• Court of Chancery Declares that a Proposed Refinancing of Unsecured Indebtedness Violates an Indenture
  • December 21, 2009
  • Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
  • In Bank of New York Mellon v. Realogy Corp., C.A. No. 4200-VCL (Dec. 18, 2008), the Court of Chancery, applying New York law, ruled that an attempt by defendant Realogy Corporation ("Realogy") to refinance a large amount of unsecured indebtedness would violate an indenture governing certain senior securities. The Court issued a declaratory judgment to that effect in favor of plaintiff The Bank of New York Mellon, as Trustee under the indenture (the "Trustee").

    While being taken private in April 2007, Realogy issued a number of debt instruments, including certain senior debt, secured by a first lien on substantially all of Realogy's assets, incurred pursuant to a credit agreement (the "Credit Agreement"). At the same time, Realogy issued several classes of notes, including the "Senior Cash Notes" and the "Senior Toggle Notes" (collectively, the "Senior Notes"), which rank pari passu with the Credit Agreement indebtedness but are unsecured. While the Senior Cash Notes are paid in cash, the Senior Toggle Notes allow Realogy to pay interest in kind with additional Senior Toggle Notes.

    Realogy had fallen on hard times, and its Senior Notes were trading at less than 20 cents on the dollar. Therefore, in November 2008, Realogy announced a proposed debt refinancing. The proposed refinancing invited all eligible noteholders to participate as lenders under a new $500 million term lending facility to be secured by a second lien on substantially all of Realogy's assets. In lieu of cash, the noteholders would fund their obligations by delivering their existing notes. Thus, existing unsecured lenders would be able to turn in their old notes for secured debt, while Realogy would emerge with a substantially smaller debt load. Significantly, while the new term loans would be pari passu to both the Credit Agreement indebtedness and the Senior Notes, they would be secured--unlike the Senior Notes.

    Holders of the Senior Toggle Notes objected and demanded on November 24 that Realogy not go forward with the proposed refinancing. Realogy persisted, and the Trustee filed suit on November 26. A motion to expedite was granted, and the parties filed cross-motions for summary judgment.

    The parties' dispute rested on the terms of the Credit Agreement. The indenture governing the Senior Toggle Notes (the "Indenture") restricts Realogy's ability to grant or suffer the existence of liens, unless those liens fall within the definition of "Permitted Liens." The definition of Permitted Liens in the Indenture includes liens created under the Credit Agreement. The parties disputed--and the Court therefore had to answer--the question whether Realogy's proposed transaction was permitted by the Credit Agreement.

    The Trustee advanced two arguments in support of its position that the proposed transaction was not permitted by the Credit Agreement: First, it asserted that the proposed loans could not be "Loans" under the Credit Agreement because they were not to be funded in cash, but in notes. Second, the Trustee argued that the proposed refinancing was prohibited by certain negative covenants in the Credit Agreement. The Credit Agreement and the Indenture are both governed by New York law, which the Court applied in addressing the Trustee's arguments.

    With respect to the Trustee's first argument, the Court found uncompelling the argument that the plain meaning of the term "loan" did not permit for the funding of borrowings other than in cash. The Court was similarly unpersuaded by the Trustee's argument that provisions of the Credit Agreement referring to loans in terms of quantities of currency and referring to bank accounts prevented loans issued under the Credit Agreement from being funded with non-cash contributions.

    The Court was persuaded, however, by the Trustee's argument under another provision of the Credit Agreement. Section 6.09(b) of the Credit Agreement addresses limitations on Realogy's right to make payments on the Senior Notes. Section 6.09(b)(1) flatly prohibits any payment of principal or interest, or any distribution of property in redemption or exchange for the Senior Notes--unless a specific exception exists. An exception does exist for "Permitted Refinancing Indebtedness," which would have allowed Realogy's proposed transaction but for one feature: it prohibited the granting of greater security to the Permitted Refinancing Indebtedness than that afforded to the Senior Notes. Determining that a proffered interpretation of a proviso to that prohibition would have caused its applicability to be overbroad, the Court held that the Trustee's interpretation of the Credit Agreement was the better one.

    Accordingly, the Court held that the proposed refinancing would not be Permitted Refinancing Indebtedness, therefore destroying the exception to Section 6.09(b)(1) prohibiting distributions of property in redemption or exchange of the Senior Notes. Because Section 6.09(b)(1) prohibited the proposed refinancing, Realogy's proposed liens were not permitted by the Credit Agreement and therefore were not Permitted Liens under the meaning of the Indenture. Accordingly, the Court granted the Trustee a declaration that the proposed refinancing would constitute a breach of the Indenture.1

    In a final footnote, however, the Court noted that the terms in the Credit Agreement prohibiting Realogy's refinancing could be amended without the consent of the Trustee or the holders of the Senior Toggle Notes.

    1Corporate litigators should take note of the speed at which this case was litigated and decided. The complaint was filed on November 26. The Court granted expedited treatment on December 1, and the answer was filed on December 8. The parties filed simultaneous opening and answering briefs on December 9 and 14, respectively. Oral argument was held on December 15, and on December 18--only 22 days after the suit was filed--the Court of Chancery issued its opinion.