Bankruptcy Court Enforces “No Action” Clause and Rules that Bondholders Lack Standing in Chapter 11 Case

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On August 28, Judge Burton R. Lifland of the Bankruptcy Court for the Southern District of New York held that an ad hoc group of bondholders did not have standing to object American Roads LCC’s plan or otherwise participate in its chapter 11 proceedings because the bondholders had delegated their rights to pursue remedies and take certain other actions under the applicable agreements to Syncora as bond insurer. In re American Roads LLC., Case No. 13-12412 (BRL) (Bankr. S.D.N.Y. August 28, 2013). The case involved what Judge Lifland described as a “unique financing structure known as an ‘insured unitranche,’” whereby all the secured claims are secured by the same lien under the same agreement with Syncora Guarantee as insurer. Judge Lifland reasoned that bankruptcy courts have routinely held that a party lacks standing to take action where, as here, the party is subject to a “no action” clause pursuant to which that party delegated its rights to a third party. Therefore, because the Court found that the prepetition intercreditor agreement that contained the no action clause was enforceable, the Court held that the bondholders did not have standing to participate in the debtors’ chapter 11 cases and overruled the bondholders’ objections to the debtors’ plan and disclosure statement. Judge Lifland’s decision demonstrates that courts will continue to enforce strictly prepetition no action clauses in bankruptcy, and that creditors cannot participate in bankruptcy cases solely on account of their status as a parties-in-interest where they are subject to a no action clause. Opinion.