July 11, 2018 - Last month, in In re Woodridge, a decision that is making waves in the claims trading market, Judge Kevin Carey of the Delaware Bankruptcy Court Bankruptcy Court ruled that an assignment of promissory notes effected in violation of an express anti-assignment clause was null and void and that the purchaser of the note could not properly file a claim in the debtor’s bankruptcy case. Does the decision also raise questions about the assignability of syndicated loans? While it could under certain circumstances, the way most syndicated loans are documented today mitigates against adverse consequences.
The facts. The promissory notes in Woodbridge stated that they could not be assigned without the consent of the borrower and, importantly, any such attempted assignment would be “null and void”. Moreover, the notes did not include a carve-out from the consent provisions allowing a lender to freely assign the notes in the event of a default by the borrower. After the borrower filed for bankruptcy, the original creditors assigned the notes to Contrarian Funds without obtaining the consent of the borrower and Contrarian subsequently filed a proof of claim in the amount of the notes. The debtors then filed an objection to the proof of claim seeking to disallow the purported transferred claim.
The decision. The court upheld the objection and addressed three important issues. First, Judge Carey ruled that an anti-assignment clause within loan documentation is enforceable. The court noted specifically that there is a difference between a mere anti-assignment clause and one that also states that any assignment effected in contravention of the clause is null and void. Thus, an anti-assignment clause alone restricts only the “right” to assign but not the “power” to assign while, in combination with a “null and void” provision, anti-assignment language also restricts the power to assign. Why does it matter? An assignment in violation of a right gives rise only to a claim for breach of contract while an assignment in violation of the power to assign, as in this case, results in the nullification of the assignment itself. The court next ruled that without an express carve out in the documentation, a breach by the borrower of the loan agreement does not nullify the anti-assignment clause which remains enforceable. Finally, the court concluded that the provisions in the Uniform Commercial Code that prohibit anti-assignment clauses do not apply to promissory notes (only to assignments of security interests in in promissory notes).
What does this mean for the claims trading market? At the risk of sounding flip, buyers should read underlying loan documents to ensure that they can be properly transferred. (It is important to note that New York law is similar to the law governing the documents in this case).
What does this mean for the loan market? It goes without saying that market participants should always perform due diligence on the underlying documents. However, on a practical level, at least under current LSTA documentation standards, there is less to worry about. First, it is extremely rare for syndicated loan documents to contain “null and void” clauses. So while assignments in violation of anti-assignment clauses could theoretically give rise to breach of contract claims (albeit claims for which it is hard to observe any damages), the underlying assignment would not be nullified. More importantly, borrower consent provisions terminate upon default in virtually all credit agreements. For more on the topic, see recent memos by Alston & Bird and King & Spaulding.