United States: Bankruptcy Court Rejects Involuntary Chapter 11 For CDO

A bankruptcy case is usually commenced by the debtor, but the Bankruptcy Code permits creditors to seek to place a debtor into bankruptcy involuntarily, where certain statutory conditions are met. Recently, the bankruptcy court for the Southern District of New York rejected an attempt by certain creditors (the "Petitioning Creditors") to place a financing vehicle known as a collateralized debt obligation, or CDO, into involuntary chapter 11 bankruptcy. See Taberna Preferred Funding IV, Ltd. v. Opportunities Fund II Ltd., et al. (In re Taberna Preferred Funding IV, Ltd.), No. 17-11628 (MKV), 2018 WL 5880918 (Bankr. S.D.N.Y. Nov. 8, 2018).

The Petitioning Creditors held senior notes issued by Taberna, which the court found were nonrecourse (i.e., the Petitioning Creditors had agreed to look solely to the collateral securing their notes). Taberna and certain junior noteholders sought dismissal of the petition on a number of grounds. The court addressed one of these grounds, that the Petitioning Creditors, as nonrecourse claimants, did not hold claims against Taberna as required under Section 303 of the Bankruptcy Code. Additionally, pursuant to Wilk Auslander LLP v. Murray (In re Murray), 900 F.3d 53 (2d Cir. 2018), the bankruptcy court issued an order to show cause on whether it should dismiss the Taberna petition for cause under Section 1112(b) of the Bankruptcy Code. The court ruled against the Petitioning Creditors on both grounds.

First, the court concluded that the Petitioning Creditors, as nonrecourse claimants, were not eligible to file the involuntary petition, because Section 303(b)(1) of the Bankruptcy Code permits an involuntary petition to be filed against a person by a "holder of a claim against such person." The court concluded that the notes held by Petitioning Creditors were nonrecourse, and Taberna had no personal liability for the notes.

The Petitioning Creditors relied on two provisions of the Bankruptcy Code to argue that the recourse/nonrecourse distinction was irrelevant for purposes of Section 303. First, Section 102(2) of the Bankruptcy Code provides that the phrase "claim against the debtor" in the Bankruptcy Code includes a claim against property of the debtor. Second, Section 1111(b) of the Bankruptcy Code provides that a secured claim is generally allowed or disallowed in chapter 11 as if the holder had recourse to the debtor. The court concluded that neither section applied. Section 303(b) uses the phrase "claim against such person," so Section 101(2)'s guidance on the meaning of the phrase "claim against the debtor" was inapplicable. The issues arising from Section 1111 regarding allowance and secured status of a claim inhere in the chapter 11 process itself, and do not apply to the question of whether a company should be placed into chapter 11 in the first place.

Second, the court ruled that even if the Petitioning Creditors were eligible under Section 303(b), the case should be dismissed for cause pursuant to Section 1112. The court concluded that "cause" is a fact-specific inquiry that can consider whether the filing is an appropriate use of the Bankruptcy Code. Thus, a petition that seeks to benefit all creditors by creating or preserving value and ensuring equal distribution to creditors is consistent with the objectives of chapter 11. Here, in contrast, the court concluded that the purpose of the filing was to liquidate the collateral solely for the benefit of the Petitioning Creditors, in contravention of the indenture and at the expense of other noteholders. Taberna was a financing vehicle that held securities for the purpose of generating cash flow to pay noteholders in accordance with the indenture. It did not have any operating business to rehabilitate in chapter 11. The filing of the petition followed extensive efforts by the Petitioning Creditors to liquidate their collateral, which were unsuccessful outside of bankruptcy because of bargained-for limitations in the indenture (which set forth a process for management and liquidation of the remaining portfolio and distribution of losses among the noteholders).

Far from a legitimate attempt to rehabilitate the debtor, the court concluded, the case was "nothing more than a last-ditch effort by a senior sophisticated noteholder to further its personal, tactical and pecuniary aims and to coerce redemption of its notes to the detriment of junior creditors." Taberna, 2018 WL 5880918 at *22 (emphasis in original). If these "tactics were permitted and rewarded with an entry of an order for relief, this would create significant uncertainty across the capital markets." Id. at *23.

While the Section 303 statutory analysis in Taberna is interesting, the greater impact of the decision is likely to be the analysis and ruling on Section 1112. As noted by the court, a CDO is a "bankruptcy remote" structure, in which the creditors of the entity - the noteholders - negotiate their respective rights and remedies. It is not an operating business with numerous, diverse creditor groups. In this context, permitting one group of noteholders to employ chapter 11 to rewrite their contract to the detriment of other noteholders is problematic, and the Taberna decision sends a clear signal that such tactics are not likely to prevail. The decision may therefore find application in other structured finance situations where all the creditors have contractually agreed on a process for liquidation and distribution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions