November 03, 2020

Marblegate Under Attack! Or Not?
Out-of-Court Bond Restructurings in Light of NY Court of Appeals Decision in CNH Diversified


In its October 22, 2020, CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc. (“CNH Diversified”) decision,1 New York’s highest appellate court, the Court of Appeals, appears to have reignited at least some uncertainty with respect to out-of-court bond restructurings on an issue that appeared largely to have been quelled following the Second Circuit’s 2017 decision in Marblegate Asset Management, LLC v. Education Management Finance Corp. (“Marblegate”).2

Siding with a group of minority noteholders, who continued to seek payment on their notes following the indenture trustee’s strict foreclosure and purported note cancellation, the court’s majority in CNH Diversified ruled that, based on an indenture provision substantively identical to Section 316(b) of the Trust Indenture Act (“TIA”), the strict foreclosure itself was valid, but only to the extent it impacted the noteholders who consented to it (i.e., 96% of holders). On the other hand, minority objecting holders who did not consent to the strict foreclosure retained the right to sue the borrower even after the strict foreclosure because that right constituted a “right to receive payment … or to bring suit for the enforcement of any such payment,” which the court concluded could not be “impaired or affected” without the holder’s consent.3

In so ruling, the Court of Appeals reasoned that its judgment did not contradict, and was instead fully consistent with, the Second Circuit’s Marblegate decision. The Marblegate court held that TIA Section 316(b) does not restrict the substance of an out-of-court restructuring or remedy so long as an indenture’s payment terms are not amended.4 The Court of Appeals majority reasoned that the strict foreclosure in CNH Diversified, in contrast to the restructuring at issue in Marblegate, did not merely effectuate a restructuring transaction or remedy—instead, it effectively amended the governing indenture’s terms to the extent it purported to extinguish the minority holders’ rights to demand payment. In sum, the strict foreclosure itself was effective, the court held, but the related cancellation of the holders’ notes, over those holders’ objection, was not.

It remains to be seen the degree of uncertainty that the CNH Diversified decision may cause. The dissent raised such uncertainty as a substantial concern, while also suggesting that the majority’s decision was inconsistent with Marblegate and, indeed, the transaction’s governing agreements. If the dissent is correct, CNH Diversified’s impact could prove to be significant.

The CNH Transaction and Lower Court Decisions

On December 15, 2010, Cleveland Unlimited, a telecommunications company, defaulted on $150 million in notes that it had issued five years earlier. The notes were guaranteed by 19 of Cleveland Unlimited’s subsidiaries and were governed by three documents: an indenture, a collateral trust agreement and a security agreement. Following the default, noteholders entered into a forbearance agreement with Cleveland Unlimited, agreeing not to exercise remedies as a result of the default and instead to begin negotiating with Cleveland Unlimited regarding a possible out-of-court restructuring.

As part of the forbearance agreement, another Cleveland Unlimited entity—CUI Holdings, LLC—pledged its 100% equity stake in Cleveland Unlimited as collateral and joined the governing agreements as a guarantor. Noteholders holding 96.7% of the debt (the “majority noteholders”) then negotiated a purchase and sale agreement with Cleveland Unlimited under which CUI Holdings would transfer its equity to a noteholder-owned entity and, in return, the noteholders would deem Cleveland Unlimited’s obligations under their notes satisfied. CNH Diversified—which, in April 2010, had acquired 3.3% of the outstanding notes—objected to this transaction. As a result, when the forbearance period ended on April 30, 2011, no agreement had been reached.

On September 8, 2011, the majority noteholders directed the trustee to strictly foreclose on the Cleveland Unlimited equity held by CUI Holdings and thereby cancel any remaining obligations of Cleveland Unlimited under the notes, including any obligations owed to CNH Diversified. (Under the governing indenture, a majority of noteholders were entitled to “direct the time, method and place of conducting any proceeding for exercising any remedy available” to the trustee.) In accordance with the majority noteholders’ direction, the trustee proceeded with a strict foreclosure and distributed the equity, pro rata, to all noteholders, including to CNH Diversified.

Following the strict foreclosure, and the purported cancellation of its notes, CNH Diversified sued Cleveland Unlimited and the note guarantors in New York state court, asserting that the foreclosure and purported cancellation of its notes constituted a breach of contract and a breach of guaranty and seeking to recover the $5 million in principal that remained outstanding on its the notes, plus interest. After several procedural motions, both parties subsequently moved for summary judgment, and the court ruled in Cleveland Unlimited’s favor, holding that the governing agreements were unambiguous and permitted majority holders to direct the trustee to exercise remedies on behalf of all noteholders—including objecting minority holders—in the event of a default.5 The court also cited to Marblegate for its holding that TIA Section 316(b), and contractual provisions like it, do not provide noteholders an absolute and unconditional substantive right to payment and instead merely bar formal amendments of an indenture’s payment terms.6 The court concluded that, similar to the actions at issue in Marblegate, the trustee’s strict foreclosure in this matter neither violated the indenture provisions nor “amend[ed] any terms of the Indenture” nor prevented minority holders such as CNH Diversified “from bringing an action to collect payments due on the dates indicated in the Indenture.”

On appeal, the New York Supreme Court Appellate Division, First Department affirmed the lower court’s ruling for the same reasons, holding that “the strict foreclosure and debt equity restructuring did not amend the [indenture’s] core payment terms.”7 The Court of Appeals then took the case under review and subsequently reversed the lower courts’ denial of Cleveland Unlimited’s motion for summary judgment and instead granted partial summary judgment to CNH Diversified in accordance with its opinion.

Court of Appeals Decision

In its 4-3 decision, the Court of Appeals reversed the lower courts’ rulings, framing the issue as whether the minority holders’ rights were improperly “extinguished” and focusing its analysis on a clause in the parties’ indenture that tracked Section 316 of the TIA. The clause provided that “[n]otwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal. . .and interest. . .on a Note. . .or to bring suit for the enforcement of any such payment. . .shall not be impaired or affected without the consent of such Holder” (emphasis added).8

That clause, the majority ruled, protected the rights of minority holders such as CNH Diversified to bring suit regardless of any actions the majority holders directed the trustee to take. Therefore, to the extent the strict foreclosure purported to cancel CNH Diversified’s notes and CNH Diversified’s related rights to sue for payment on those notes, it violated the governing indenture provision modeled after TIA Section 316(b), as interpreted by the Second Circuit’s decision in Marblegate. The majority reasoned that, unlike in Marblegate, to rule otherwise would restrict not only CNH Diversified’s “practical ability” to recover payment in full but also its legal right to payment, which was not permitted.9

Rejecting an argument from the majority holders that the minority holders’ consent to the strict foreclosure could be implied by the collateral trust agreement—which expressly gave the collateral trustee the right to strictly foreclose when directed by majority holders and which was executed on the same date as and, thus, was arguably integrated with the indenture—the court majority emphasized that noteholders were not party to the collateral trust agreement, and, thus, any consent to such agreement came only from the indenture itself. Because the indenture was qualified by the TIA Section 316(b)-like language—i.e., “notwithstanding any other provision of this Indenture, the right of any Holder to receive payment … shall not be impaired …”—the holders’ consent to the collateral trust agreement was similarly qualified. The holders consented to the strict foreclosure but only to the extent their right to receive payment was not impaired.


Strongly disagreeing with the majority’s position, the dissent opined that the majority had “needlessly inject[ed] uncertainty into a multi-trillion-dollar corporate debt market.”10 The indenture and collateral trust agreements, the dissent emphasized, were executed simultaneously and, when read together, “support the strict foreclosure course chosen by the trustee.”11 Specifically, the dissent noted, the collateral trust agreement “was contemplated in the indenture” and “modified the powers granted” to the trustee “through the indenture” so as to allow the trustee “to act as directed by the majority of noteholders in realization of the collateral in the event of a default.” In other words, the provision in the collateral trust agreement that permitted the trustee to foreclose at the direction of majority holders satisfied the requirement, in the indenture, that holders consent to any action that could impair their right to payment. There was “no need for unanimity of noteholders opinion” at that point.12 Instead, by entering into a transaction under which the trustee was permitted to foreclose at less than unanimous holder direction, all holders—including any minority holders who perhaps later changed their mind as to what the proper remedy was to pursue—consented to trustee action on the basis of majority noteholder consent.

Moreover, the dissent emphasized, its preferred result was completely consistent with Marblegate. Marblegate, the dissent noted, made clear that when a sale, or other remedy, is “consistent with, and authorized by the indenture,” that transfer cannot be “nullified for failure to comply with the consent requirement of TIA Section 316(b)” or contractual provisions like it. The strict foreclosure, in this case, was consistent with the terms of the “unmodified indenture documents,” which, with minority consent, including the consent of the objecting minority noteholders, “confer upon the trustee the power to pursue the strict foreclosure” at the majority holders’ direction. To suggest otherwise, the dissent claimed, was to strike “at the consistency between the law” of New York courts “and that of the United States Court of Appeals for the Second Circuit” with respect to rules “by which disputes related to an indenture of this nature are to be resolved,” thereby “needlessly disconnect[ing] the law of the two courts most relevant to the markets in which these securities are traded.”


The broader impact of the CNH Diversified decision remains to be seen. Both the majority and dissent claimed to be consistent with Marblegate, merely extrapolating its principles to a different set of circumstances. The dissent was clearly worried that investors, issuers and trustees could be confused. The majority disagreed. Further market data—and perhaps further court rulings—will be needed to determine who is correct.



1 CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc., 2020 WL 6163305 (N.Y. Oct. 22, 2020).

2 Marblegate Asset Management, LLC v. Educ. Mgmt. Fin. Corp., 846 F.3d 1 (2d Cir. 2017).

3 CNH, 2020 WL 6163305 at *1 citing § 6.07 of governing indenture. Compare to TIA Section 316 (b) (providing that “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security … or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder…”).

4 Id. at 17.

5 CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc., 2018 WL 437518 at *12 (N.Y. Sup. Ct. January 16, 2018).

6 Id. at *16.

7 See CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc., 81 N.Y.S.3d 1 (N.Y. App. Div. 2018).

8 CNH Diversified, 2020 WL 6163305 at *3.

9 Id. at *18.

10 CNH Diversified, 2020 WL 6163305, dissenting opinion at *17.

11 Id. at *2.

12 Id. at *9.

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