This month's issue of Debt Dialogue address handover of records to a substitute collateral manager (in the Tilton litigation), the EU bail-in rules, the interplay of Section 3(c)(7) of the Investment Company Act and rights of debtholders as well as other matters.

Topics covered in  this issue include:

  • Delaware Court Rules Against Tilton's Patriarch Partners in Dispute Over Records 
    A Delaware judge has ordered Patriarch Partners, the investment adviser founded by Lynn Tilton, to turn over to a successor books and records relating to its role as collateral manager of several CLO funds. The case serves as a useful reminder that even standard successor provisions are worthy of consideration in the heat of negotiation, because their application can be critical.
  • EU Requirements for Contractual Bail-In Clauses
    "Bail-in" clauses, which have become a standard feature of contracts between European financial institutions and non-European parties, stipulate that European financial regulators have the power to write down, or convert to equity, the obligations of the financial institution. The EU bail-in legislation requires financial institutions under the jurisdiction of the EU to include bail-in language in certain obligations subject to the law of a third country — including those subject to New York law — entered into after January 1, 2016.
  • Alleged Violation of the Investment Company Act Does Not Afford Rights to Junior Debt Classes 
    Issuers of collateralized debt obligations often must contend with potential application of the Investment Company Act of 1940. In order to steer clear of the Act, these issuers typically look to Section 3(c)(7), which exempts an issuer if all of its investors are so-called "qualified purchasers." In Lansuppe Feeder, LLC v. Wells Fargo Bank (SDNY Sept. 29, 2016), the court rebuffed the effort of holders of junior debt to upend the priority of the senior debt by claiming a failure to comply with Section 3(c)(7).
  • U.S. District Court Upholds Risk Retention for Open Market CLO Managers
    The Loan Syndications and Trading Association (LSTA) brought an action challenging the applicability to open market CLOs of the final credit risk retention rules adopted pursuant to Section 941 of the Dodd-Frank Act. Rejecting the challenge, a U.S. District court for the District of Columbia ruled that the agencies did not act arbitrarily or unlawfully in declining to provide an exemption from the rules for open market CLOs.
  • When Actions Speak Louder Than Words — A Trade Is a Trade Despite Formulaic "Subject To" Language
    The New York Court of Appeals in Stonehill Capital Management LLC, v. Bank of the West recently held that a valid contract was formed for the sale of a syndicated loan in an auction, even though the terms were subject to a partial deposit and the execution of a written agreement by both the seller and the buyer. In its decision, the court emphasized the importance of the "totality of the parties' conduct" and the parties' "clear objective" in forming a binding contract.
  • Another Strictly Construed No-Action Clause 
    In Daniel Penades v. The Republic of Ecuador, 2016 WL 5793412 (S.D.N.Y. October 2016), the court was called upon to interpret a broad no-action clause in an Ecuadorian debt indenture that was qualified by the "unconditional right ... to receive principal and interest at maturity." The court interpreted the no-action clause literally, so that a noteholder could not sue for defaulted interest until the final maturity date of the notes. The case serves as yet another reason why debtholders should pay careful attention to the particular nuances of the no-action clauses in their indentures.

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