Who is in control? The rights of noteholders and the discretion of the note trustee
The debate at the heart of US Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd and others was whether a distressed property portfolio should be sold at once or retained in the hope of realising a better price. Such disputes are by no means novel, particularly at times when property values have tumbled, but they can give rise to new issues in cases involving complex financial arrangements with multiple layers of borrowing. The importance of this decision is twofold. It has implications for noteholders who invest on the basis of the information provided to them by issuers as to their rights, and it also has implications for those acting as trustees obliged to enforce those rights.
In May 2007, Titan issued notes in order to fund the purchase of the senior ‘A’ tranche of a loan originally advanced by Credit Suisse, referred to as the ‘A Loan’. A note trustee was appointed in relation to the notes, which were divided into different classes ranked from A to E in descending order of seniority. The competing arguments heard by the judge were advanced on behalf of an anonymous ‘Class A’ noteholder, and Anchorage, the holder of ‘Class E’ notes.
The loan acquired by Titan (referred to in the documents as the ‘A Loan’, to distinguish it from subordinate tranches purchased by other lenders) was to be administered by a servicer under a servicing agreement. If breaches of the covenants in the loan took place, then a special servicer would take over management and decide whether to take enforcement action. The special servicer could be replaced by notice to the note trustee from the ‘controlling party’…
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