CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc.

CNH Diversified Opportunities Master Account, L.P. and others (collectively, minority noteholders) (plaintiffs) owned a minority of secured debt (notes) issued by Cleveland Unlimited, Inc. (Cleveland) (defendant) and guaranteed by certain Cleveland entities (guarantors) (defendants). Section 6.07 of the notes’ indenture provided that notwithstanding any other provision therein, the noteholders’ payments or payment-enforcement rights would not be impaired or affected without the noteholders’ consent. The indenture was not qualified under the Trust Indenture Act of 1939, but it incorporated language from §§ 316(a) and (b) of the act. Consistent with the act, § 6.05 of the indenture empowered the trustee to take any remedial action, including pursuing remedies under the Uniform Commercial Code (UCC), and permitted a majority of noteholders to direct the time, place, and manner of conducting a proceeding for exercising any trustee remedy. CUI Holdings, LLC (CUI) (which owned all Cleveland’s stock) subsequently guaranteed the notes and pledged its Cleveland stock as collateral. Thereafter, the holders of a majority of the notes (majority noteholders) tried to restructure Cleveland’s debt without obtaining unanimous noteholder consent by directing the trustee to strictly foreclose (pursuant to the UCC) on CUI’s pledged collateral and then distribute the collateral to the noteholders, thereby cancelling the notes and extinguishing the indenture. As directed, the trustee executed the strict foreclosure and distributed the pledged Cleveland stock to the noteholders. However, the minority noteholders sued Cleveland (which had been liquidated), the guarantors, and CUI for breach of contract, alleging that they were entitled to note payments and that their enforcement rights were impaired without their consent. Cleveland, the guarantors, and CUI responded that the strict foreclosure properly extinguished the minority noteholders’ rights. The trial court granted summary judgment against the minority noteholders, holding that the strict foreclosure did not violate § 316(b) of the act or indenture § 6.07’s equivalent language because it did not amend the indenture or prevent the minority noteholders from suing Cleveland. The appellate division affirmed. The minority noteholders appealed.