Issuers of bonds governed by New York law indentures – the instrument containing the rights and obligations of the issuer, the trustee for the bondholders and the noteholders under the bonds – had been able to rely upon a relatively stable body of court decisions in interpreting covenants and other provisions in indentures. However, there have been a number of notable judicial decisions, particularly from appellate courts, that have impacted the interpretation of bond indentures and surprised many practitioners. These decisions may impact how issuers interpret bond indentures and may result in changes in the drafting of certain indenture provisions in the future. The following is a survey of recent key decisions turning on interpretations of terms within New York law-governed indentures that have changed the way practitioners draft and interpret these instruments.


Fundamentally, New York law-governed indentures are contracts that are interpreted in accordance with general principles of New York contract law. Recent judicial decisions have reinforced this construct, building on a principle set forth in a case from the early 1980s, Sharon Steel v Chase Manhattan Bank N.A., that indenture interpretation "is a matter of basic contract law".1 In particular, the Southern District of New York s2 decision in Chesapeake Energy Corporation v Bank of New York Mellon Trust Company, N.A., 57 F. Supp. 2d 316 (S.D.N.Y. 2013) offers a roadmap to indenture interpretation under New York law. Following the basic framework for contract interpretation, 3 the court in Chesapeake stated that the primary objective in interpreting the terms of an indenture is that the intent of the parties is revealed in the language of the agreement. Where the text is definite and precise in meaning, it is unambiguous and therefore "the intent of the parties must be found within the four corners of the contract". If a reasonably intelligent person viewing the contract objectively could interpret the language in more than one way, then the court deems the text ambiguous and may consider extrinsic evidence as to the parties' intent. 4

What constitutes an unambiguous text can be a matter for debate and is a question of law for the court to determine. In Chesapeake, the lower court determined that the text was unambiguously in favour of the issuer, only to be overruled by the appellate court holding that the text was unambiguously in favour of the noteholder plaintiffs. One member of the appellate panel dissented, claiming the text was ambiguous on the basis that the district court judge was surely a reasonably intelligent person and therefore evidence that the language was ambiguous. In evaluating whether a text is ambiguous, courts typically look at the agreement as a whole, priorities specific language over general language, give words and phrases their ordinary meaning, examine whether a particular interpretation creates internal inconsistencies, look to commercial effect and disfavour an interpretation that renders language superfuous. When evaluating extrinsic evidence (which a court may do if it finds ambiguity in the language), courts can look to a variety of sources, including the summary of terms in the offering document, an issuer s public reports, internal reports to management, statements to rating agencies and regulators by the issuer, public declarations on investor calls, the underwriters' sale force communications to potential investors and expert testimony as well as communications among counsel and other transaction parties in the negotiation of the indenture.


In late 2014, the Southern District of New York issued a decision in Marblegate Asset Management LLC v Education Management Corp (Marblegate), 75 F. Supp. 3d 592 (S.D.N.Y. 2014), that drew the attention of high yield industry participants as well as the international financial press and demonstrated the power of litigation by noteholders. Tis decision also illustrated the disruptive effects on the marketplace of a court introducing uncertainty on indenture interpretation issues thought to be long settled.

Education Management Corporation (EMC) issued secured and unsecured notes governed by a New York law indenture. The notes were guaranteed by EMC s parent company, EDMC. EDMC offered to exchange the secured notes for a combination of new secured term loans and EDMC common stock. The noteholders who accepted the offer were required to consent to the release of EDMC from its guarantee obligations (which would automatically trigger a release of the guarantee of the unsecured notes) as well as the transfer of EMC s assets to a new EDMC subsidiary, leaving EMC a shell company. The indenture permitted amendments to allow for the foregoing with the consent of holders of a majority of notes, thereby leaving unsecured noteholders and non-participating secured noteholders with notes in a company with virtually no assets, such that the issuer would be unable to meet its payment obligations under the remaining notes. Marblegate, a noteholder, argued that EMC s exchange offer was a restructuring conducted outside the US Chapter 11 process which had functionally eliminated Marblegate s right as noteholder to receive payment on its notes in violation of s 316(b) of the Trust Indenture Act of 1939 (TIA).5 Section 316(b) provides that, for an indenture qualified under the TIA, a noteholder s right to receive payment of principal and interest from the due dates thereof or to institute suit for enforcement of such payment, may not be impaired without each noteholder s consent. Tis provision had generally been interpreted by practitioners as precluding changes to "money terms" of the indenture without each noteholder s consent. The court agreed with Marblegate: s 316(b) foreclosed more than just amendments to payment terms; it also prohibited actions, including indenture amendments which have the substantive effect of impairing a noteholder s right to payment without such noteholder s consent.

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1 691 F.2d 1039, 1049 (2d Cir. 1982).

2 The US judicial system is separated into state and federal courts. Federal district courts are predominately trial-level courts whose decisions are appealable to the circuit (or appellate) courts. Tere are 13 circuit courts with regional or subject matter jurisdiction. Circuit court decisions are appealable to the US Supreme Court. Federal bankruptcy court decisions are appealable in the frst instance to the relevant federal district court.

3 57 F. Supp. 2d 316, 331 (S.D.N.Y. 2013).

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