the anglo-american indenture – covenant enforcement and bond defaults

418 Pages·2009·2.35 MB·English

THE ANGLO-AMERICAN INDENTURE –
COVENANT ENFORCEMENT AND BOND DEFAULTS --
U.S. EXPERIENCE AND LESSONS FROM CANADA AND THE
U.K.

Prepared for the
American Bar Association
Section of Business Law
Spring Meeting
Vancouver, BC ♦ April 16-18, 2009

10:30 a.m. – 12:30 p.m.
Thursday, April 16, 2009
Presented by Committee on: Trust Indentures and Indenture Trustees and
Business Bankruptcy, Trust Indentures Subcommittee
CHIC_3952905.6
Moderator
Doneene Keemer Damon
Richards, Layton & Finger, P.A.
One Rodney Square, 920 N. King Street
Wilmington, DE 19801
Tel: [phone] Fax: [phone]
Email: [email protected]
The Panel
Daniel R. Fisher Mark F. Hebbeln
Wilmington Trust Company Foley & Lardner LLP
One Rodney Square, 1100 N. Market Street 321 North Clark, Suite 2800
Wilmington, DE 19890 Chicago, IL 60654-5313
Tel: [phone] Fax: [phone] Tel: [phone] Fax: [phone]
Email: [email protected] Email: [email protected]
Harold L. Kaplan Brendan O’Neill
Foley & Lardner LLP Goodmans, LLP
321 North Clark, Suite 2800 250 Yonge Street, Suite 2400
Chicago, IL 60654-5313 Toronto, Ontario M5B 2M6
Tel: [phone] Fax: [phone] Tel: [phone] Fax: [phone]
Email: [email protected] Email: [email protected]
Program Chair
Harold L. Kaplan
Foley & Lardner LLP
321 North Clark, Suite 2800
Chicago, IL 60654-5313
Tel: [phone] Fax: [phone]
Email: [email protected]
Program Co-Chair
Jay A. Carfagnini
Goodmans, LLP
250 Yonge Street, Suite 2400
Toronto, Ontario M5B 2M6
Tel: [phone] Fax: [phone]
Email: [email protected]

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THE ANGLO-AMERICAN INDENTURE – COVENANT ENFORCEMENT AND BOND
DEFAULTS -- U.S. EXPERIENCE AND LESSONS FROM CANADA AND THE U.K.
Harold L. Kaplan and Mark F. Hebbeln, Foley & Lardner LLP
U.S. EXPERIENCE AND TRENDS
I. INDENTURES AND INDENTURE COVENANTS
Publicly-issued corporate debt securities in the United States are generally issued
(and have been for over a century) pursuant to Indentures. The Indenture is the contract setting
forth the terms and conditions of the relationship between the issuer and the bondholders, and is
generally executed by the issuer with an Indenture Trustee, which serves as the representative of
the bondholders and the primary enforcer of the terms of the Securities and Indenture.
Indenture covenants are undertakings -- sometimes boilerplate, sometimes heavily
negotiated -- included in indentures for debt securities which are intended to give investors some
additional financial assurances or protections -- other than an issuer’s promise -- that the
principal of and interest on the securities will be paid when due and that the market value of the
securities will not artificially be undercut. Similar to, but usually less stringent than covenants
contained in bank loan agreements, indenture covenants are intended to protect investors by
limiting the issuer’s right to take specified steps that might impair its ability to pay. Typically, in
addition to requiring payment of principal and interest as scheduled, such covenants (i) require
certain reporting, corporate and financial actions of the issuer, and (ii) limit or condition the
ability of the issuer and any subsidiary guarantors to, for example, borrow money, grant liens on
assets, dispose of assets or make distributions to equityholders. For corporate (non-municipal)
debt of over $5 million which is generally governed by the Trust Indenture Act (TIA),1 certain of
these covenants are mandated by the TIA, while most other covenants are subject to negotiation.
In any case, the covenants attempt to address the myriad of transactions that may have the effect,
either directly or indirectly, of weakening the issuer’s economic ability to repay the debt or the
market value of the underlying securities.
II. THE ROLE OF THE INDENTURE TRUSTEE IN AN ACTIVIST WORLD
Modern indenture trustees have increasingly been called upon to balance
issuer/bondholder demands in interpreting and implementing the indenture, while serving as the
neutral conscience and enforcer of the fair interplay between today’s ever more aggressive
issuers and activist investors. This interplay is often complicated by such investors –
increasingly hedge funds with significant concentrations of debt -- (i) wanting to aggressively
read and enforce indenture covenants and (ii) holding different levels or tranches of such debt
and sometimes having multiple agendas (including sometimes aspiring to ultimate ownership or
control of the issuer).

1 15 U.S.C. Sections 77aaa through 77 bbbb.
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While the indenture trustee’s role expressed this way may seem to encompass and
raise serious ethical, or at least judgment, issues, it is important to remember and maintain that
the indenture trustee does not assume the generalized broad-based responsibilities of a common
law trustee, or “fiduciary”, but purely administers and implements contractual obligations under
the indenture. Having said that, the indenture trustee’s role under the indenture still can be
viewed as including facilitating a level playing field for all bondholders, while recognizing the
legitimate interests of (often including directions from) majority and minority holders. Whether
viewed as an ethical, contractual or just practical/self-protective mandate for the indenture
trustee, the indenture trustee has increasingly been confronted with ever more difficult issues of
balancing countervailing interests in doing what is right.2
This section obviously cannot consider all the situations or ramifications
confronting the modern indenture trustee, but will address by way of a big picture or thirty
thousand foot conceptual overview of fundamental principles: (i) some of the issues and
standards of care implicating the role of the indenture trustee; (ii) why indenture trustees are not
and should not be (or allow themselves to be) called or viewed as pure “fiduciaries”; and (iii)
how the indenture trustee may increasingly need as an initial matter to analyze the diverse
positions of its constituent bondholders in order to faithfully fulfill its role to “do right” in a
world of complicated debt offerings and capital structures, with investors often holding divergent
positions, tranches of debt and even agendas (such as sometimes the ambition to own or control
the issuer) and to deal with the conundrum of recognizing the legitimate interests of majority
holders, while still protecting and giving voice to minority holders who may feel disadvantaged
by a transaction or restructuring supported by the majority.
A. THE ROLE AND STANDARD OF CONDUCT EXPECTED OF THE
INDENTURE TRUSTEE.
1. Pre-Default/Post-Default Conduct.
It is hornbook law that, pre-default, the indenture trustee is expected to perform
the express ministerial functions prescribed in the four corners of the indenture document, and
post-default is to perform as would a “prudent man” (the phrasing used in the Trust Indenture
Act).3 The “prudent man” standard appears explicitly in most indentures4 and is read into all

2 Some of these issues are discussed in the authors’ recent article on issues confronting indenture trustees in
discriminatory exchange offers and consent solicitation by issuers, “Keeping a Level Playing Field: The Evolution
of Discriminatory Consent Solicitations and Exchange Offers”, ABA Trusts & Investments, March/April 2008.
3 See, e.g., Peak Partners, LP v. Republic Bank, 191 Fed. Appx. 118, 122 (3d Cir. 2006); Shawmut Bank v.
Kress Assocs., 33 F.3d 1477, 1491 (9th Cir. 1994); In re E.F. Hutton Southwest Properties II, Ltd., 953 F.2d 963,
972 (5th Cir. 1992) (heightened duties are not activated until a conflict arises where it is evident that the indenture
trustee may be sacrificing the interests of the beneficiaries in favor of its own financial position); Elliott Assocs. v. J.
Henry Schroder Bank & Trust Co., 838 F.2d 66, 71 (2d Cir. 1988) (“so long as the trustee fulfills its obligations
under the express terms of the indenture, it owes the debenture holders no additional, implicit pre-default duties or
obligations except to avoid conflicts of interest.”); Cruden v. Bank of New York, 1990 U.S. Dist. LEXIS 11564, at
*16 (S.D.N.Y. Sept. 4, 1990) (“The law in this Circuit therefore is clear concerning the pre-default duties of the
indenture trustee. The duty is purely contractual, and it is defined by the Trust Indenture Act and the terms of the
Indenture.”), aff’d in part, rev’d in part, 957 F.2d 961 (2d Cir. 1992); New York State Med. Care Facilities Fin.
Agency v. Bank of Tokyo Trust Co., 621 N.Y.S.2d 466, 467 (N.Y. Sup. Ct. 1994), aff’d, 629 N.Y.S.2d 3 (N.Y. App.

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TIA-governed corporate debt indentures, as required by TIA Section 315(c) (15 U.S.C. Section
77ooo(c)). As such, the indenture trustees’ standard of conduct is effectively contractually-
mandated (often in accordance with statutory prescriptions) as opposed to arising whole cloth
from natural or common law.
This long-standing formulation is subject to the further limitation on trustee self-
dealing or conflicts of interest5 and has been reiterated in the few recent cases dealing with the
standards of conduct expected of indenture trustees. For example, in the recent decision in Peak
Partners, LP v. Republic Bank, 191 Fed. Appx. 118, 122 (3d Cir. 2006), the Court, in holding
that allegedly premature payments of over $10 million alleged to have been made by the
indenture trustee to a secondary level of debt based on the reports it received, did not constitute
an “event of default” or cause harm, stated:
Unlike the ordinary trustee, who has historic common-law duties
imposed beyond those in the trust agreement, an indenture trustee
is more like a stakeholder whose duties and obligations are

Div. 1995); AMBAC Indem. Corp. v. Bankers Trust Co., 573 N.Y.S.2d 204, 206 (N.Y. Sup. Ct. 1991) (the duties of
an indenture trustee can be limited to those set forth in the indenture and, as a result, the trustee does not owe the
broad fiduciary duties of an ordinary trustee prior to an event of default, except that the trustee is at all times
obligated to avoid conflicts of interest with the beneficiaries). See also First Interstate Bank v. Pring, 969 F.2d 891,
900 (10th Cir. 1992) (an indenture trustee’s duties are strictly defined and limited to the terms of the indenture),
rev’d 511 U.S. 164 (1994); Lorenz v. CSX Corp., 1 F.3d 1406, 1416 (3d Cir. 1993) (the duties of an indenture
trustee, unlike those of a typical trustee, are defined exclusively by the terms of the indenture. The sole exception to
this rule is that the indenture trustee must avoid conflicts of interest with the debenture holders); Meckel v. Cont’l
Resources Co., 758 F.2d 811, 816 (2d Cir. 1985); Eldred v. Merchs. Nat’l Bank, 468 N.W.2d 221, 223 (Iowa 1991)
(an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of
the indenture); Nat’l City Bank v. Coopers & Lybrand, 409 N.W.2d 862, 866 (Minn. App. 1987). Cf. Broad v.
Rockwell Int’l Corp., 642 F.2d 929 (5th Cir. 1981), cert. denied, 454 U.S. 965 (1981); Dabney v. Chase Nat’l Bank,
196 F.2d 668 (2d Cir. 1952), supplemented by, 201 F.2d 635 (2d Cir. 1953), cert. dismissed, 246 U.S. 863 (1953);
United States Trust Co. v. First Nat’l City Bank, 394 N.Y.S.2d 653 (N.Y. App. Div. 1977), aff’d, 382 N.E.2d 1355
(N.Y. 1978).
4 See, e.g., Section 7.01(a) of the Model Simplified Indenture published in The Business Lawyer, 38 Bus.
Law. 741 (1983), and Section 7.01(a) of the Revised Model Simplified Indenture published in The Business Lawyer,
55 Bus. Law. 1118 (2000).
5 The above standards of care may be enforced more stringently on the trustee if it is found that the trustee
engaged in self-dealing. Self-dealing encompasses any action of benefit to the indenture trustee financially or
otherwise in possible conflict with interests of holders. In re E.F. Hutton SW Props. II, Ltd., 953 F.2d 963, 972 (5th
Cir. 1992) (heightened duties are not activated until a conflict arises where it is evident that the indenture trustee
may be sacrificing the interests of the beneficiaries in favor of its own financial position); LNC Invs., Inc. v. First
Fid. Bank, 935 F. Supp. 1333, 1347 (S.D.N.Y. 1996) (fiduciary duties are not activated until it is clear that the
indenture trustee has a conflict of interests); AMBAC Indem. Corp. v. Bankers Trust Co., 573 N.Y.S.2d 204, 207
(N.Y. Sup. Ct. 1991) (the duties of an indenture trustee can be limited to those set forth in the indenture and, as a
result, the trustee does not owe the broad fiduciary duties of an ordinary trustee prior to an event of default, except
that the trustee is at all times obligated to avoid conflicts of interest with the beneficiaries). However, the possible
conflict must be plainly evident from the circumstances—a purely hypothetical conflict is not sufficient. In re E.F.
Hutton, 953 F.2d at 972. Moreover, the existence of a conflict may not be inferred simply from a relationship
between the issuer and the indenture trustee that is mutually beneficial (or even lucrative). Page Mill Asset Mgmt.
v. Credit Suisse First Boston Corp., Collateralized Mortgage Sec. Trust II, 2000 U.S. Dist. LEXIS 9077, at *5-6
(S.D.N.Y. June 27, 2000).
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exclusively defined by the terms of the indenture
agreement….New York common law imposes two duties on an
Indenture Trustee in addition to those specified in the Indenture:
(1) a duty to avoid conflicts of interest with the beneficiaries, and
(2) a duty to perform basic non-discretionary ministerial tasks….It
is only after an “event of default” occurs, as that term is defined in
the Indenture, that an Indenture Trustee's duty to noteholders
becomes more like that of a traditional trustee….In that case, the
Indenture Trustee must use the same degree of care and skill in
[its] exercise as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs while exercising its
rights and powers under the Indenture….While not required to act
outside of its rights and powers under the Indenture, the trustee still
must, as prudence dictates, exercise those singularly conferred
prerogatives in order to secure the basic purpose of any trust
indenture, the repayment of the underlying obligation (internal
quotations and citations omitted).6
2. The Loewen Case – Pre-Default Ministerial Conduct .
In a decision dated June 25, 2008, in the Loewen case,7 the New York Court of
Appeals reinstated a negligence claim against an indenture trustee. Asserted on behalf of
upwards of $550 million of a total $750 million of holders of Loewen Notes, under three Note
issuances,8 the claim was made as a separate, standalone count, non-duplicative of contractual or
TIA claims, which had been released in the Loewen plan.
The Noteholders sought tens of millions of dollars in damages from the indenture
trustee, based on the claim that the trustee failed to deliver or cause to be delivered to a collateral

6 Accord U.S. Bank National Association v. United Airlines, 438 F.3d 720, 730 (7th Cir. 2006), in which
the Court held that the indenture trustee was bound by the terms of the indenture to make disbursements to United,
even though United was on the verge of bankruptcy; Semi-Tech Litigation Trust, LLC v. Bankers Trust Company,
353 F. Supp. 2d 460 (S.D.N.Y. 2005), in which the Court held that the “prudent person” duties of the trustee were
not triggered and damages were not caused under the terms of indenture merely as a consequence of the obligor's
submission of non-conforming compliance documentation; LNC Investments, Inc. v. National Westminster Bank,
308 F.3d 169 , 176 (2d Cir. 2002), in which the Court held that the trustee’s failure to make a prompt motion to lift
an automatic stay on airline equipment was not imprudent and that the question of prudence should be evaluated
based on what was reasonably known at the time; and Bluebird Partners v. First Fidelity Bank, et al., No. 601365/97
(Sup. Ct. N.Y. County Dec. 12, 2002), in which the Court instructed the jury that the appropriate inquiry in
determining prudence is whether the trustee made an informed, well-reasoned decision and whether prudence
dictated that a different course of action be followed.
7 For more details on issues raised in the Loewen case, see the following articles the author has written:
“Cases to Watch: Loewen,” ABA (American Bankers Association) Trust & Investments, September/October 2002
(pp. 11-12), “Trustee Indemnification as a Shield,” ABA (American Bankers Association) Trust & Investments,
March/April 2002 (pp. 13-15).
8 AG Capital Funding Partners, L.P. v. State Street Bank and Trust Co., 2008 NY Slip Op 5766, 2008 WL
2510628 (N.Y. Ct. of Appeals, June 25, 2008).
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trustee certain Additional Secured Indebtedness Registration Statements (ASIRS), the purpose of
which was to inform the collateral trustee of the new indenture trustee and that the Notes were to
share in the collateral pool. This asserted failure gave rise to the argument that the Notes were
not entitled to secured treatment or to share in the collateral pool. This exposure lead to a Plan-
imposed compromise by the Noteholders in which they were forced to accept in excess of 10
percent – or perhaps $50 million to $75 million -- less than their total potential recovery if the
ASIRS had been filed.
The Court’s decision is perhaps the first appellate decision expressly holding that
prior to an event of default, an indenture trustee may not only owe noteholders contractual duties
under the indenture, but may also owe noteholders an independent, non-duplicative, non-
preempted duty to perform ministerial functions with due care (such as delivery and filing of
security interest documents), and that the failure to fulfill those obligations may subject the
trustee to stand-alone liability in tort, under a negligence standard, in addition to under any
contractual or other theory. In particular, the Court of Appeals specifically found:
“Based on the foregoing, we hold that an indenture trustee owes a
duty to perform its ministerial functions with due care, and if this
duty is breached the trustee will be subjected to tort liability.
However, contrary to plaintiffs’ arguments, the alleged breach of
such duty neither gives rise to fiduciary duties nor supports the
reinstatement of plaintiffs’ fourth and fifth causes of action [based
on claims of fiduciary duty].”
Not only does this decision raise the specter of possible ultimate trustee liability
in the Loewen situation -- where contractual, TIA and other indemnifiable claims other than
negligence had been released under the Plan -- but, it may also give indenture trustees additional
cause to consider the advisability (even where they may not have assumed primary responsibility
to do so) of monitoring and following-up protectively on assuring the filing of security interests
and other documents necessary to protect holders’ property interests.
B. THE INDENTURE TRUSTEE IS NOT A “FIDUCIARY” AND SHOULD NOT
FALL (OR BE PUSHED) INTO THE FIDUCIARY TRAP.
While indenture trustees have been called and still often are referred to as
“fiduciaries” with “fiduciary duties,” this characterization is probably a misnomer (and a
disservice to indenture trustees) that should not be countenanced or repeated by indenture
trustees, as it can only prejudice indenture trustees and mislead investors and other capital
market participants. In particular, while indenture trustees certainly have defined good faith
duties under the indenture, to the extent the “fiduciary” characterization is used or allowed to be
used, it may convey broader or more generalized (almost parental) duties of, for example, a
common law trustee, as opposed to the express contractual duties actually required of the
indenture trustee as a representative of (not replacement for) the bondholders, as discussed
above. Thus, using or allowing use of the “fiduciary” characterization may be read as the
indenture trustee agreeing to assume greater discretionary obligations than are prescribed or
allowed under the indenture.
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At common law, fiduciary duties generally attach to a common law trustee’s
decisions regarding the management of assets and the distribution of property to trust
beneficiaries.9 A common law trustee has a fiduciary obligation to protect and deal honestly
with its beneficiaries, including an obligation to provide information when it knows that its
failure to provide information might cause harm.10 This duty has been described as being the
“highest” duty11, “intense,”12 and “exacting,”13 as well as “demanding and inflexible.”14
Similarly, the Restatement (Third) of Trusts provides that “a trustee, in deciding whether and
how to exercise the powers of the trusteeship, is subject to and must act in accordance with the
fiduciary duties stated [in the Restatement].” Restatement (Third) of Trusts (2007), §86.
By contrast, indenture trustees’ duties are strictly limited to those set forth in the
indenture.15 As the United States District Court for the Southern District of Texas recently
explained in Newby v. Enron Corp., “[B]ondholders/noteholders are a distinguishable type of
beneficiary . . . [because they] obtain their rights from a contract, known as an indenture, which
sets out a system of individual rights held separately by individual noteholders and of collective
rights held by the group of noteholders or their representative, i.e., the indenture trustee.”16 In
further illustration, the Court also noted that: “‘The term ‘trustee’ evokes strictly enforced
fiduciary duties. But an indenture trustee for a corporate bond has quite a different status and
serves different functions than, say, a trustee in a traditional default. Until the Event of Default
occurs, the trustee has virtually no obligations towards the bondholders . . . .’”17 Indeed, some

9 Tittle v. Enron Corp., 284 F. Supp. 2d 511, 544 (S.D. Tex. 2003).
10 Bouboulis v. Transp. Workers Union, Local 100, 2006 U.S. Dist. LEXIS 74238, at * 10-11 (S.D.N.Y.
2006).
11 Cundall v. U.S. Bank Nat’l Assoc., 882 N.E.2d 481, 490 (Ohio App. 2007).
12 Dabney v. Chase Nat’l Bank, 196 F.2d 668, 670 (2d Cir. 1952).
13 In re Schipper, 993 F.2d 513, 516 (7th Cir. 1991).
14 John Blair Comms. Profit Sharing Plan v. Telemundo Group, 26 F.3d 360, 367 (2d Cir. 1994)
15 See cases cited in footnote 1, supra; see also Peak Partners, LP v. Republic Bank, 191 Fed. Appx. 118,
122 (3d Cir. 2006) (“Unlike the ordinary trustee, who has historic common-law duties imposed beyond those in the
trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively
defined by the terms of the indenture agreement.”) (internal citations and quotations omitted); Bank of New York v.
Sunshine-Junior Stores, Inc. (In re Sunshine-Junior Stores, Inc.), 456 F.3d 1291, 1308-09 (11th Cir. 2006) (holding
that “[t]he scope of the indenture trustee’s duties and liabilities . . . is dictated by the express terms of the Trust
Indenture Agreement” and that “[t]he Indenture Trustee is . . . a creature created and governed by contract.”);
Raymond James & Assoc. v. Bank of New York Trust Company, N.A., 2008 U.S. Dist. LEXIS 4111, at *13 (M.D.
Fla. Jan. 18, 2008) (holding that “[u]nlike the ordinary trustee, who has historic common-law duties imposed beyond
those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are
exclusively defined by the terms of the indenture agreement”) (citation omitted).
16 Newby v. Enron Corp. (In re Enron Corp. Sec., Derivative & “ERISA” Lit.), 2008 WL 744823, at *8
(S.D. Tex. Mar. 19, 2008).
17 Id. at *8, n.22 (quoting Marcel Kahan, Rethinking Corporate Bonds: The Trade-Off Between Individual
and Collective Rights, 77 N.Y.U. L. Rev. 1040, 1063-64 (Oct. 2002)).
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courts have rejected breach of fiduciary duty claims against indenture trustees as non-actionable,
allowing only claims for breach of the indenture to proceed.18
Indenture trustees and their counsel may only encourage greater exposure to
themselves to a higher, more unlimited standard of conduct (and discretion) than contemplated in
the indenture if they refer to themselves or allow themselves to be referred to as pure
“fiduciaries.” In so doing, they may be viewed as “leading with their chin” in implicitly
assuming or accepting the “self-inflicted wound” of a higher, more discretionary common law
trustee standard of care than the representative/prudent person role contemplated in the indenture
for indenture trustees. They should, therefore, probably refrain from ever using the word
“fiduciary” to describe the indenture trustee role, not only because of the possible expanded
exposure it invites, but also because it is misleading and contrary to the contractually-dictated
standard of care legally expected of indenture trustees.
C. THE MODERN CHALLENGE TO INDENTURE TRUSTEES: ANALYZING
THE POSITION OF AND DEALING WITH CONSTITUENCIES SO AS TO
PROMOTE AN EVEN PLAYING FIELD.
Thus, the role of the indenture trustee is not to be a common law fiduciary or to
super-impose its ethical or generalized judgment over its conduct towards or involving issuers
and bondholders, but rather to administer its obligations under the indenture, and to act as a
“prudent man” would upon default. While these contractual standards may not on their face
confront the indenture trustee with pure ethical choices, they do often force the indenture trustee
to make judgment calls in unclear situations, often considering the proper interpretation of the
indenture and balancing the interests of bondholders generally against maintenance of a fair,
even playing field for all holders. These issues have been presented in technicolor to the modern
indenture trustee as it has had to deal with ever more complex capital structures and more activist
investors who may insist on expansive reading of indentures; or have multiple and disparate
interests and agendas.19

18 See, e.g., Orix Real Estate Capital Mkts., LLC v. Superior Bank, FSB, 127 F. Supp. 2d 981, 984-985
(N.D. Ill. 2000).
19 While we cannot here examine the full range of scenarios that may arise, as a general proposition and
initial matter, in meeting its duties, the indenture trustee will generally need not only to identify the constituencies it
represents, but in doing so may also have to scratch below the surface to determine which exact interests particular
bondholders are attempting to vindicate and advance. Thus, the trustee may need to ask and address questions such
as the following: Does the indenture trustee have a duty to the issuer, all bondholders, majority bondholders, or
minority holders? Does the trustee have a duty to preserve a fair or level playing field between all the holders, and
how can the trustee determine the legitimate (as opposed to ulterior) interests and agenda of disparate constituencies,
including different holders within the class it represents?
In determining where particular investors may be coming from, it may be increasingly crucial to determine
whether unfairness in a transaction is contemplated and what positions holders may individually be seeking to
protect. In doing so, questions like the following can arise and may need to be addressed to give the trustee the
analytical tools to act prudently and assure a fair or level playing field for all its bondholders:
How much did the activist investor actually pay for its securities position so as to determine its break-even
or profit point absolutely and in contrast to other holders?

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III. RECENT, MORE AGGRESSIVE ENFORCEMENT OF INDENTURE COVENANTS:
THE NO-ACTION CLAUSE IN AN ACTIVIST WORLD
A. REPRESENTATIVE COVENANT INTERPRETATION AND
ENFORCEMENT ACTIONS
Recently a trend implicating investors and indenture trustees seems to have
emerged, involving the more proactive reading, interpretation and enforcement of indenture
covenants -- all under the more aggressive eye or overview of today’s modern fund investors.
The motivation for this more aggressive approach from the investor/hedge fund perspective
seems to be everything from (1) securing consent fees in exchange for waivers; to (2)
renegotiating financial terms of the securities like interest rates or maturities; to (3) accelerating
debt to attempt to accelerate and/or optimize recovery; to (4) using covenants to block issuer
transactions which might undermine or prejudice the bondholders’ position. This section will
look at (1) the contractual and conceptual bases underlying indenture interpretation and such
aggressive remedial action, and some representative cases and (2) the often-ignored question of
who -- the trustee and/or the securityholders -- has the authority to pursue or enforce covenant
interpretations or violations.
Among the earliest and most pronounced examples of this trend which burgeoned
in the last two years is the push by some investor to move aggressively (and insist that trustees
move aggressively) in pursuing seeming or arguable defaults relating to the failure of issuers to
timely file and transmit annual and quarterly reports with the S.E.C. pursuant to an indenture
reporting covenant and Section 314(a) of the TIA.20 The explosion of Delayed SEC Filing

Does the investor have conflicting tranches or positions, e.g., debt at different obligor entities or non pari
passu levels?
Is the investor merely seeking to optimize its recovery on certain bonds, or does the investor aim to gain
control of the issuer?
Finally, reflecting a new phenomenon -- has the investor hedged its position by, for example, also shorting
its position in the security, and how does this affect its goals, including perhaps putting its interests at odds with
other holders?* (This issue recently presented itself in the Delphi Corporation chapter 11 proceedings in the
Bankruptcy Court for the Southern District of New York. There, Delphi sought and obtained an order from the
Bankruptcy Court authorizing Delphi to conduct discovery under Bankruptcy Rule 2004 concerning allegations that
certain investors, including potentially certain entities that funded Delphi’s chapter 11 plan, had engaged in
“inappropriate conduct” by trading in or shorting of one or more of Delphi’s outstanding securities.)
While the answer to such questions might be difficult to uncover and the indenture trustee cannot be held
responsible for uncovering the full scope and accuracy of such information, such inquiries are becoming an
increasingly relevant initial analytical exercise for indenture trustees, if they are to sort out the actions they are to
take or are directed to take by disparate security holders.
20 See “Reading Indentures Strictly: The Rise of Delayed SEC Filing Defaults and Aggressive
Bondsecurityholders,” Trust & Investments, January/February 2007. In that article we discussed, among other
things, the September 2006 decision by the New York State Supreme Court in Bank of New York v. BearingPoint
which interpreted an indenture provision requiring the issuer to file with the trustee, within 15 days of filing the
same with the S.E.C., copies of its annual and other periodic reports pursuant to Section 13 or 15(d) of the Exchange
Act, to also require that the issuer timely file the annual and periodic reports with the S.E.C. Bank of New York v.
BearingPoint, Inc., 824 N.Y.S.2d 752 (N.Y.S. Sup. Ct.) (Sept. 18, 2006). In a June 2007 decision, however, a
federal district court for the Southern District of Texas held that a similar indenture provision required the issuer to
furnish a copy of its annual and period reports to the trustee only after such reports had actually been filed with the
S.E.C. (Cyberonics v. Wells Fargo Bank National Association.) See also Landry’s Restaurants, Inc. v. Post

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