The firm achieved a groundbreaking victory in the U.S. Bankruptcy Court for the Southern District of New York when, on November 8, 2018, Judge Vyskocil issued an opinion dismissing an involuntary chapter 11 petition that had been filed against Taberna Preferred Funding IV (“Taberna”) – a collateralized debt obligation vehicle (or “CDO”).
On June 12, 2017, three senior noteholders – Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., and Real Estate Opps Ltd. – filed an involuntary bankruptcy petition against Taberna. The petition was opposed by Taberna, Taberna’s collateral manager, TP Management LLC, and five holders of junior classes of notes, including Quinn Emanuel’s clients Hildene Opportunities Master Fund II Ltd. and EJF Capital LLC.
Following five days of trial, the objecting parties moved for judgment as a matter of law, arguing that because the petitioning creditors held only secured nonrecourse claims under the governing indenture, they did not satisfy Bankruptcy Code section 303(b)’s eligibility requirements which require that a petitioning creditor hold an unsecured claim “against such person.” In subsequent briefing, the parties also argued that Taberna’s involuntary case should be dismissed for “cause” under section 1112(b) of the Bankruptcy Code because the filing did not advance a valid bankruptcy purpose and the petitioning creditors would not suffer any prejudice if the case were dismissed.
In a comprehensive 52-page opinion, the Court adopted virtually all of the arguments advanced by our clients and ordered dismissal of Taberna’s case. Focusing on the plain language of section 303(b), the Court held that the statue “requires that an involuntary petition be brought by at least three qualifying creditors and that each such creditor holds a claim against the target of the involuntary petition.” The Court agreed that “the Indenture explicitly provides that the Notes are nonrecourse,” and therefore concluded that because the petitioning creditors “hold claims against only the Collateral, and do not hold claims against Taberna” they failed to meet the eligibility requirements of section 303(b). The Court added that even if the petitioning creditors were eligible to file a petition under section 303(b), dismissal of the case was still warranted for “cause” under Bankruptcy Code section 1112(b). Specifically, the Court observed that the petitioning creditors had “in a very methodical and deliberate process, set out to force an accelerated liquidation” of Taberna, “solely for their benefit, and at the expense of other Note holders.” The Court emphasized that “[n]ot only is this involuntary petition fundamentally at odds with the purpose of securitization vehicles,” but “it also violates the spirit and purpose of the Bankruptcy Code.” The Court further reasoned that “allowing a party to force a CDO into bankruptcy at the expense of all [other] noteholders” would encourage other parties “to disregard bargained-for contractual remedies in an Indenture and pursue bankruptcy as a way to redefine the terms of the contracts they freely entered.”
The opinion represents not only a significant win for Taberna’s junior noteholders, but also for the CDO market as whole. Not only does the opinion establish new precedent that nonrecourse creditors are not eligible to file involuntary bankruptcy petitions under section 303(b), it strongly reinforces that CDOs (and other similarly structured finance entities) do not belong in bankruptcy.