Bank of New York v Montana Board of Investments & Anor

A security agreement may require a security trustee to enforce security for senior creditors without giving those creditors power to dictate the time, place or manner of sale. Where the agreement gives the trustee exclusive control and discretion, that discretion must be exercised within the contractual framework, including subordination provisions, the purpose of the security and any requirement of commercial reasonableness. Following mandatory acceleration, a provision requiring collection of collateral proceeds does not necessarily require immediate liquidation or prescribe a specific sale date. Any sale must comply with the agreement’s provisions governing sales and with applicable mandatory requirements of the New York Uniform Commercial Code.

The claimant was the security trustee for a Cayman Islands structured investment vehicle. The defendants represented senior noteholders and senior subordinated noteholders. Following enforcement events and a mandatory acceleration event, the senior noteholders directed the trustee to commence a prompt sale of the collateral, while the subordinated noteholders directed it not to liquidate the collateral.

The claimant sought construction of the security agreement under New York law. The questions were whether senior creditors could direct the time, place and manner of sale, what obligations would arise from such a direction, and whether the agreement required liquidation at a specified time after mandatory acceleration where available funds were insufficient.

1. The senior creditors had no power to specify the time, place or manner of sale. The agreement distinguished between the trustee’s obligation to enforce the security and the manner in which that obligation was to be performed. The relevant provisions preserved only rights expressly conferred elsewhere in the agreement. They did not create a general power to direct the trustee’s execution of enforcement.
2. Section 5.6.1 gave the trustee exclusive control and the exclusive right to deal with the collateral. It authorised the trustee to preserve or sell collateral at such place or places as it deemed best, subject to conducting any sale in a commercially reasonable manner. Those provisions were inconsistent with a power in the senior creditors to override the trustee’s judgment.
3. The trustee’s discretion was not unfettered. It had to enforce consistently with the full subordination of the subordinated creditors’ rights, bear in mind the purpose of the security to secure prompt payment when due, and take account of the senior creditors’ resolution that the security should be enforced.
4. The second question did not arise because the asserted direction-making power did not exist. The court declined to answer it hypothetically.
5. Section 5.5 did not prescribe a specific timing for liquidation following mandatory acceleration and insufficient funds. The requirement to collect collateral proceeds could be satisfied by receiving income or selling assets, depending on the circumstances. Any sale undertaken for section 5.5 purposes had to comply with section 5.6.1. An implied obligation to sell as soon as reasonably practicable would conflict with the agreement and risk undermining the mandatory commercial-reasonableness requirement in Articles 9-610 and 9-602(g) of the New York Uniform Commercial Code.

Questions 1 and 3 were answered accordingly; question 2 was not answered.