In re American Roads: Bankruptcy Court Holds Bondholders Subject to No-action Clause Lacked Standing to Participate in Proceedings | Practical Law

In re American Roads: Bankruptcy Court Holds Bondholders Subject to No-action Clause Lacked Standing to Participate in Proceedings | Practical Law

The US Bankruptcy Court for the Southern District of New York, in In re American Roads LLC, ruled that an ad hoc committee of bondholders in an "insured unitranche" financing had no standing to object to the debtors' proposed plan of reorganization or the insurer's vote in favor of the plan because of the unambiguous language in the indenture's no-action clauses.

In re American Roads: Bankruptcy Court Holds Bondholders Subject to No-action Clause Lacked Standing to Participate in Proceedings

by Practical Law Finance
Published on 26 Sep 2013 • USA (National/Federal)
The US Bankruptcy Court for the Southern District of New York, in In re American Roads LLC, ruled that an ad hoc committee of bondholders in an "insured unitranche" financing had no standing to object to the debtors' proposed plan of reorganization or the insurer's vote in favor of the plan because of the unambiguous language in the indenture's no-action clauses.
On August 28, 2013, the US Bankruptcy Court for the Southern District of New York, in In re American Roads LLC, ruled that an ad hoc committee of bondholders in an "insured unitranche" financing:
  • Had no standing to object to the debtors' proposed plan of reorganization or the insurer's vote in favor of the plan because the unambiguous language in the indenture's no-action clauses precluded individual bondholders from enforcing rights or remedies against the collateral, even though these clauses did not contain specific language barring participation in bankruptcy proceedings.
  • Could prohibit neither the discharge of the bonds under the bankruptcy plan nor the insurer's vote on the plan because the bondholders' consent to these actions was not required under the terms of the indenture.
  • Could not participate in the bankruptcy because they were sophisticated parties who waived their bankruptcy rights.

Background

American Roads, LLC (Debtors) issued $162.5 million in senior secured bonds in an "insured unitranche" financing. Under the terms of the indenture, the claims of the bondholders were all secured by the same lien, through the same trustee and collateral agent. A monoline insurer, Syncora Guarantee Inc. (Insurer), fully insured all of the bondholders' claims in exchange for their agreement to a no-action clause in the indenture. The indenture provided the following:
  • The Insurer controls the enforcement of rights and remedies on an event of default.
  • The Insurer has the authority to give all instructions to the trustee and the collateral agent.
  • The bondholders cannot institute or direct proceedings with respect to enforcement of the financing documents without the Insurer's consent.
  • The Insurer was the "sole holder" and "sole representative" for all purposes under the indenture.
  • The bondholders cannot challenge or enforce the lien with the Insurer's consent.
  • A provision entitled "Bondholder Reserved Actions," indicating which "supplemental indentures" constitute actions requiring the approval of all bondholders.
On July 25, 2013, the Debtors filed for Chapter 11 bankruptcy protection. They also filed a disclosure statement, a prepackaged plan, and a motion to schedule a confirmation hearing to consider the adequacy of the disclosure statement and confirmation of the plan.
In August 2013, the bondholders filed a motion for an order to adjourn the combined hearing and a motion to support their standing to participate in the Debtors' bankruptcy proceedings. In the motion to support standing, the bondholders set out the following arguments:
  • The bondholders have standing because nothing in the indenture constituted a waiver of the right to appear and be heard in the Debtors' bankruptcy proceedings.
  • The discharge of the bonds under the Debtors' proposed plan and the Insurer's vote in favor of the plan were prohibited without the bondholders' consent because they each constituted a "Bondholder Reserved Action."
  • Even if the Bankruptcy Court determined that the indenture delegated the bondholders' bankruptcy rights to the Insurer, courts have refused to enforce the terms of intercreditor agreements that are inconsistent with the Bankruptcy Code, other than terms affecting the priority of distribution.

Outcome

The Bankruptcy Court denied the bondholders' motion to adjourn the confirmation hearing and overruled their objections to the disclosure statement, holding that only the Insurer could vote on the Debtors' proposed plan.
First, the Bankruptcy Court explained that the bondholders did not have standing to participate in the Debtors' bankruptcy proceedings because:
  • No-action clauses in indentures are strictly construed under New York law.
  • Bankruptcy courts have routinely held that parties subject to a no-action clause lack standing to take actions in bankruptcy.
  • The no-action clauses in the indenture unambiguously prevented the bondholders from asserting their claims to collateral or enforcing their rights, and delegated that authority to the Insurer, regardless of whether or not the Debtors are in bankruptcy proceedings.
Next, the Bankruptcy Court concluded that the "Bondholder Reserved Action" provision applies only to "supplemental indentures." Therefore, the bondholders' consent was only required to prevent the Insurer from unilaterally amending the indentures in certain specified ways (for example, by reducing the principal or interest rate). Because neither the discharge of the bonds under the plan nor the Insurer's vote in favor of the plan constituted a supplemental indenture, neither required the bondholders' approval.
Finally, the Bankruptcy Court noted that courts have upheld prepetition intercreditor agreements waiving a creditor's bankruptcy rights where the creditors are sophisticated parties who were fully aware of the implications of such waivers (see Legal Update, Bankruptcy Court Upholds Second Lien Lenders' Waivers in Intercreditor Agreement). In this case, not only were the bondholders self-acknowledged sophisticated parties, but their rights to monetize or exert control over the collateral were derived from contractual entitlements, not separate property interests.

Practical Implications

This decision demonstrates that courts strictly enforce prepetition no-action clauses in bankruptcy. For example, in this case the court enforced the no-action clauses in the indenture even though they did not contain specific language that barred the bondholders' participation in bankruptcy proceedings. Therefore, where creditors are subject to a no-action clause, they cannot rely on their status as parties-in-interest to participate in bankruptcy cases and cannot assume that courts will not enforce waivers of bankruptcy rights by sophisticated creditors in prepetition agreements.

Court Documents