American Bankruptcy Institute

A New Weapon in Mega-Bankruptcy Cases: The Trust Indenture Act

Courts and commentators have long agreed that the Trust Indenture Act (TIA) provides protection against majority bond holder amendments to certain core trust indenture terms. Given recent aggressive maneuvers in mega-bankruptcy cases, the TIA has become a weapon of choice in bankruptcy proceedings by minority bond holders seeking to maintain the value of their holdings in the face of majority bond holder-sponsored amendments. More pressing questions, however, concern the breadth of this protection outside of bankruptcy in nonconsensual debt restructurings. Should the TIA protect the ability, and not merely the formal right, to receive payment in non-bankruptcy situations? Is the protection limited to conduct that disenfranchises the minority, or does it have broader uses as a weapon against unilateral conduct by issuers in amending indentures with negative implications for all bondholders’ recovery?


Business Reorganization


M. Natasha Labovitz, Debevoise & Plimpton LLP
David M. Dunn, Arrowgrass Capital Partners
Sandra E. Horwitz, Delaware Trust Company
James H. Millar, Drinker Biddle & Reath LLP

Sandra Horwitz, managing director and leader of Delaware Trust’s restructuring and bankruptcy business, was a speaker at the American Bankruptcy Institute’s 2015 Winter Leadership Conference attended by over 500 bankruptcy professionals including judges, attorneys, financial advisors, and investors. Ms. Horwitz was a member of the panel that presented “A New Weapon in Mega-Bankruptcy Cases: The Trust Indenture Act.”

The panelists explained the legislative history of Sec. 316(b) of the Trust Indenture Act, the provision meant to prevent the impairment of a bond holder’s right to payment of principal and interest absent unanimous consent of bond holders. They also summarized current litigation instituted by bond holders to protect their rights in out-of-court restructurings, and described the obligations and rights of indenture trustees under the TIA, while expressing their views of possible implications for distressed bond obligors, bondholders, and trustees prior to the resolution of current ongoing litigation.

Ms. Horwitz informed the attendees that prior to an event of default under an indenture, the trustee’s responsibilities are ministerial and limited to the specific trustee requirements enumerated in the trust indenture. The trustee has no implied or explicit duty to investigate the circumstances necessitating a proposed amendment and can conclusively rely on the veracity and correctness of TIA mandated officers’ certificates and opinions of the obligor’s counsel.

Ms. Horwitz went on to describe the heightened level of prudence imposed upon a trustee once an event of default under a trust indenture has occurred. In these circumstances, the trustee must act as would a prudent person in the conduct of his or hers affairs, which imposes an obligation to understand more fully the transaction requiring the amendment.

She suggested that in the current environment, trustees in pre-event of default situations will likely be more cautious when presented with amendments that could potentially impair bondholders’ rights to receive payments. For example, trustee’s counsel may advise that in addition to receiving direction and indemnity from the majority bondholders, the obligor’s legal opinion must expressly state that the amendment in question does not violate Sec. 316(b). Ms Horwitz went on to indicate that obligors’ counsel may be far more reluctant to issue these opinions if they believe the amendment could be attacked by minority bondholders as a breach of Sec. 316(b).

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