CNH Diversified Opportunities Master Account v. Cleveland Unlimited

State of New York OPINION
Court of Appeals This opinion is uncorrected and subject to revision
before publication in the New York Reports.

No. 42
CNH Diversified Opportunities
Master Account, L.P., et al.,
Appellants,
v.
Cleveland Unlimited, Inc., et al.,
Respondents.

James H. Millar, for appellants.
James M. McGuire, for respondents.

GARCIA, J.:

After the issuer defaulted, plaintiffs, the holders of a minority in principal amount

of senior secured debt, brought this lawsuit against the debtor and its guarantors to recover

payment of principal and interest. We are called upon to determine whether plaintiffs’

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right to sue for payment on the notes survived a strict foreclosure, undertaken by the trustee

at the direction of a group of majority bondholders over plaintiffs’ objection, that purported

to cancel the notes. We hold that it did, and therefore modify the order of the Appellate

Division by reversing the grant of summary judgment to the defendants and granting partial

summary judgment to the plaintiffs.

Facts

In December 2005, defendant Cleveland Unlimited, Inc. (Cleveland Unlimited), a

telecommunications company, issued $150 million of “senior secured” debt in the form of

“Notes” pursuant to an indenture agreement (the Indenture). The Notes had a five-year

term and required Cleveland Unlimited to pay interest to holders of the Notes (Noteholders

or Holders) on a quarterly basis up to and including the maturity date, at which point the

principal also became due. The Indenture named Cleveland Unlimited as the “Issuer” of

the Notes, eighteen of Cleveland Unlimited’s subsidiaries and affiliates as the

“Guarantors,” and U.S. Bank National Association (U.S. Bank) as the Indenture “Trustee.”

At the same time the Indenture was executed, the Issuer, the Guarantors, and the Trustee

executed a Collateral Trust Agreement and a Security Agreement (collectively, Indenture

Documents).1 In April 2010, plaintiffs purchased approximately $5 million of the Notes

in the secondary market, amounting to 3.33% of the outstanding principal value.2

1
The Indenture also appointed U.S. Bank as the “Collateral Trustee.” U.S. Bank, in its
role as both Indenture Trustee and Collateral Trustee, will be referred to as the “Trustee.”
2
Plaintiffs are CNH Diversified Opportunities Master Account, L.P., AQR Delta Master
Account, L.P., AQR Delta Sapphire Fund, L.P., and AQR Funds—AQR Diversified
Arbitrage Fund (collectively, Minority Noteholders or plaintiffs).
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At issue in this case are certain provisions in the Indenture Documents governing

the rights of the Noteholders to receive payment, the remedies available in the event of

default, and the power of a majority of Noteholders to direct the Trustee’s choice of

remedy. Section 6.07 of the Indenture, titled “Rights of Holders To Receive Payment,”

provides:

“Notwithstanding any other provision of this Indenture, the
right of any Holder to receive payment of principal of,
premium, if any, and interest and Additional Interest, if any, on
a Note, on or after the respective due dates expressed in such
Note, or to bring 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.”
Section 6.07 tracks section 316 (b) of the Trust Indenture Act of 1939 (TIA) (see 15 USC

§ 77ppp [b]). The Indenture was not qualified under the TIA, meaning that it was not an

indenture that governed securities registered with the Securities and Exchange Commission

(see 15 USC § 77iii [a]). Nevertheless, in addition to restating some of the statutory

language, the Indenture incorporated by reference “[a]ny provision of the TIA which is

required to be included in a qualified indenture.”

Remedies in the event of default are set out in the Indenture Documents, and the

Trustee is authorized to take any available remedial action, including remedies available

under the Uniform Commercial Code (UCC) (see sections 6.03 and 12.08 of the Indenture;

section 9.1 [viii] of the Security Agreement; section 3.1 [a] [4] of the Collateral Trust

Agreement). In addition to empowering the Trustee with this broad authority, section 6.05

of the Indenture, titled “Control by Majority,” provides that “the Holders of a majority in

principal amount of the outstanding Notes may direct the time, method and place of

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conducting any proceeding for exercising any remedy available to the Trustee.” Section

6.05 tracks section 316 (a) of the TIA (see 15 USC § 77ppp [a]).

As the date for the payment of principal approached, and Cleveland Unlimited’s

financial situation deteriorated, the interplay among the provisions governing the

Noteholders’ rights and remedies took on practical significance.

Cleveland Unlimited Defaults

Interest payments on the Notes were made, as scheduled, up to September 2010. In

early December of that year, however, Cleveland Unlimited determined that it would not

be able to pay the outstanding principal and interest shortly to come due. Seeking to avoid

an event of default, Cleveland Unlimited entered into negotiations regarding potential

workouts with the Trustee and a committee of Noteholders that owned over 99% of the

outstanding principal value of the Notes, including the Minority Noteholders and a separate

group that owned 96.3% (Majority Noteholders).3

Despite those efforts, on December 15, 2010, Cleveland Unlimited defaulted on its

obligation to pay the outstanding principal and interest now due. Discussions regarding

potential restructuring transactions continued post-default. Several weeks later, the same

committee executed a “Forbearance Agreement” with Cleveland Unlimited, the

Guarantors, the Trustee, and CUI Holdings, LLC (CUI Holdings), an affiliate of Cleveland

Unlimited that owned 100% of its stock. Pursuant to this agreement, CUI Holdings became

3
“A workout is simply a contractually concluded modification of debt effected either by
amendment of the terms of the existing debt or an exchange of the existing debt for new
obligations” (William W. Bratton & Adam J. Levitin, The New Bond Workouts, 166 U Pa
L Rev 1597, 1604 [2018]).
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a Guarantor on the Notes, pledging the Cleveland Unlimited stock as collateral, and the

Noteholders and the Trustee agreed to refrain from exercising any rights or remedies

available to them through April 2011.

On the same day that the Forbearance Agreement was executed, CUI Holdings and

a new entity owned by the Majority Noteholders, CUI Acquisition Corp. (CUI

Acquisition), negotiated a “Purchase and Sale Agreement.” Pursuant to this agreement,

CUI holdings would transfer all outstanding stock in Cleveland Unlimited to CUI

Acquisition for the benefit of the Noteholders. In return, the Noteholders would forfeit

their rights as secured creditors and, instead, become equity holders in Cleveland

Unlimited, thereby relieving Cleveland Unlimited and the Guarantors of their obligations

under the Notes. In April 2011, the Minority Noteholders informed the Majority

Noteholders that they did not plan to participate in the Purchase and Sale Agreement,

opting to remain secured Noteholders and seek full payment on the Notes. The Purchase

and Sale Agreement failed to close by the end of the Forbearance Period.

The Strict Foreclosure

In June 2011, counsel for the Majority Noteholders informed all Noteholders that it

had been “working with” the Trustee on an alternative restructuring transaction, namely a

“strict foreclosure” pursuant to sections 9-620 and 9-622 of the model UCC (see NY UCC

§§ 9-620; 9-622). According to counsel, this transaction “would enable [them] to maintain

the structure of the [Purchase and Sale Agreement] . . . without requiring consent from all

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of the [H]olders.”4 Instead of reaching an agreement among all the Noteholders, the

Trustee, at the direction of the Majority Noteholders, would “foreclose strictly” on the

collateral that CUI Holdings had pledged against the Notes—100% of the outstanding

stock in Cleveland Unlimited—and then distribute the stock on a pro-rata basis to the

Noteholders, thereby cancelling the Notes and ending the obligations of Cleveland

Unlimited and the Guarantors under the Indenture.

The Minority Noteholders, in a letter sent to Cleveland Unlimited, the Majority

Noteholders, and the Trustee, asserted that they did not “join or in any way consent to the

[strict foreclosure].” The letter explained that, “pursuant to [s]ection 6.07 of the Indenture

and relevant sections of the [TIA],” the Minority Noteholders did not “consent to any

impairment or effect on their rights to receive payment of principal or interest” on their

Notes, “on or after the respective due dates, or to bring suit for the enforcement of any such

payment on or after such respective dates.”

Over the Minority Noteholders’ objection, the strict foreclosure went forward. As

the first step, the Majority Noteholders and the Trustee entered into a “Majority Noteholder

Direction and Indemnity Agreement,” in which the Majority Noteholders “directed” the

Trustee to “foreclose strictly” on the Cleveland Unlimited stock owned by CUI Holdings,

“thereby extinguishing the indebtedness evidenced by the Notes.”5 The Trustee complied

4
Counsel’s email indicates that the workout contemplated an additional loan to Cleveland
Unlimited in the amount of $35 million. After the strict foreclosure, a senior secured loan
in a similar amount was made by certain Majority Noteholders.
5
A secured party may accept collateral in full or partial satisfaction of the obligation (see
UCC § 9-620 [a]). In a full strict foreclosure, the secured party retains the collateral in full
satisfaction of the remaining debt, foreclosing any deficiency claim (see UCC § 9-622 [a]
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with the Majority Noteholders’ direction and, in turn, executed a “Strict Foreclosure

Agreement,” pursuant to which CUI Holdings transferred its 100% equity stake in

Cleveland Unlimited to the Trustee for the benefit of the Noteholders. The Strict

Foreclosure Agreement specified that the Trustee’s acceptance of the stock constituted a

“full and final payment and satisfaction of” Cleveland Unlimited’s “indebtedness

evidenced by the Indenture [and] the Notes.”

On the same day as the execution of the strict foreclosure, the Trustee advised all

Noteholders that the Majority Noteholders had “directed” the “Trustee to foreclose strictly

on the Cleveland [Unlimited] stock in full satisfaction of the Notes” and to distribute the

stock to all Noteholders on a pro-rata basis. The Trustee further advised the Noteholders

of the legal effect of the strict foreclosure, specifically that:

“[B]y operation of law as a result of the strict foreclosure, the
indebtedness evidenced by the Notes shall be deemed paid and
cancelled and with limited exceptions, the obligations of
[Cleveland Unlimited] under the Indenture shall be terminated.
The rights of Holders will be limited to receiving the pro rata
share of the aforementioned distribution [of Cleveland
Unlimited stock] and no further distributions will be made to
Holders on account of the Notes.”
The Trustee subsequently distributed the Cleveland Unlimited stock on a pro-rata basis to

the Majority and Minority Noteholders.

[1] and comment 2; In re CBGB Holdings, LLC, 439 BR 551, 555 [SD NY 2010]). In a
partial strict foreclosure, the creditor retains the collateral, forgives part of the debt owed
by the debtor, and sues the debtor for deficiency (see UCC § 9-622 [a] [1] and comment
2). In either case, the consent of the debtor and other secured creditors is required (see
UCC § 9-620 [a]-[b]).
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Shortly after the strict foreclosure, a majority of the Majority Noteholders made a

$34 million senior secured loan to Cleveland Unlimited at a 10% interest rate. When

Cleveland Unlimited was subsequently liquidated, the proceeds were used to pay that group

of secured lenders the principal and outstanding interest owed on the loan. Ultimately,

Cleveland Unlimited distributed approximately $13.5 million to its shareholders, but

withheld any distribution to the Minority Noteholders pending resolution of this litigation.

The Minority Noteholders’ Suit for Payment

Plaintiffs, the Minority Noteholders, commenced this action for breach of contract

and breach of guaranty against Cleveland Unlimited and the Guarantors, now including

CUI Holdings (collectively, defendants), for payment of principal and interest on the Notes,

contending that, because they had not consented to the transaction, their right to payment

and interest, and their right to bring suit to enforce those payment rights, had been

impermissibly terminated. Defendants countered that plaintiffs’ rights under the notes

were extinguished by operation of the strict foreclosure, an enforcement mechanism

expressly authorized by the terms of the Indenture Documents. Both parties moved for

summary judgment. Supreme Court denied the Minority Noteholders’ motion, and granted

defendants’ motion, dismissing the complaint. The court held that several provisions in

the Indenture Documents, when read together, evidenced a “collective design” that

authorized the Trustee “to act for all the [N]oteholders in the event of [Cleveland

Unlimited]’s default, upon the direction of the [Majority Noteholders].” Accordingly, the

court held that the strict foreclosure was permissible under the parties’ agreement, relying

on this Court’s decision in Beal Sav. Bank v Sommer (8 NY3d 318 [2007]). Further, citing

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Marblegate Asset Mgt., LLC v Education Mgt. Fin. Corp. (846 F3d 1 [2d Cir 2017]), the

court held that the strict foreclosure did not violate section 316 (b) of the TIA—or the

equivalent language of section 6.07 of the Indenture—because that transaction neither

formally “amend[ed] any terms of the Indenture” nor “prevent[ed the Minority

Noteholders] from bringing an action to collect payments due on the dates indicated in the

Indenture.” Despite granting summary judgment to defendants and dismissing the

complaint, the court concluded that the Minority Noteholders “retain[ed] the legal right to

obtain payment by suing Cleveland Unlimited as the issuer of the original [N]otes.”

The Appellate Division affirmed based on much of the same rationale, holding that

“[a] fair reading of the [Indenture Documents] demonstrates that the [Trustee] was

authorized to pursue default remedies, including the strict foreclosure at issue here, if so

directed by a majority of noteholders” (162 AD3d 573, 573 [1st Dept 2018]). The

Appellate Division held that section 6.07 of the Indenture did not supersede, nor conflict

with, the sections of the Indenture Documents that authorized the Trustee to take those

remedies; rather, section 6.07 of the Indenture, “which tracks the language of” section 316

(b) of the TIA, “‘prohibits only non-consensual amendments to an indenture’s core

payment terms’” (id. at 573-574, quoting Marblegate, 846 F3d at 3). The strict foreclosure,

the Appellate Division concluded, “did not amend the core payment terms in violation of

section 6.07 of the Indenture, even if it had a similar effect” (id. [internal quotation marks

omitted]).

This Court granted plaintiffs leave to appeal (32 NY3d 914 [2019]).

Analysis

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In order to determine whether plaintiffs may proceed against defendants in this

action to recover outstanding principal and interest on the Notes, we must examine whether

plaintiffs’ payment rights were, in fact, extinguished by the strict foreclosure, which

purportedly cancelled their Notes. As specified in the agreement between the parties to the

Indenture Documents, New York law controls (see section 11.7 of the Indenture). Our case

law makes clear that we approach the interpretation of the Indenture provisions as a matter

of basic contract law (see Cortlandt St. Recovery Corp. v Bonderman, 31 NY3d 30, 39

[2018]; Quadrant Structured Prods. Co., Ltd. v Vertin, 23 NY3d 549, 559 [2014]). If an

indenture “‘is complete, clear and unambiguous on its face,’” it “‘must be enforced

according to the plain meaning of its terms’” (Cortlandt, 31 NY3d at 39, quoting Quadrant,

23 NY3d at 559-560). When reviewing an indenture, “particular words should be

considered, not as if isolated from the context, but in light of the obligation as a whole and

the intention of the parties manifested thereby” (Kolbe v Tibbetts, 22 NY3d 344, 353 [2013]

[internal quotation marks and brackets omitted]). Applying these principles of contract

interpretation, we turn to the language of the Indenture provision underlying the dispute

between the parties.

Section 6.07 provides that, “[n]otwithstanding” any other provision in the Indenture,

the rights of a Noteholder to “receive payment” of principal and interest on the Notes, and

to “bring suit for the enforcement of any such payment . . . , shall not be impaired or affected

without the consent of such Holder.” Plaintiffs argue that the plain terms of this section

prohibited the strict foreclosure from having the effect of extinguishing their legal rights to

payment and to bring suit. Defendants maintain that the meaning of “impaired or affected”

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is ambiguous and cannot be read to cover the effect of the strict foreclosure, because those

terms relate to only formal amendments to the core payment terms of the Indenture.

Although the Indenture is governed by New York law and is not qualified under the

TIA, sections 6.05 and 6.07 of the Indenture incorporate language from subsections (a) and

(b) of section 316 of the TIA, respectively. Therefore, we may look to the TIA for guidance

as to the intended application of those Indenture provisions (see Racepoint Partners, LLC

v JPMorgan Chase Bank, N.A., 14 NY3d 419, 423 [2010] [parties’ intent in the indenture

provision may be equated with congressional intent with respect to the relevant section of

the TIA]; see generally Felix Frankfurter, Some Reflections on the Reading of Statutes, 47

Colum L Rev 527, 537 [1947] [“if a word is obviously transplanted from another legal

source, whether the common law or other legislation, it brings the old soil with it”]). In

interpreting sections 6.05 and 6.07, we look to the structure and design of the corresponding

TIA provisions (see Nadkos, Inc. v Preferred Contrs. Ins. Co. Risk Retention Group LLC,

34 NY3d 1, 9-10 [2019]).6

As the title of section 316 of the TIA announces, the provision covers “[d]irections

and waivers by bondholders” and the “prohibition of impairment of holder’s right to

payment” (15 USC § 77ppp). The topics are not unrelated. Subsection (a) permits a

qualified indenture to contain certain “majority action” or “collective action” clauses

6
It seems, at best, inconsistent to argue, as the dissent does, that our opinion inappropriately
“elevates the importance of the [TIA] . . . to a place of undue prominence in determining
this case” (dissenting op at 2; see dissenting op at 12 [“the TIA does not have charge of
this review”]), while at the same time lamenting that our opinion “strikes at the consistency
between” the law of this Court and federal law (dissenting op at 2; see dissenting op at 13-
15).
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authorizing a majority in principal amount of the securities to: (1) “direct the time, method,

and place for conducting any proceeding for any remedy available to such trustee”; and (2)

“consent to the waiver of any past default and its consequences” on behalf of all security

holders (15 USC § 77ppp [a] [1]). A separate part of subsection (a) states that an indenture

may contain a provision permitting the holders of at least 75% in principal amount of the

indenture securities “to consent on behalf of the holders of all such indenture securities to

the postponement of any interest payment for a period not exceeding three years from its

due date” (15 USC § 77ppp [a] [2]).

Subsection (b), which is mandatory in all indentures governed by the TIA, serves as

a limitation on the majority action authorized in subsection (a). The only exception to the

blanket rule in subsection (b) is the ability of 75% of the security holders to postpone

interest for a limited period of time provided for in subsection (a) (2) (see 15 USC § 77ppp

[b]; Marblegate, 846 F3d at 14). Accordingly, the other types of majority action permitted

by subsection (a), namely the authority to excuse a default and to direct trustee action in

the event of a default, are constrained by subsection (b) (see Kimmel v State, 29 NY3d 386,

394 [2017], quoting McKinney’s Cons Laws of NY, Book 1, Statutes § 240 at 412-413

[“‘where a statute creates provisos or exceptions as to certain matters(,) the inclusion of

such provisos or exceptions is generally considered to deny the existence of others not

mentioned’”]; see e.g. Continental Bank & Trust Co. of N.Y. v First Natl. Petroleum Trust,

67 F Supp 859, 871 [D RI 1946] [holding that, despite the unconditional language in

subsection (a) permitting a majority of bondholders “to consent to the waiver of any past

default,” an attempt by a majority group of bondholders to postpone or waive a default of

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an interest payment was nevertheless “directly contrary to the provisions of the (TIA)

expressly prohibiting impairment of the right of a debenture holder to receive payment”]).

Majority action with respect to remedies must be similarly constrained (see In re Board of

Directors of Telecom Argentina, S.A., 528 F3d 162, 172 [2d Cir 2008] [recognizing that

section 316 (b) of the TIA “protects the holder of a bond issued under a qualified indenture

from majority-imposed impairment of its rights”]; George W. Shuster, Jr., The Trust

Indenture Act and International Debt Restructurings, 14 Am Bankr Inst L Rev 431, 433

[2006] [“section 316(b) protects the rights of each individual bondholder under an

indenture as against other bondholders under that indenture”]). Indeed, the structure of the

TIA demonstrates an intent to protect bondholders’ legal rights to payment and to bring

suit from the effects of collective action. The Majority Noteholders were empowered to

act, without the consent of all Noteholders, in directing a specific remedy—the strict

foreclosure—and the Trustee was authorized to follow that directive. However, the

purported cancellation of the Notes cannot extinguish the rights protected by section 6.07

of the Indenture.

The dissent instead frames the issue as “whether the trustee was authorized to

proceed with the strict foreclosure” (dissenting op at 6; see also dissenting op at 17 [“For

an undisclosed reason, plaintiffs here chose not to sue the trustee for breach of its duties”]).

There is no question that, here, the Trustee was authorized to act. The issue is whether the

Minority Noteholders’ rights were extinguished—not “impair[ed]” (dissenting op at 17)—

by the purported cancellation of the Notes. A similar disconnect from the issue in this case

leads the dissent to mine lengthy block quotes from the legislative history of the Barkley

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Bill, an earlier version of what became the TIA, concerning the authorization of a trustee

to act at the direction of a majority of bondholders (see dissenting op at 16-17, citing The

Regulation of the Sale of Certain Securities in Interstate and Foreign Commerce, and the

Trust Indentures Under Which the Same are Issued, and for Other Purposes: Hearing on S.

2344 Before a Subcommittee of the Committee on Banking and Currency, 75th Cong. 48,

66-67 [1937] [statement of William O. Douglas, Commissioner, Securities and Exchange

Commission] [hereinafter S. 2344]). The discussion concerning the percentage of

bondholders that could compel the trustee to act took place in the context of a bill that

would have vested the Securities and Exchange Commission (SEC) with broad discretion

to approve indenture terms (see Talcott M. Banks, Jr., Indenture Securities and the Barkley

Bill, 48 Yale L J 533, 563 [1939] [“the Commission’s power to create indenture clauses

appears to be altogether unlimited”]). Commissioner William O. Douglas was addressing

the concern that the SEC would qualify an indenture that contained a provision requiring

100% of the bondholders to authorize the trustee to take any specific course of action (see

S. 2344 at 48). As enacted, the TIA provides that, unless otherwise expressly excluded,

the indenture will be deemed to include a provision permitting a simple majority in

principal amount of the securities to authorize the trustee to pursue an available remedy.

In the same section of the TIA, however, certain core rights of minority bondholders are

protected (see Marblegate, 846 F3d at 15 n 15 [“while the 1938 version of the bill vested

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discretion in the SEC to regulate indenture provisions, the 1939 version of the bill was

altered to mandate that all qualified indenture contain certain provisions”]).7

Defendants maintain that, despite the language of the statute, cancellation of the

Notes by majority action authorized in subsection (a) of section 316 of the TIA does not

violate the rights protected by subsection (b), relying on language in Marblegate that they

claim limits the scope of subsection (b) to protection against “formal amendments” of “core

payment terms” (see 846 F3d at 7, 14-15). The strict foreclosure, defendants argue, did

not effectuate such an amendment, and thus was not prohibited by subsection (b). Plaintiffs

assert that Marblegate, when read correctly, supports their argument that the strict

foreclosure could not be used to extinguish their rights to sue Cleveland Unlimited, the

Issuer—an entity that “remained intact with all its operating assets.” Plaintiffs are correct.

The Marblegate decision addressed a theory of recovery, adopted in a series of

district court cases, which expanded the concept of impairment of the right to payment

under section 316 (b) of the TIA to include limitations on a bondholder’s “practical ability”

to collect (see e.g. BOKF, N.A. v Caesars Entertainment Corp., 144 F Supp 3d 459, 467-

7
In the early drafts of the TIA, the language empowering majority bondholders to “direct
the method and place of conducting all proceedings at law or in equity for any remedy
under [the] indenture” appeared in the section detailing the duties of the trustee in the event
of default, rather than the section on majority action and bondholders’ rights (see Trust
Indentures: Hearings on H.R. 10292 Before the Subcommittee of the House Committee on
Interstate & Foreign Commerce, 75th Congress, 11-13 [1938]; Trust Indentures: Hearings
on H.R. 2191 & H.R. 5220 Before the Subcommittee of the House Committee on Interstate
and Foreign Commerce, 76th Congress, 11-14 [1939] [hereinafter H.R. 2191 & H.R.
5220]). At some point prior to the passage of the TIA, however, that language was
incorporated into what became section 316 (see 15 USC § 77ppp [a]; H.R. 2191 & H.R.
5220 at 30-31).
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468, 474-477 [SD NY 2015]; MeehanCombs Global Credit Opportunities Funds, LP v

Caesars Entertainment Corp., 80 F Supp 3d 507, 509 [SD NY 2015]; see generally

Cummings v Chesapeake Energy Corp., 2017 WL 3836112, *2-5 [WD Ok, Feb. 8, 2017,

NO. CIV-16-00647-HE]). The minority bondholder in Marblegate asserted that section

316 (b) demonstrated “Congress’s broad intent to prohibit an out-of-court restructuring that

has the purpose and effect of eliminating any possibility of receiving payment under their

notes,” a view effectively adopted by the district court (846 F3d at 8 [emphasis in original]

[internal quotation marks omitted]). The Second Circuit, after a detailed examination of

the transaction at issue and the resulting impact on minority payment rights, rejected that

expansive reading of the statute (see id. at 8-17; see also Bratton & Levitin, The New Bond

Workouts, 166 U Pa L Rev at 1649-1655 [describing “The Rise and Fall of the Broad

Reading of (s)ection 316(b)”]).

The issuer in Marblegate had two layers of debt, secured and unsecured (see 846

F3d at 3). Upon default, the secured creditors became the exclusive owners of the

collateral, consisting of virtually all the issuer’s assets (see id. at 3-4). After failing to get

unanimous creditor consent for a voluntary workout plan, an “Intercompany Sale” was

initiated, pursuant to which the secured creditors would “first exercise their preexisting

rights under the [at-issue credit agreement] and Article 9 of the [UCC] to . . . foreclose on

[the issuer]’s assets” (id. at 4). That action would serve to release a parent guarantee under

both the secured and unsecured debt (see id.). The secured creditors then consented to the

sale of the foreclosed assets to a newly-created subsidiary of the issuer, which would

distribute debt and equity to only the consenting creditors (see id.). The plaintiff, a minority

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holder of unsecured notes, did not consent and sued to enjoin the Intercompany Sale on the

ground that it violated section 316 (b) of the TIA because it impaired the practical ability

to recover on the debt (see id. at 5). The Second Circuit held that section 316 (b) was not

violated because the plaintiff “retain[ed] its legal right to obtain payment by suing [the

issuer], among others” (id. at 17). Absent changes to “core payments terms,” the Second

Circuit explained, the plaintiff could not “invoke [s]ection 316(b) to retain an absolute and

unconditional right to payment of its notes” (id. [internal quotations marks omitted]).

As an initial matter, the phrase “changes to the core payment terms” in Marblegate

was used to describe the right to payment of principal and interest protected in section 316

(b) of the TIA; it was not relevant to the right to bring suit (see id. at 7; see also Upic &

Co. v Kinder-Care Learning Ctrs., Inc., 793 F. Supp. 448, 454-455 [SDNY 1992]). The

plaintiff’s unimpaired right to bring suit—also protected by section 316 (b)—was crucial

to Marblegate’s holding that there was no violation of section 316 (b) (see 846 F3d at 16-

17; see also Cummings, 2017 WL 3836112 at *5 [noting that, in Marblegate, the Second

Circuit “concluded that as long as a bondholder retains the legal right to obtain payment

by suing . . . , the holder cannot invoke (s)ection 316(b) to retain an absolute and

unconditional right to payment of its notes” (internal quotation marks omitted)]). As the

Marblegate Court noted, with the plaintiff’s right to bring suit unaffected by the out-of-

court reorganization, section 316 (b) had not been violated because the plaintiff could

pursue claims against the issuer and others (see 846 F3d at 16-17).

The plaintiff in Marblegate needed to rely on a theory of interference with its

“practical ability”—not its legal right—to receive payment (id. at 2, 5, 7). After all, the

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restructuring transaction left the issuer intact, thereby preserving the plaintiff’s legal rights

to sue the issuer and to receive payment, but making any chance of recovery remote.8 With

that right to bring suit intact, the Second Circuit expressly rejected the notion that section

316 (b) of the TIA protects a noteholder’s “practical ability” to recover payment in full

and, instead, concluded that the provision was not violated by the transaction at issue (see

id. at 17). Here, unlike in Marblegate, a minority holder of unsecured debt did not merely

lose the “practical ability to collect payment” by virtue of a foreclosure accomplished by

secured creditors (id. at 2). Rather, at the direction of the Majority Noteholders, the Trustee

initiated a strict foreclosure that, while leaving the intact issuer with its operating assets,

cancelled the Notes, terminating the Minority Noteholders’ legal right to receive payment

of principal and interest on the Notes (see Brief of the Law Professors as Amicus Curiae

in Support of Motion to Appeal: 7).

Defendants also argue that plaintiffs’ rights were not violated because the

transaction was authorized by section 6.05 of the Indenture, which empowers the Majority

Noteholders to “direct the time, method and place of conducting any proceeding for

exercising any remedy available to the Trustee,” including a strict foreclosure under the

UCC. Because section 6.07 applies “[n]otwithstanding any other provision in this

Indenture[,]” however, the powers conferred upon the Majority Noteholders by section

8
The minority bondholder in Marblegate was an unsecured junior creditor whose only
guarantee was a “tag along,” meaning “the guaranty had been created in connection with
the [senior secured] loan and could be terminated at the [senior secured creditor]’s option”
(Bratton & Levitin, The New Bond Workouts, 166 U Pa L Rev at 1651 [internal quotation
marks omitted]; see Marblegate, 846 F3d at 3-4). Plaintiffs in this case, by contrast, are
senior secured creditors with numerous guarantors securing the obligation.
- 18 -
 - 19 - No. 42

6.05 are subject to the limitations in section 6.07. When a preposition such as

“notwithstanding any other provision” is included in a contractual provision, that provision

overrides any conflicting provisions in the contract (see Beardslee v Inflection Energy,

LLC, 25 NY3d 150, 158 [2015]; accord Cisneros v Alpine Ridge Group, 508 US 10, 18

[1993] [“the use of . . . a ‘notwithstanding’ clause clearly signals the drafter’s intention that

the provision of the ‘notwithstanding’ section override conflicting provisions of any other

section”]). Therefore, the powers granted to the Majority Noteholders in section 6.05

cannot be used to extinguish the legal right to sue or the legal right to payment of non-

consenting Noteholders protected in section 6.07.

The dissent agrees, recognizing that section 6.07 of the Indenture, “which

demand[s] the consent of each noteholder as a predicate to an action of the trustee that

would impair or affect” the rights afforded to such Noteholder under that section, overrides

any conflicting Indenture provision (dissenting op at 7-8). Nevertheless, the dissent argues

that the strict foreclosure was authorized by the Collateral Trust Agreement, namely section

3.3, which allows the Trustee, at the direction of a group of majority Noteholders, to take

remedial action in the event of a default (dissenting op at 8-9). According to the dissent,

this “adjustment of the indenture by operation of the collateral trust agreement provided

the consent of the minority noteholders required in the indenture” (dissenting op at 10).

The Noteholders are not parties to the Collateral Trust Agreement, notwithstanding

the dissent’s suggestion to the contrary (see dissenting op at 12 [referring to “the consent

given by the noteholders through the collateral trust agreement”]). Rather, the

Noteholders’ consent to the terms of the Collateral Trust Agreement is found in the

- 19 -
 - 20 - No. 42

provisions of the Indenture. Section 12.01 (b) of the Indenture provides that the

Noteholders “consent[] and agree[] to the terms of” the Collateral Trust Agreement and

“authorize[]” the Trustee “to perform its obligations and exercise its rights hereunder and

thereunder in accordance herewith and therewith.” Relatedly, section 12.08 of the

Indenture, titled “Authorization of Actions to be Taken by the Collateral Trustee under the

Security Documents,” provides that the Noteholders “agree[] that the Trustee “may, in its

sole discretion and without the consent of the . . . Holders, take all actions it deems

necessary or appropriate in order to . . . enforce any of the terms of the . . . Collateral Trust

Agreement.” The only authorization—or consent—for the Collateral Trustee to act on

behalf of the Noteholders is found in the Indenture, and, as with any other Indenture

provision, the authority granted in Article Twelve must yield to the “[n]otwithstanding”

clause in section 6.07.9

Defendants’ reliance on a “collective design” theory, and their use of this Court’s

decision in Beal in support of this argument, is likewise unavailing (see also dissenting op

at 10-11). In Beal, because the credit agreement lacked an “explicit provision stating that

a Lender may—or may not—take individual action in the event of a default,” it was

necessary to “look to other specific clauses and the agreements as a whole to ascertain the

9
The dissent references section 9.1 (viii) of the Security Agreement, stating that, “[t]o the
extent it is relevant here,” it “endows the trustee with the remedial power to, among other
things, exercise in respect of the collateral all rights and remedies of a secured party on a
default under the UCC” (dissenting op at 11 n 4). Section 11.1 (a) of the Security
Agreement, however, states that the actions of the Trustee “are subject to the provisions of
the Indenture.” Accordingly, the power conferred upon the Trustee by the Security
Agreement is “subject to” the limitations imposed by section 6.07 of the Indenture.
- 20 -
 - 21 - No. 42

parties’ intent” (Beal, 8 NY3d at 326). We determined that the agreements had “an

unequivocal collective design” (id.), indicating that “the lenders intended to act

collectively” and “to preclude an individual lender from disrupting the scheme of the

agreements at issue” (id. at 321). Accordingly, this Court concluded that the parties had

no intention to create an individual right of action (see id. at 328).

In stark contrast to the agreement at issue in Beal, the Indenture in this case

contained a specific provision, section 6.07, that affords each individual Noteholder the

absolute legal right to bring suit on its own behalf for payment of principal or interest,

despite any “no-action clause” to the contrary (see Cruden v Bank of N.Y., 957 F2d 961,

968 [2d Cir 1992]; see also Marblegate, 846 F3d at 7). Further, the Indenture contained

another provision, section 6.06, which explicitly prescribes a Noteholder’s right to sue.

Sections 6.06 and 6.07, therefore, answer the question that the operative documents in Beal

did not—an individual Noteholder’s legal right to sue for payment of principal and interest

may not be impaired or affected without such Noteholder’s consent, notwithstanding any

other provision in the Indenture, including those contained in Article Twelve related to the

Collateral Trust Agreement.

We hold, consistent with the language, structure, and organization of the relevant

Indenture provisions and the TIA, that, under the circumstances here, the purported

cancellation of the Notes without the dissenting Minority Noteholders’ consent violated

section 6.07 of the Indenture. Because we reject defendants’ only defense on liability—

the claim that any legal rights plaintiffs had to payment on the debt had been extinguished

by the strict foreclosure, which purportedly cancelled their Notes without their consent—

- 21 -
 - 22 - No. 42

plaintiffs were entitled to partial summary judgment. Although plaintiffs argue they are

entitled to an award equal to the face value of the Notes plus unpaid interest, defendants

contend that, even if a breach occurred, a trial is needed on damages, and, therefore, the

appropriate course would be to remit to Supreme Court, with the caveat that the claims

against one of the guarantors, CUI Holdings—the owner of the collateral subject to the

strict foreclosure—should be dismissed. These arguments, among others preserved by the

parties, raise questions of law and fact that should be addressed in the first instance by

Supreme Court upon remittal (see generally Sasso v Vacharis, 66 NY2d 28, 37 [1985]).

Accordingly, the order of the Appellate Division should be modified, without costs,

by denying defendants’ motion for summary judgment, and granting partial summary

judgment to plaintiffs, in accordance with this opinion.

- 22 -
FAHEY, J. (dissenting):

This decision needlessly disconnects the law of the two courts most relevant to the

markets in which these securities are traded. Confusion will surely follow.

-1-
 -2- No. 42

The majority opinion begins with what is presented as a relatively benign

conclusion: “plaintiffs’ right to sue for payment on the notes survived a strict foreclosure,

undertaken by the trustee at the direction of a group of majority bondholders over plaintiffs’

objection, that purported to cancel the notes” (majority op at 1-2). Lurking beneath that

faulty premise is an alarming notion.

The majority strikes at the consistency between the law of this Court and that of the

United States Court of Appeals for the Second Circuit with respect to the rules by which

disputes related to an indenture of this nature are to be resolved. This matter is one that

should be governed by basic principles of contract interpretation, and here there are two

agreements that, when properly read as one, govern that review: the indenture, for which

the majority accounts, and the collateral trust agreement, which the majority does not

meaningfully consider. Those agreements were executed simultaneously and, when read

together, they support the strict foreclosure course chosen by the trustee following the

default of defendant Cleveland Unlimited, Inc. (Cleveland Unlimited) with respect to the

notes in question.

The majority, however, brushes the collateral trust agreement aside. At the expense

of both our rules of contract interpretation and the symmetry of such principles with those

of the Second Circuit, the majority elevates the importance of the Trust Indenture Act of

1939 (TIA) (see 15 USC § 77aaa) to a place of undue prominence in determining this case.

Certainty of the law is an essential underpinning of financial dealings such as this

one. The prudent, common-sense approach here would be to maintain that sureness and to

avoid creating space between the rules of this Court and the rules of the Second Circuit

-2-
 -3- No. 42

governing the interpretation of indenture agreements. We should conclude that our steady

rules of contract interpretation applied to the plain language of the contract in question

authorize the strict foreclosure here at issue. For those reasons, we respectfully dissent and

would affirm the Appellate Division order.

I.

A.

In 2005, Cleveland Unlimited, a wireless communications provider based in Ohio,

issued $150 million in senior security notes guaranteed by 18 entities that are defendants

in this matter. The issuance of those notes was accomplished in part through the indenture,

which named U.S. Bank National Association (U.S. Bank) as the trustee and addressed the

remedies available in the event of a default.

“An indenture agreement is essentially a written agreement that bestows legal title

of the securities in a single Trustee to protect the interests of individual investors who may

be numerous or unknown to each other” (Quadrant Structured Prods. Co., Ltd. v Vertin,

23 NY3d 549, 555 [2014]; see Cortlandt St. Recovery Corp. v Bonderman, 31 NY3d 30,

39 [2018]). The indenture “identifies the rights of all parties concerned, as well as the

duties of the trustee (a third-party administrator), the obligations of the borrower, and the

remedies available to the investors” (Quadrant Structured Prods. Co., 23 NY3d at 555

[internal quotation marks omitted]).

Said more simply, an indenture is a contract, absent which investors in a distressed

security covered by such a compact likely would race to protect their individual interests,

potentially through majority action to force a sale that might harm minority stakeholders.

-3-
 -4- No. 42

That is, an indenture is a way of establishing equality and stability among investors. It acts

to prevent the chaos that would follow should each investor be free to pursue its own

interests with respect to the covered investment.

In this case the indenture is one of two agreements of primary concern. The

indenture and the collateral trust agreement were executed contemporaneously. The

collateral trust agreement was contemplated in the indenture. It modified the powers

granted to U.S. Bank through the indenture so as to allow U.S. Bank to act as directed by

the majority of noteholders in realization of the collateral in the event of a default.

B.

In January 2008, Moody’s Investor Services downgraded the notes and judged them

to be of high credit risk. Still, in April 2010, plaintiffs purchased on the secondary market

$5 million in notes, or approximately 3.33% of the outstanding principal amount of $150

million.

Shortly before the notes were to mature in December 2010, Cleveland Unlimited

recognized that it would not be able to pay the outstanding principal and interest on those

instruments. That financial distress prompted negotiations involving Cleveland Unlimited,

U.S. Bank, and an ad hoc committee of noteholders that owned over 99% of the outstanding

principal value of the notes. Those efforts failed. Cleveland Unlimited subsequently

defaulted on its obligations under the notes.

-4-
 -5- No. 42

Following that default, a group that owned 96.3% of the outstanding notes

(hereafter, the majority noteholders) instructed the trustee to exercise a strict foreclosure1

on the collateral that had been pledged to secure the notes, which consisted of stock in

Cleveland Unlimited. Plaintiffs—the minority noteholders—made no effort to enjoin the

proceeding, voiced their opposition to the transaction, and maintained that section 6.07 of

the indenture prohibited the foreclosure absent their consent. That stock then was

transferred to U.S. Bank and distributed to the minority noteholders, as well as to a holding

company (CUI Acquisition Corp.) created for the benefit of the majority noteholders.

That strict foreclosure prompted this action, in which plaintiffs, among other things,

contended that section 6.07 of the indenture prevented defendants from denying them

payment under the notes without their consent. The lower courts disagreed, concluding

that the indenture and the collateral trust agreement permitted the pursuit of the strict

foreclosure here in question (see CNH Diversified Opportunities Master Account, L.P. v

Cleveland Unlimited, Inc., 162 AD3d 573, 573 [1st Dept 2018]). We granted plaintiffs

leave to appeal (32 NY3d 914 [2019]).

II.

1
“Strict foreclosure” is an industry name for the remedy afforded secured creditors
pursuant to UCC 9-620 and UCC 9-622. Through that remedy, the secured creditor accepts
the debtor’s pledged collateral in satisfaction of the obligation that the collateral was to
secure (see Phillip J. Hendell, The Friendly Foreclosure, 16 Com L Bull 16 [2001]). The
“strict foreclosure” remedy is to be distinguished from a bankruptcy proceeding, which
generally considers either the adjustment or the liquidation of a debtor’s assets in
satisfaction of an unsatisfied obligation.
-5-
 -6- No. 42

We turn to the question whether the trustee was authorized to proceed with the strict

foreclosure and, in doing so, to defeat the ability of the minority noteholders to seek an

independent means of recompense with respect to the notes. That analysis, as the majority

notes (see majority op at 10), should be governed by our basic rules of contract

interpretation (see Cortlandt St. Recovery Corp., 31 NY3d at 39; Quadrant Structured

Prods. Co., Ltd., 23 NY3d at 559). The analysis also proceeds under the rule that where,

as here, multiple agreements are executed at substantially the same time and related to the

same subject matter, we will regard those contemporaneous writings as one and read them

together (see Nau v Vulcan Rail & Constr. Co., 286 NY 188, 197 [1941] [three instruments

“executed at substantially the same time, (and) related to the same subject-matter, . . . must

be read together as one . . . (s)ince they were to effectuate the same purpose and formed a

part of the same transaction”]; see generally TVT Records v The Is. Def Jam Music Group,

412 F3d 82, 89 [2d Cir 2005] [“Under New York law, all writings which form part of a

single transaction and are designed to effectuate the same purpose (must) be read together,

even (if) they were executed on different dates and were not all between the same parties”]

[internal quotation marks omitted]).

A.

Under section 6.03 of the indenture, the indenture trustee—U.S. Bank—was

authorized to “pursue any available remedy by proceeding at law or in equity to collect

payment” on behalf of the holders in the event of a default. That is, under that part of the

indenture, U.S. Bank, as the indenture trustee, was empowered to take any legal action on

behalf of the noteholders necessary to make them whole in the event of a default.

-6-
 -7- No. 42

Under section 6.05 of the indenture, such action by the trustee was to be prompted

by authorization of a majority of the noteholders. That section, entitled “Control by

Majority,” specifically provides that,

“[s]ubject to any applicable law, the [h]olders of a majority in
principal amount of the outstanding [n]otes may direct the
time, method and place of conducting any proceeding for
exercising any remedy available to the [indenture] [t]rustee or
the [c]ollateral [t]rustee . . . including, without limitation, any
remedies provided for in Section 6.03.”

Under Section 6.07 of the indenture, the right of the indenture trustee or the

collateral trustee—U.S. Bank has both roles—to enforce a payment obligation on an

outstanding note arguably is limited. That part of the indenture provides that,

“[n]otwithstanding any other provision of [the] [i]ndenture, the
right of any [h]older to receive payment of principal of,
premium, if any, and interest and [a]dditional [i]nterest, if any,
on a [n]ote, on or after the respective due dates expressed in
such [n]ote, or to bring 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 [h]older” (emphasis
added).

“ ‘[U]nder New York Law, clauses similar to the phrase “[n]otwithstanding any

other provision” trump conflicting contract terms’ ” (Beardslee v Inflection Energy, LLC,

25 NY3d 150, 158 [2015], quoting Bank of N.Y. v First Millennium, Inc., 607 F3d 905, 917

[2d Cir 2010] [emphasis added]). Consequently, to the extent there is a conflict between

the combined force of sections 6.03 and 6.05 of the indenture (which empower the trustees

to take any steps authorized by majority noteholders to collect payment on behalf of those

holders in the event of a default) and the requirements of section 6.07 of that compact

(which demand the consent of each noteholder as a predicate to an action of the trustee that

-7-
 -8- No. 42

would impair or affect the right of the holder to receive payment of, among other things,

principal outstanding on the note), the latter section would control. Absent the consent of

the minority noteholders, and standing alone, that latter section would prohibit the trustee

from pursuing the strict foreclosure in question here.

B.

The indenture, however, is not a lonely compact and it cannot be read in a vacuum.

To do so would be to disregard the collateral trust agreement, which is connected to the

indenture. The strict foreclosure in question was given “the consent of the holder” by the

collateral trust agreement.

As noted, multiple agreements of common execution and subject should be treated

as a single writing and read together (see Nau, 286 NY at 197; TVT Records, 412 F3d at

89). The collateral trust agreement, which was executed contemporaneously with the

indenture, names U.S. Bank the collateral trustee and empowers U.S. Bank, acting in that

capacity and upon a default, to foreclose upon the direction of the majority shareholders.

Section 3.3 of the collateral trust agreement empowers U.S. Bank to act as directed by the

majority of noteholders “in the exercise and enforcement of the Collateral Trustee’s

interests, rights, powers and remedies in respect of the Collateral” following a default.

Section 3.5 of the collateral trust agreement adds a grant of absolute authority to the

collateral trustee to pursue a foreclosure authorized by the majority noteholders; through

that section, individual noteholders forfeited the “right individually to realize upon any of

-8-
 -9- No. 42

the Collateral” and acknowledged “that all powers, rights and remedies . . . may be

exercised solely by the Collateral Trustee.”2

The foreclosure provision contained in section 3.3 of the collateral trust agreement

satisfies the consent requirement of section 6.07 of the indenture. There is no need for

unanimity of noteholder opinion; instead, trustee action is based on majority noteholder

consent. Absent an unanimity requirement, and in view of the forfeiture language of

section 3.5 of the collateral trust agreement, there can be no conclusion other than the

noteholders recognized that foreclosure could have occurred based on a majority vote of

the noteholders.

The foreclosure and forfeiture provisions of the collateral trust agreement provide

the consent for foreclosure required by the indenture when those documents are properly

read as one (see generally Nau, 286 NY at 197). Section 6.07 of that agreement makes

consent a condition to foreclosure, and the seniority language of that section—namely, the

“[n]otwithstanding” preposition—applies only to the text of the indenture.3 Left open in

2
This point is important. The majority acknowledges that the trustee was authorized to
pursue the strict foreclosure (see majority op at 13) but concomitantly reads the indenture
in isolation to conclude that the strict foreclosure did not extinguish the ability of the
minority noteholders to seek remuneration relative to the notes through a mechanism other
than the strict foreclosure (see majority op at 19). The application of that narrow lens to
the contractual language that governs our review yields the flaw in the majority’s analysis:
it fails to see the import of the collateral trust agreement, which is to be read in conjunction
with the indenture and by operation of which minority noteholders forfeited the right to
recover on the notes through means of their own choosing.
3
As noted, this part of the indenture provides that,

“[n]otwithstanding any other provision of [the] [i]ndenture,
the right of any [h]older to receive payment of principal of,
-9-
 - 10 - No. 42

the indenture was the possibility that a codicillary agreement—such as the collateral trust

agreement—would modify the indenture. That, of course, is precisely what occurred here,

and the adjustment of the indenture by operation of the collateral trust agreement provided

the consent of the minority noteholders required in the indenture to allow the majority

noteholders to authorize the foreclosure in question here.

III.

A.

The majority, of course, reaches a different result, driven by its conclusion that the

indenture and the collateral trust agreement are not of collective design and operate

independently of one another (see majority op at 19-20). We see no reason to base our

determination with respect to the propriety of the strict foreclosure upon only the indenture.

Beal Sav. Bank v Sommer (8 NY3d 318 [2007]) is instructive. There, in a dispute

with respect to a syndicated loan arrangement, we read multiple documents evidencing the

premium, if any, and interest and [a]dditional [i]nterest, if any,
on a [n]ote, on or after the respective due dates expressed in
such [n]ote, or to bring 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 [h]older” (emphasis
added).

That is, section 6.07 of the indenture is “senior” and controlling, but only with respect to
other parts of the indenture. Nothing in the indenture prohibits or precludes what happened
here, namely, the superseding of part of the indenture by an ancillary compact. If it had
been the intent that 6.07 of the indenture supersede any provision of any codicillary
agreement, such as the collateral trust agreement, then the indenture easily could have (and
surely would have) stated as much.

- 10 -
 - 11 - No. 42

loan in question (see id. at 321-322) together, as if they comprised a single, unified compact

(see id. at 326 [noting “that the agreements ha(d) an unequivocal collective design”]).

Here, the indenture repeatedly referred to the collateral trust agreement and placed

those agreements under the single, unified umbrella of the “indenture documents.”4

Moreover, the collateral trust agreement is referred to in no fewer than eight sections of the

indenture—notably, in the part of the indenture considering control by the majority in the

event of default (section 6.05 of the indenture). Those entangling references speak to a

singular governance structure in which the notes and the obligations flowing therefrom are

controlled by, among other things, an indenture and a collateral trust agreement that are to

be read in tandem.

B.

Although the indenture is not governed by the TIA, the majority emphasizes that act

in support of its conclusion that the indenture documents, when read to isolate section 6.07

of the indenture and to shun section 3.3 of the collateral trust agreement, prohibit the strict

foreclosure at issue here (see majority op at 11-14). We disagree with that approach.

There can be no dispute that sections 6.05 and 6.07 of the indenture incorporate the

language of TIA sections 316 (a) and (b), which are codified, respectively, at 15 USC §

4
To the extent it is relevant here, we note that the indenture documents consist of a third
compact, characterized as the security agreement. Similar to the collateral trust agreement,
the security agreement endows the trustee with the remedial power to, among other things,
exercise in respect of the collateral all rights and remedies of a secured party on a default
under the UCC. The majority notes that such power is rooted in the indenture (see majority
op at 20 n 9), and in doing so clings to its misguided belief that the indenture is unaffected
by the collateral trust agreement.
- 11 -
 - 12 - No. 42

77ppp (a) (1) and § 77ppp (b). Like the indenture, TIA section 316 (a) provides that a

majority of holders may “direct the time, method, and place of conducting any proceeding

for any remedy available to such trustee, or exercising any trust or power conferred upon

such trustee, under [a qualified] indenture” (§ 77ppp [a] [1]; cf. indenture § 6.05). Further

similar to the indenture, TIA section 316 (b) adds that, “[n]otwithstanding any other

provision of the indenture to be qualified, the right of any holder . . . to receive payment of

the principal of and interest on [the] indenture security . . . shall not be impaired or affected

without the consent of such holder” (§ 77ppp [b]; see indenture § 6.07).

The fact remains, however, that TIA sections 316 (a) and (b) apply only to

“qualified” indentures, that is, indentures that cover securities that have been registered

with the Securities and Exchange Commission (see 15 USC § 77iii [a]). These notes were

not so registered, meaning that the indenture was not qualified, and that the TIA does not

have charge of this review.

C.

Section 316 (b) of the TIA was complied with by the consent given by the

noteholders through the collateral trust agreement. However, even if the TIA and

authorities interpreting that act controlled here, the result would be the same. Made more

artfully in the indenture than in the TIA is the point that the right of any holder, including

a minority noteholder, shall not be diminished without the consent of that holder (cf.

indenture § 6.07 with 15 USC § 77ppp [b]). As stated, that was given.

The Second Circuit addressed a similar problem in Marblegate Asset Mgt., LLC v

Education Mgt. Fin. Corp. (846 F3d 1 [2d Cir 2017]). There, the Education Management

- 12 -
 - 13 - No. 42

Corporation (EDMC) had outstanding secured and unsecured debt. The unsecured debt

was issued by EDMC’s subsidiaries, known collectively as the EDM Issuer, and governed

by an indenture qualified under the TIA. The plaintiffs held unsecured notes with a face

value of $14 million (see id. at 3).

As EDMC’s financial position deteriorated, all EDMC creditors, except for the

plaintiffs, consented to an intercompany sale. Under that sale, consenting secured creditors

would foreclose on EDMC’s assets pursuant to UCC article 95 and a 2014 credit

agreement. Following a release, the collateral agent would sell the foreclosed assets to a

new EDMC subsidiary constituted specifically for the intercompany sale. The new EDMC

subsidiary would then distribute debt and equity to consenting creditors and continue the

business. Non-consenting unsecured creditors (the plaintiffs) “would not receive anything

from the new company: though not a single term of the Indenture was altered and [the

unsecured creditors] therefore retained a contractual right to collect payments due under

the Notes, the foreclosure would transform the EDM Issuer into an empty shell” (id. at 4).

Important for these purposes is the point that when the plaintiffs sued to enjoin the

intercompany sale on the ground that it violated TIA section 316 (a) (codified, as noted, in

15 USC § 77ppp [b]), a divided Second Circuit refused to prohibit the sale because the

“[t]he transaction did not amend any terms of [that] Indenture” (Marblegate, 846 F3d at

17). That is, where the sale in question was consistent with, and authorized by the indenture

there in question, that transfer could not have been nullified for failure to comply with the

5
The strict foreclosure remedy is codified in UCC 9-620 and UCC 9-622, which appear
in UCC article 9.
- 13 -
 - 14 - No. 42

consent requirement of TIA section 316 (b). “Absent changes to the Indenture’s core

payment terms, [the minority noteholder could not] invoke section 316(b) to retain an

‘absolute and unconditional’ right to payment of its notes” (Marblegate, 846 F3d at 17). 6

Marblegate prohibited only “formal indenture amendments to core payment rights”

(846 F3d at 16). The noteholders have a right to bring an action unless they consent to a

change in that right. The result here is consistent with Marblegate (846 F3d 1). Similar to

that case, the disaffected noteholders in this matter consented to the procedure now in

question (here, the strict foreclosure) through the unmodified indenture documents, which,

with minority consent, confer upon the trustee the power to pursue the strict foreclosure

with the authorization of the majority noteholders.7

IV.

6
As noted (see supra at 12), TIA section 316 (b) provides that, “[n]otwithstanding any
other provision of the indenture to be qualified, the right of any holder . . . to receive
payment of the principal of and interest on [the] indenture security . . . shall not be impaired
or affected without the consent of such holder” (15 USC § 77ppp [b]).
7
Some historical perspective is important in understanding the role of the TIA and the
protections offered dissenting bondholders. Any review makes clear that pre-TIA or post-
TIA/pre-Marblegate dissenting bondholders were not entitled to a 100% payout, based on
the controlling indenture, during reorganization.
The recoveries sought were not based on breach of contract, but on fraudulent
conveyance and the facts of the case. The TIA did not derive from any desire to suggest
that a foreclosure-based reorganization meant that a bondholder’s right to receive payment
was automatically violated.
The argument supporting this reading of the history is thoughtfully set out in Debt
Restructurings and the Trust Indenture Act by Harald Halbhuber (25 Am Bankr Inst l Rev
1 [2017]).
- 14 -
 - 15 - No. 42

The conclusion that the indenture and the collateral trust agreement support the strict

foreclosure course chosen by the trustee necessarily is accompanied by these additional

comments.

The root problem in this case concerns not the TIA, but the question of the “cash

out” on the notes. Read together, the indenture and the collateral trust agreement require a

collective approach of the noteholders to restructuring upon default. That collective

approach is driven by the majority of the noteholders, who upon default, exchanged their

notes for the collateral securing those instruments. That collateral was stock in Cleveland

Unlimited.

The indenture documents ensure that, in the event of a default, the “tail” that is the

minority noteholders do not wag the “dog” that is the entire body of noteholders. There is

no indication that the minority noteholders were anything other than open-eyed investors

who voluntarily stepped into an arrangement in which their ability to control remuneration

in the event of a default was sacrificed in the hopes of achieving financial reward.

Indeed, the reality is that this case requires determination of no more than

contractual language that governs the relationship of majority and minority noteholders.

The indenture documents authorize the foreclosure course taken by the trustee upon

Cleveland Unlimited’s default, and the conclusion to the contrary oddly implements the

TIA in what should be this straightforward contractual analysis.

In fact, even the majority’s implementation of the TIA is flawed. In short, the

majority is incorrect to conclude that the TIA frowns on a direction to the trustee by 97%

of the holders to effectuate a strict foreclosure. The SEC’s concern was, for qualified

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indentures, to make sure that the threshold for the percentage of bondholders necessary to

direct the action of the trustee not be set too high:

“Under the Barkley bill, the trustee must exercise due care after
default, whither the bondholders demand action or not. But
suppose a certain percentage of the bondholders want to
compel the trustee to follow some specific course of action.
Anticipating just a little bit, let me say that the Commission
would have the discretion and power, as I see it, to insist that
the percentage required for that not be too high. That is, it
would have the power to say, ‘No.’ Let us take a clear-cut case:
An indenture provides that the trustee is not under
responsibility to take the action specified unless 100 percent of
the bondholders should make a request of it. I cannot imagine
the Commission allowing a thing like that to go through” (The
Regulation of the Sale of Certain Securities in Interstate and
Foreign Commerce, and the Trust Indentures Under Which the
Same are Issued, and for Other Purposes: Hearing on S. 2344
Before a Subcommittee of the Committee on Banking and
Currency, 75th Cong. 48 [1937] [statement of William O.
Douglas, Commissioner, Securities and Exchange
Commission]).

As to qualified indentures, the TIA’s principal innovation was not Section 316(b),

but rather the transformation of duty-less, immunized trustees to true fiduciaries, liable to

aggrieved bondholders for breaches of that duty. As Commissioner Douglas explained:

“[I]n case of default under these corporate trust indentures, the
trustee must move. He is in the danger zone there, and
immediate action has to be taken. Investments are at stake
which are about to be lost; the senior interest are about to wipe
out the interests of the junior interests. There is about to be a
reorganization, and the securityholders need an active agent in
there. The main impact of the bill–not the exclusive, but the
main impact, is upon the trustee, after default. The bill makes
it exercise such rights and powers invested in it, and to use a
degree of skill comparable with which a prudent man would
exercise under the circumstances, if he were a fiduciary and
had the skill which the trustee has or which the indenture
trustee represents itself as having, as indenture trustee, at the

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time of the offering of the indenture securities, whichever is
the higher” (The Regulation of the Sale of Certain Securities in
Interstate and Foreign Commerce, and the Trust Indentures
Under Which the Same are Issued, and for Other Purposes:
Hearing on S. 2344 Before a Subcommittee of the Committee
on Banking and Currency, 75th Cong. 66-67 [1937] [statement
of William O. Douglas, Commissioner, Securities and
Exchange Commission]).

Contrary to the majority’s conclusion, even as to qualified indentures, Section

316(b) of the TIA could not plausibly be read to disable a trustee, post default, from taking

action that might in some sense “impair” the rights of bondholders to obtain a full recovery

on their notes. (At the point of default, the issuer has stated its inability to provide full

payment.) For an undisclosed reason, plaintiffs here chose not to sue the trustee for breach

of its duties. Under the agreements here, properly read together, the trustee had the power

to effectuate the strict foreclosure. If that foreclosure was in breach of plaintiffs’ rights,

then they have a remedy.

At bottom, the majority’s approach—in which it effectively ignores the collateral

trust agreement, mistakenly applies the TIA to what should be a pure, direct contractual

analysis, and then is mistaken in its application of the TIA within that review— needlessly

injects uncertainty into a multi-trillion-dollar corporate debt market (see Capital Markets

Fact Book, 2019, available at https://sifma.org/recourse/research/fact-book/ [last accessed

Sept. 29, 2020]). It ultimately strikes a chord of disharmony in undermining what should

be the prevailing rule in both this Court and the Second Circuit that agreements of

collective design should be read as one. It also compels this dissent.

For all of the foregoing reasons, we would affirm the Appellate Division order.

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Order modified, without costs, by denying defendants’ motion for summary judgment
and granting partial summary judgment to plaintiffs in accordance with the opinion
herein and, as so modified, affirmed. Opinion by Judge Garcia. Chief Judge DiFiore and
Judges Stein and Feinman concur. Judge Fahey dissents and votes to affirm in an opinion
in which Judges Rivera and Wilson concur.

Decided October 22, 2020

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