to reverse the Trial Court’s grant of summary judgment.
A more thorough description of the case background and discussions regarding the earlier rulings can be found in Arent Fox’s prior Alerts summarizing the Trial Court’s decision and the Appellate Division’s decision.
The Court of Appeal’s Reasoning
Focusing on the language in the Indenture, the Court of Appeals concluded that the Indenture language provided a broad grant of authority to the indenture trustee, WTC, to pursue claims on behalf of the noteholders. Specifically, the Court of Appeals found that section 6.03 of the Indenture grants the trustee authority to “pursue any available remedy to collect the payment, principal, premium, if any, and interest on the Notes[.]” The Court reasoned that, by its plain terms, “any available remedy . . . includes all remedies available at law and in equity.” Id. at *5. WTC was, therefore, authorized “to pursue any lawful means of enforcing the noteholders’ rights, against any individual or entity, based on any viable theory of recovery in order to secure repayment upon the event of a default on the debt to the noteholders.” Id.
Although section 6.03 granted the trustee broad authority to take action, it is subject to two limitations. First, remedies asserted by WTC are limited to the amounts due and owing under the notes, ie, “the payment, principal, premium, if any, and interest on the Notes[.]” WTC is not permitted to seek recovery in excess of such amount. Second, WTC may only pursue claims for the benefits of all noteholders, on a pro rata basis. WTC does not have standing to pursue claims personal to certain, but not all, noteholders—such as individual tort claims like fraudulent inducement. Id.
The Court of Appeals rejected the PE Defendants’ argument that section 6.03 only provides for the trustee with authority to pursue claims specifically arising from the Indenture against parties that contractually obligated to make payments on the PIK notes (ie, the issuer and guarantor). Under the PE Defendant’s interpretation, “collection . . . on the Notes” would need to be read as “collection . . . under the terms and conditions of the Notes.” The Court concluded that this interpretation would require the court to read a phrase into the Indenture “found nowhere in the document. Instead, “the words actually used in the indenture are dispositive;” and provided authority for WTC to bring claims against the third-party PE Defendants. Id. (“by the terms of the agreement, the trustee is empowered to bring this third-party suit against the [PE Defendants] in order to recover monies due and unpaid on the PIK notes.”)
Likewise, the Court of Appeals rejected the PE Defendants’ argument that the “no-action clause” contained in section 6.06 limits the trustee’s power to assert the claims. The Court explained that no-action clauses are meant to “protect issuers from the expense involved in defending individual lawsuits that are either frivolous or otherwise not in the economic interest” of the noteholders collectively and observed that the clause in section 6.06 both protects the trustee from potential losses that may arise from exercising its rights under the Indenture and restricts individual noteholders from pursuing actions that are unpopular among fellow all noteholders. Id. at 6. Nothing in section 6.06 restricts the trustee’s authority of WTC to assert the claims.
This decision solidifies a trustee’s standing under typical and customary indenture provisions and New York law to pursue claims for fraudulent conveyances and other tort claims against third-parties so long as such claims are for the benefit and on behalf of all noteholders. While the Court of Appeal’s decision relied on the dispositive language in the specific Indenture at issue, such provision is nearly identical to the language contained in the American Bar Association’s Revised Model Simplified Indenture and, therefore, the Court’s reasoning will have broad applicability.
Arent Fox’s Bankruptcy & Financial Restructuring group will continue to monitor developments in this area. If you have any questions, please contact Andrew Silfen, Jordana Renert, Nicholas Marten, or the Arent Fox professional who usually handles your matters.
 As of the release of this Alert, the Court of Appeals only issued an uncorrected version of its decision, which remained subject to revision before the decision’s publication in the New York Reports.  Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.a.r.l., No. 651693/2010, 2014 WL 4650231 (N.Y. Sup. Ct. Sept. 16, 2014).  Cortlandt Street Recovery v. Hellas Telecommunications, S.A.R.L., 142 A.D. 3d 833 (1st Dep’t, Sept. 2016).  Notably, the Court of Appeals found that the case law cited by the PE Defendants in support of their positions support the Court’s “conclusion that section 6.03 empowers the trustee to pursue causes of action to remedy an injury common to all noteholders arising from the failure to pay the PIK note obligations.” The cases relied on by the PE Defendants each involve an indenture trustee asserting claims personal to a subgroup of holders rather than the all holders collectively. See, e.g., Regions Bank v. Blount Parrish & Co., 2001 WL 726989 (N.D. Ill., June 27, 2001) (a claim of pre-agreement fraudulent inducement that “could not have uniformly affected the bondholders’ reliance”). Here, WTC was not “stepping into the shoes of particular bondholders to assert their claims,” but rather sought to remedy a collective loss that sprung from the issuer and guarantor’s failures to all bondholders.  Revised Model Simplified Indenture, 55 Bus. Law. 1115, 1137 (2000) (available here) (as of March 28, 2018).