August 26, 2021 - by Elliot Ganz. A recent New York State trial court ruling in TriMark allowed minority lenders to pursue breach of contract claims against the majority lenders relating to the controversial “uptiering” restructuring. The decision by is important not only because of importance of the breach of contract ruling on uptiering transactions, but also because of the broad implications of some of the other rulings in that case. The court dismissed “tortious interference” claims raised by the minority lenders against the private equity sponsors, and very narrowly read both the application of the implied covenant of good faith as well as the “no-action clause” contained in the credit agreement which purported to limit the standing of lenders to bring claims independently. This article will briefly review the decision and consider what it’s broader implications for the loan market.
Background. The case arises out of a 2020 restructuring transaction pursuant to which TriMark and a bare majority of lenders amended an existing credit agreement to eliminate restrictions on Trimark’s ability to issue senior incremental debt. Trimark then issued a $120MM super senior, first-out loan secured by the same collateral that secured TriMark’s existing first lien debt as well as $307.5 million of new second-out super senior debt to the defendant lenders in a dollar-for-dollar exchange for their existing $307.5 million face amount of existing which was retired upon assignment back to TriMark. As a result of the restructuring, the minority lenders’ loans, which had been senior, were subordinated to over $400MM of priming loans. Importantly, the plaintiff minority lenders were never given the opportunity to participate in the restructuring.
The claims. The minority lenders filed several claims against both the majority lenders and the private equity sponsors for declaratory judgment, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract and violations of the New York Uniform Voidable Transactions Act.
No-action clauses. The majority lenders argued that the minority lenders lacked standing to bring this action because of the credit agreement’s “no-action clause”. As a threshold matter, the court held that the so-called “no-action” clause in the original credit agreement did not prevent the minority lenders from bringing the claims. The original loan agreement’s no-action clause prohibited lenders from suing in their own name “to realize upon any of the Collateral or to enforce any Guarantee of the Secured Obligations”, requiring instead that such actions be brought by the Administrative Agent. The amended credit agreement imposed substantial new restrictions, precluding lenders from perusing virtually any action against Trimark or other lenders. It also imposed significant limitations on the Admin Agent’s ability to sue. While going out of his way to validate the enforceability of no-action clauses generally, the court ruled that this case was atypical; the no-action provision in this case was “strategically deployed …as part of a larger scheme to breach and then exist the agreement.” The judge described it as a “preemptive self-pardon” noting that, “subtle this was not.” For a deeper analysis of the court’s ruling on the no-action clause, please see this memo from O’Melveny. While agreeing with the ruling in this case, the authors raised concerns that the court’s ruling could be construed more broadly based on its commentary that enforcing the clause would not “effectuate a principal purpose of such clauses, to protect an issuer from multiple claims from different lenders, in order to protect the venture as a whole”. The authors worry that this limitation is nowhere found in the language of no-action clauses and could create difficulties for lenders seeking to enforce bargained-for no-action clauses in future, more typical, intercreditor disputes. They conclude, “that it “will have to be seen if the courts read such a broad rule into the TriMark court’s holding, or if they continue to enforce the plain language of no-action clauses.”
Breach of “scared rights” provisions. The court initially found that the various prongs of the uptiering transaction represented a single transaction for the purposes of analyzing the impact on the plaintiff creditors’ “sacred rights” under the original credit agreement. While the court’s analysis is quite technical and a detailed breakdown is beyond the scope of this article, its bottom line is that “one reasonable way” to read the credit agreement is that the original credit agreement prohibits the defendants from placing any debt above the minority lenders’ position in the waterfall, “even if the order of the distribution…remains facially unaffected.” Accordingly, the minority lenders had a “plausible argument” that the transaction required their consent because it altered “the order of application of proceeds” by subordinating their interests to the superpriority loans.
Breach of the implied covenant of good faith and fair dealing. The minority plaintiffs argued that the defendants breach the good faith covenant implicit in all contracts under New York law. The court dismissed these claims, concluding that such claims are necessarily cabined by the express terms of the contract. Thus, if “the defendants were within their contractual rights to amend the Original Credit Agreement without Plaintiffs’ consent, that is the end of the story” and “the implied covenant cannot be used to impose obligations or restrictions going beyond what is set forth in the contract.”’ The court’s ruling here explicitly confirms a point that Professor Elisabeth de Fontenay made in a recent article in the LSTA’s Loans Magazine: “there is no actual substantive bite to the implied covenant of good faith and fair dealing in debt contracts among sophisticated parties”.
Tortious Interference with Contract. The minority lenders sued Trimark’s equity sponsors for “tortious interference with contract” arguing that Centerbridge and Blackstone orchestrated the transactions that led to the subordination of their loans. The court dismissed these claims, finding that the minority lenders did not show that “the sponsors acted without economic justification in procuring the alleged breach of the Original Agreement” The court noted that “a defendant may raise the economic interest defense” in response to a claim for tortious interference with contract”, and may act to protect its own economic interest. While the court’s analysis is technical and beyond the scope of this article, the court concluded that the economic interest defense bars the minority lenders’ claims since the sponsors’ economic interests were “closely aligned” with Trimark’s and they acted to protect the financial value of their stakes. The case was dismissed as to the sponsors since this was the only claim against them. If this decision stands, it is difficult to see how sponsors in similar uptiering transactions could be held liable.
Conclusion. This decision is important for a number or reasons. First, because claims brought in an “uptiering” liability management case survived a motion to dismiss. Whether it is appealed, litigated on the merits, or settled, it threatens to raise the costs for parties attempting such priming transactions. Second, the decision puts a dagger to the heart of the doctrine of implied covenants of good faith in sophisticated transactions such as syndicated loans. Third, the courts ruling on no-action clauses may cause market participants to rethink the contractual provisions contained in credit agreements. And, finally, the decision seems to provide a free pass to sponsors who orchestrate uptiering liability management transactions.
The LSTA will continue to follow this case and others that could significantly impact the loan market.