Article courtesy of Maggie Parker-Yavuz (Akin Gump) and Jake Gawlak (Akin Gump)
Bayside Cap. Inc. v. TPC Group Inc. (In re TPC Group Inc.), Docket Nos. 22-10493 (CTG), 22-50372 (CTG) (Bankr. D. Del. July 6, 2022)
Overview:
Minority holders of notes issued by chapter 11 debtor TPC Group Inc. under a 2019 indenture filed an adversary proceeding seeking a declaratory judgment that amendments to the indenture and an intercreditor agreement approved by super-majority holders, which subordinated the liens securing the notes as part of an “up-tiering” transaction, were in violation of the indenture. The Bankruptcy Court for the District of Delaware considered whether, under New York law, the indenture’s no-action clause precluded the lawsuits and whether the indenture permitted the super-majority holders to subordinate the liens. The court held that the no-action clause did not preclude individual holders from filing suit to enforce “sacred rights”, and that the express language of the indenture permitted the super-majority holders to amend the indenture and subordinate the liens securing the notes.
Full Summary:
In 2019, TPC Group Inc. (“TPC”), a Texas-based petrochemical company, issued $930 million of 10.5% senior secured notes (the “2019 Notes”) under a 2019 indenture governed by New York law. The 2019 Notes were secured by a first lien on substantially all of TPC’s assets. In 2021 and 2022, TPC issued a total of $204.5 million of 10.875% notes (the “10.875% Notes”) under a 2021 New York law indenture to purchasers holding more than 67% of the 2019 Notes. The 10.875% Notes were initially unsecured, but TPC and the purchasers intended for them to be secured by the same collateral as the 2019 Notes with a lien senior to the lien securing the 2019 Notes. In order to subordinate the 2019 Notes’ liens, various amendments to the 2019 indenture and a new intercreditor agreement were needed. The 2019 indenture permitted all or substantially all of the collateral for the 2019 Notes to be released with the consent of 66-2/3% of the holders. It also granted certain “sacred rights” to each individual holder, including a provision that changes to the provisions dealing with application of proceeds of collateral that would adversely affect the holders cannot be made without the consent of each holder affected thereby. In addition, the 2019 indenture contained a “no-action clause” precluding lawsuits by individual holders absent a decision by the holders of 25% of the 2019 Notes. The purchasers of the 10.875% Notes, holding more than 67% of the 2019 Notes, provided consents under the 2019 indenture authorizing amendments to the indenture and a new intercreditor agreement pursuant to which the 2019 Notes’ liens were subordinated to those of the 10.875% Notes.
In June 2022, TPC filed for chapter 11 bankruptcy and minority holders of approximately 10% of the 2019 Notes filed adversary proceedings seeking a declaratory judgment that the amendments to the 2019 indenture and the intercreditor agreement subordinating the 2019 Notes’ liens violated the terms of the 2019 indenture because they constituted adverse changes to the provisions dealing with application of proceeds of collateral that were not consented to by each of the holders of the 2019 Notes and, therefore, the liens securing the 2019 Notes are senior to those securing the 10.875% Notes.
In its analysis, the court first evaluated whether the 2019 indenture’s no-action clause barred the objecting minority holders’ suit. The court acknowledged the inconsistency between a contractual provision that grants a right to an individual holder (i.e., a “sacred right” requiring the consent of each holder) with a separate no-action provision that requires the consent of a larger percentage of holders to enforce that right. Citing New York precedent, the court held that, since the purpose of the “sacred rights” provisions is to ensure that certain rights of individual holders cannot be removed or amended without unanimous consent, the no-action clause does not operate to preclude the objecting minority holders from enforcing their rights with respect to adverse changes to provisions dealing with the application of proceeds of collateral.
Next, the court evaluated whether the amendments and intercreditor agreement were permissible under the express language of the 2019 indenture and, specifically, whether they changed any provisions “dealing with the application of the proceeds of collateral.” On this point, the defendant majority holders who approved the transaction argued that the only provision in the 2019 indenture dealing with the application of proceeds of collateral was the “waterfall” provision addressing how the indenture trustee should distribute monies it receives from collateral and other sources under the indenture, which the amendments and the intercreditor agreement did not modify. The plaintiff minority holders read the language more broadly and argued that any change that would put new debt ahead of the 2019 Notes with respect to a right to recover from the collateral deals with the application of proceeds of the collateral. In considering the parties’ arguments, the court noted that it is common for indentures to contain express anti-subordination clauses, but the 2019 indenture lacked one. The court found it telling that, while the 2021 indenture included the same consent language as the 2019 indenture, the 2021 indenture also included an additional provision specifically addressing anti-layering. The court also noted that, unlike many other “up-tiering” transactions, the majority consenting holders in this case retained their interests in the 2019 Notes following their subordination. The court reasoned that it would be inconsistent to read the 2019 indenture to permit a two-thirds majority to release all of the collateral but not to subordinate a lien on the collateral to that of another lender, since subordination of a lien is a less drastic intrusion on the rights of an individual holder than releasing all of the collateral. The court concluded that the indenture’s requirement for all-holder consent to changes to provisions dealing with the application of the proceeds of collateral was primarily directed at protecting holders’ rights to ratable treatment and that the provision should not be construed as an anti-subordination provision.
Lastly, the court considered whether the consents to the amendments and intercreditor agreement were ineffective because the 2019 indenture required the consent of the “Holders”, which was defined in the indenture as the “registered holders.” The court noted that consent was not obtained from the registered holders but rather from the beneficial holders. Based on the language in the indenture, the court held that, in the absence of an objection to the form of consent from the trustee, the 2019 indenture did not authorize other holders to assert a claim that the form of authorization was improper. The court also noted that, “in circumstances (such as here) where the distinction between registered and beneficial holders would elevate form over substance, New York courts have declined to enforce it.”
The court concluded that the 2019 indenture permitted the super-majority holders to amend the indenture and effect the intercreditor agreement subordinating the liens of the 2019 Notes, and the transactions and did not violate the rights of the objecting minority holders under the 2019 indenture.
