Posts by: Distressed Debt and Investments Team

Lender Fees At Risk?

A New York state court has voided a $1.3 million loan agreement to a corporate borrower because the loan agreement’s stated interest rate of 34% violated New York’s criminal usury law statute.

The loan agreement was governed by Virginia law, which doesn’t allow corporate borrowers to plead a usury defense. However, because this borrower was based and licensed in New York, the court found a sufficient nexus to New York to allow the state’s public interest against usurious contracts to void the agreement’s choice of law provision and enforce New York’s criminal usury law.

Specifically, the New York statute prohibits interest rates over 25% on loans between $250,000 and $2.5 million and permits voiding of such contracts. The court noted that under New York law, all consideration paid for a loan (including fees) count toward the 25% usury threshold.

This decision is relevant for smaller DIP loans governed by New York law or loans made to borrowers that have a connection to New York. If the interest and fees exceed this threshold, the contract would be void (i.e. if the money was already lent, the lenders would not their money back or the interest and fees).

Kirschner Court Adopts Fact Specific Analysis to Conclude That Loans Are Not Securities

The United States Court of Appeals for the Second Circuit recently affirmed the 2020 Kirschner v. JP Morgan Chase Bank, N.A. ruling that a secured $1.775 billion syndicated term loan to Millennium Laboratories LLC (Millennium) was not a security. The decision is great news for the loan market, but a slightly different set of facts could easily lead to a different decision. Read our key takeaways here.

Loan Trading 101: How to Ensure You Get It Right with Transfer Restrictions

If you know anything about syndicated loan trading, you probably know the basics of transfer restrictions.

New term lenders typically need the consents of the administrative agent and the borrower in order to be admitted to the syndicate. New revolving lenders usually need those consents, plus the consents of any banks that issue letters of credit or swingline loans. In many syndicated loan deals, that’s the entire universe of transfer restrictions.

But that isn’t always the case. Transfer restrictions vary from deal to deal. They may stay the same over the life of the loan or change over time. Debt exchanges, rights offerings, and other restructuring events can introduce new sources of transfer restrictions outside of the credit agreement.

Overlooked or misunderstood transfer restrictions can result in settlement delays, unexpected costs, and potentially litigation. That’s why it’s critical to do your diligence before you trade. In order to perform this task efficiently, you need to know where to look for transfer restrictions.

Where to Find Transfer Restrictions

The Credit Agreement

Most syndicated loan transfer restrictions can be found in the credit agreement, but there are several places within the agreement where transfer restrictions are most likely to be found. The most important of these is the successors and assigns provision. Consent requirements, minimum transfer amounts, and any notice requirements are usually set forth at or near the beginning of the section. In many credit agreements, those provisions will be the only restrictions on transfer. But there are many exceptions. For example, the successors and assigns provision often imposes limitations on assignments to the borrower, the sponsor (if there is one), and their respective affiliates. The credit agreement may prohibit assignments to such entities altogether, or it may require the parties to follow a special process or use a separate form of assignment and assumption to complete the transfer. Some credit agreements grant a right of first refusal to certain lenders. These provisions can be particularly troublesome because the LSTA standard terms do not address what happens to a trade if a third party exercises its right of first refusal. If the loans are convertible into equity, the successors and assigns section may set out additional requirements based on applicable securities laws. Pre-trade due diligence should always include a thorough review of the successors and assigns section.

The credit agreement’s definitions section may also contain transfer restrictions. Most notably, credit agreements often limit transfers to potential assignees that meet the definition of an “Eligible Assignee.” The definition may simply state that an “Eligible Assignee” is an assignee that satisfies the requirements set forth in the successors and assigns section. But in some cases, the “Eligible Assignee” definition will impose additional restrictions of its own. For example, the definition may require that the assignee be a commercial bank or a financial institution with assets in excess of a certain threshold. Eligible Assignee definitions also sometimes set forth the consent requirements for new lenders or describe the level of discretion the borrower or the administrative administrative agent may have in deciding whether to admit new lenders. Similarly, the definition of “Disqualified Lender” may exclude certain named entities or types of entities from becoming lenders. As Eligible Assignee and Disqualified Lender definitions often set forth restrictions that apply to certain entities and their “Affiliates”, the definition of “Affiliate” (or the lack of such a definition) may complicate things further. To the extent the definitions section contains transfer restrictions, it’s important to harmonize those restrictions with the ones set forth in the successors and assigns section and to resolve any ambiguities before trading.

Transfer restrictions may also appear elsewhere within the credit agreement. For instance, some credit agreements require borrowers to comply with a Dutch auction process when repurchasing loans. These requirements may be set forth in the definitions or in the successors and assigns sections, but they may also appear in other parts of the credit agreement or in the exhibits. In rare cases, ancillary credit documents like security agreements or intercreditor agreements may impose additional transfer restrictions beyond what is set out in the credit agreement.

Other Agreements

Restructuring support agreements (“RSAs”) are an increasingly common source of transfer restrictions outside of the credit agreement. RSAs are agreements under which a subset of lenders agrees to support a proposed plan of restructuring, often in conjunction with the borrower, sponsor, and other groups of creditors. To prevent dilution of the debt controlled by RSA parties, lenders who sign on to RSAs are usually prohibited from transferring loans unless the assignee is or becomes a party to the RSA. One common exception is that a “qualified marketmaker” (i.e., a broker-dealer or similar entity that is acting as a marketmaker) that is not a party to the RSA may buy and sell loans that are subject to the RSA, provided that the qualified marketmaker transfers the loans to an assignee that is or becomes an RSA party. In either case, one or both of the parties to a trade of RSA paper is usually required to notify the borrower, the sponsor, the other RSA parties, or some combination thereof within a fixed period of time before or after the transfer. Although the LSTA published model RSA transfer provisions several years ago, the market has not adopted them, and transfer restrictions and notice requirements vary from one RSA to another.

Occasionally, loans are required to be traded in tandem with equity or other types of interests. These types of arrangements are most common in the post-restructuring context. If the loans are stapled to common stock, the parties to a trade will need to comply with any restrictions on transfer imposed by the issuer’s articles of incorporation, bylaws, and shareholders’ agreement (if any). If warrants are stapled, the parties will also need to consider restrictions imposed by the warrant agreement. Bonds or litigation trust interests may also be stapled to loans and their governing documents may impose further restrictions.

Why Transfer Restrictions Are So Important

Failing to identify the applicable transfer restrictions before entering into a trade can have serious consequences. Settlement delays are the most likely result. And while settlement delays are common in the loan market, the risks they create should not be overlooked. The longer a trade remains unsettled, the longer each party to a trade is exposed to the other party’s credit risk. For the seller, settlement delays also mean additional exposure to the credit risk imposed by the borrower. Price fluctuations can change the parties’ economic incentives, making disputes and litigation more likely. When a trade is entered, the parties’ economic incentives are aligned in that they have chosen to enter into the transaction at the agreed upon price. If the market price changes significantly before the trade settles, the party that stands to realize a loss will have a greater incentive to find a way out of the transaction.

In some circumstances, missing a transfer restriction can give third parties the right to unwind a transfer. Most credit agreements do not include provisions that make a transfer done in violation of the credit agreement void or voidable. While a lender or credit party that is damaged by such a transfer may have a claim for breach of contract, the transfer itself would stand.

However, RSAs and certain other agreements among lenders routinely include language that makes a transfer void if it does not comply with all applicable transfer restrictions. The right to unwind such a transfer is often bestowed upon every party to the agreement, thereby creating a large pool of potential challengers to the effectiveness of a transfer. A transfer that is retroactively voided could create significant liability for the original seller and buyer because the unraveling could negate the buyer’s and/or its downstream purchasers’ rights to participate in a rights offering, vote on a plan of reorganization, or receive distributions. As the transfer restrictions contained in RSAs vary from agreement to agreement and often contain multiple notice requirements, the parties to a trade should take special care to understand and observe the applicable restrictions and procedures.


  • Perform your due diligence before you trade. The secondary loan market functions on the principle that a “trade is a trade.” In other words, if two parties agree to the material terms of a loan trade, then they have made a legally binding commitment to one another to settle the trade on the agreed terms, regardless of whether there is a signed agreement and regardless of what happens after the trade is entered. Discovering after the fact that the loans cannot easily be transferred is unlikely to excuse either party’s obligation to settle the trade under an LSTA trade confirmation. Traders need to know upfront which restrictions apply so they can make informed decisions about whether to enter into a trade and which terms should apply if they do trade.
  • Consider the drafting implications. If your pre-trade diligence identifies transfer restrictions that are not adequately addressed by the LSTA standard terms, those restrictions should be taken into account upfront when the parties agree to trade terms. Knowing which terms to include requires a mastery of the LSTA standard terms, as well as the credit documents and other applicable sources of transfer restrictions. Getting those terms into the agreement often requires close coordination among traders, closers, and legal counsel.
  • Periodically refresh your diligence. Credit agreement amendments, events of default, bankruptcy filings, updates to internal policies, and even the simple passage of time can affect which restrictions apply. Lenders and prospective loan purchasers should stay on top of developments that may affect a particular loan’s transferability. If you haven’t traded a credit recently, consider performing a fresh round of diligence before trading again.

The LSTA’s Updated DQ Structure: Loan Trading and Drafting Considerations

Earlier this month, the LSTA published a market advisory outlining some recent changes to the disqualified institutions provisions (the “LSTA DQ Structure”) set forth in the LSTA’s Model Credit Agreement Provisions (the “MCAPs”). As in previous iterations, the updated MCAPs contemplate that a borrower should have the discretion to create and periodically update a list of entities that are disqualified from becoming lenders or participants under the credit agreement (a “DQ List”). Under the updated MCAPs, entities included in the DQ List (“Disqualified Institutions”) consist of 1) any entities the borrower identifies to the arranger at or prior to the closing of the commitment letter and 2), any other entities the borrower identifies to the administrative agent from time to time that are competitors of the borrower or its subsidiaries, and 3) any affiliates of Disqualified Institutions under 1) or 2) that the borrower identifies to the administrative agent. Read our key takeaways here.

Loan Market Breathes a Sigh of Relief As SDNY District Court Finds Loan Are NOT Securities


On May 22, 2020, the loan market let out a collective sigh of relief as Judge Gardephe dismissed the Millennium Lender Claim Trust’s complaint alleging securities law violations related to the sale of loans. The central question considered was whether loan trading should be subject to securities laws. The loan market operates on the assumption that loans are not securities, and the LSTA and Bank Policy Institute sought authority for leave to file briefs as amicus curiae to support that position. The motion for leave to file was denied, thus heightening concern over the outcome. But the concerns turned out to be unwarranted. Rather than redefining the leveraged loan market, Judge Gardephe stuck with the status quo finding that the loans were not securities after applying the four prong Reves test, which considers: (i) the motivations of Seller and Buyer; (ii) the distribution plan for the loans; (iii) the reasonable expectations of the investing public and (iv) the existence of another regulatory scheme. The Court pointed to the fact that the documents used the terms “loan documents,” “loan,” and “lender” consistently throughout, instead of “investor” which “would lead a reasonable investor to believe that the Notes constitute loans, and not securities.” The Court also noted in light of the Banco Español case, where the Second Circuit affirmed the district court’s finding that because “the Office of the Comptroller of the Currency has issued specific policy guidelines addressing the sale of loan participations,” application of securities laws is unnecessary as another regulatory scheme exists. (Order at 21, citing Banco Español de Credito v. Sec. Pac. Nat. Bank, 973 F.2d 51 (2d Cir. 1992)). The Plaintiff has until June 5, 2020 to amend the complaint.

Plaintiffs Cannot Claim Creditor Status Retroactively


The Fifth Circuit Court of Appeals reminded the plaintiff that standing is “determined as of the commencement of the suit” and post filing claims purchases will not suffice to establish standing. Here, the plaintiff, [also the debtor’s owner], sought to appeal appointment of special counsel. The Bankruptcy Court found that the plaintiff lacked standing to object because he was not a creditor and did not have a stake in the estate and then approved the Trustee’s application to employ SBPC over the improper objection. The plaintiff filed an appeal and then purchased a proof claim in order to obtain creditor status. The Fifth Circuit agreed with the Bankruptcy Court and noted that “[o]nly those directly, adversely and financially impacted by a bankruptcy order may appeal it.” Standing is “determined as of the commencement of the suit and a plaintiff cannot belatedly claim creditor status and establish standing retroactively.”

Ninth Circuit Holds Protecting a Claim To Its Fullest Extent Is Not Evidence of Bad Faith


The Ninth Circuit Court of Appeals recently held that a secured creditor’s purchase of general unsecured claims to block confirmation of a Chapter 11 plan did not in itself constitute bad faith. In In re Fagerdala USA, the debtor owned real property on which Pacific Western Bank held the senior secured claim. The debtor’s plan of reorganization sought to impair Pacific Western’s claim by using an interest rate lower than the penalty interest rate for its loan, and modifying the length of the term and other loan provisions. Under section 1129(a)(10) of the Bankruptcy Code, in order to approve a plan over the objections of impaired creditors, a debtor is required to obtain the consent of at least one impaired class. In order to ensure that this debtor would not receive such consent, Pacific Western attempted to strategically buy up a sufficient amount of general unsecured claims—the only other impaired class—to block the plan. While Pacific Western did not seek to buy every general unsecured claim, it was able to purchase “one-half in number” of the general unsecured class, and was thus able to block the approval of the plan.

After the plan vote, the debtor moved to designate the votes Pacific Western cast on behalf of its general unsecured claims, arguing that Pacific Western purchased those claims in bad faith. To “designate” means the votes for the claims will not be counted in voting to accept or reject the plan. The bankruptcy court granted the debtor’s motion, concluding that “designation is appropriate in this case because [Pacific Western] will have an unfair advantage over the unsecured creditors who did not receive a purchase offer and who hold the largest percentage of claims…in terms of amount.” The district court affirmed this ruling, but the Ninth Circuit reversed it and remanded the case to the bankruptcy court.

The Ninth Circuit reasoned that “merely protecting a claim to its fullest extent cannot be evidence of bad faith. There must be some evidence beyond negative impact on other creditors.” Looking to case law, the court enumerated several clear examples of bad faith such as where a competitor purchases claims to destroy the debtor’s business or further its own or a non-preexisting creditor purchasing claims only to block the plan and then stated “[d]oing something allowed by the Bankruptcy Code and case law, without evidence of ulterior motive, cannot be bad faith. Not offering to purchase all the claims in a class (to later use those claims to block a plan) is not—alone—sufficient to evidence the bad faith necessary to designate votes under § 1126(e).”

Diligence Deferred Is A Transfer Denied

The Delaware Bankruptcy Court recently voided the transfer of bankruptcy claims where the seller failed to obtain the debtor’s prior written consent, as required by the underlying promissory notes.

Both the promissory notes and the related loan agreement included anti-assignment language providing that any transfer would be null and void unless the debtor provided its prior written consent. In spite of this restriction, the note holders transferred the notes to buyer without obtaining the debtor’s consent. When buyer filed a proof of claim based on the transferred notes, the debtor objected, arguing that the transfer was null and void because the debtor never consented.

Buyer first argued that the anti-assignment clause could not invalidate the transfer as a matter of Delaware law. In holding to the contrary, the court distinguished between anti-assignment clauses that merely limit a party’s “right” to assign from clauses that limit a party’s “power” to assign. Delaware courts will invalidate transfers under a contract where such contract includes an anti-assignment clause that provides any assignment made in violation of the clause will be null and void (e.g. limitation of “power” to assign), but will not invalidate transfers where the contract’s anti-assignment clause does not so provide (e.g. limitation of “right” to assign). The court held that the anti-assignment clauses in Woodbridge properly restricted the noteholders’ power to assign the notes because they provided for voiding any transfer made in violation thereof. Thus, invalidation of the transfers pursuant to the anti-assignment clauses was proper.

Buyer next argued that the anti-assignment clauses unenforceable either because of debtor’s breach of the agreement or because of UCC §9-408. The court disagreed holding “it is axiomatic that a non-breaching party may not emerge post-breach with more rights than it had pre-breach.” Accordingly, the anti-assignment clause remained attached to the promissory notes because “neither the [assignors] nor any assignee were able to emerge post-breach with more rights than they had pre-breach.” The Court then found UCC §9-408, which invalidates provisions restricting assignment in grants of security interests, inapplicable because Contrarian was not granted a security interest in the promissory notes.

Buyer then asserted that even if the anti-assignment clauses were both valid and enforceable they did not apply because the noteholders only transferred their rights under the notes and not the notes themselves. The court disagreed holding that “[t]he language of both the Anti-Assignment Clause and the Loan Agreement manifests both a clear intention to forbid the assignment of the Promissory Note itself, and any rights thereunder.”

While not breaking new ground, the case reinforces the court’s view that “claim purchasers are sophisticated entities that are capable of both assessing the risk of disallowance through due diligence, and mitigating that risk through contractual provisions, such as indemnities.” It also serves as a reminder that reviewing the underlying documents for transfer restrictions is a critical part of a claim purchaser’s due diligence. While not clear from the decision whether settling the transfer via participation would have overcome the disability, it is good practice to include a “participation savings clause” that takes effect if an assignment is deemed invalid. Finally, what is also not clear is whether the result would have been different if the seller had filed a proof of claim before or in conjunction with the transfer.

The Limited Power and Authority of Bankruptcy Judges: Wellness International Network, Limited v. Sharif

In January, the U.S. Supreme Court heard oral argument in Wellness International Network, Limited v. Sharif, an appeal of a decision by the U.S. Court of Appeals for the Seventh Circuit in Chicago. The ruling by the Supreme Court could have significant consequences for the constitutional power and authority of the bankruptcy courts and magistrates. Wellness stems from a dispute about the authority of bankruptcy judges to issue final judgments on claims against a bankruptcy estate that involve State-law rights. Bankruptcy judges routinely resolve State-law issues in their judgments. This appeal raises a question of constitutional law that could significantly alter the operations of bankruptcy courts and magistrates.