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Keywords

lender violence; uptier; liability-management transaction

Abstract

In recent years, lender violence has become the preferred term for a rapidly developing restructuring market centered on the premise that a subset of lenders in a syndicate can increase their own recovery prospects at the expense of the remaining lenders in their group by engaging in a so-called “liability-management transaction.” This term evokes images of rival factions of corporate lenders engaging in physical combat. Although these hyper-technical restructurings certainly fall short of the barbarity the label suggests, the reality is that lenders participating in the so-called violence can siphon hundreds of millions of dollars away from nonparticipating lenders and into their own pockets.

These transactions vary widely in structure as inventive borrowers push loan agreements to their limits. This Note explores the mechanics of several common types of liability-management transactions and identifies New York contract law as a motivating factor in their development. New York’s aim in selecting its interpretive regime was to incentivize commercial parties to litigate in New York. The New York State Court of Appeals adopted a textualist interpretive regime in pursuit of this goal. Because liability-management transactions are engineered to comply with the letter but not the spirit of their agreement, they depend on textualism to succeed.

This Note calls for a limited revival of the implied covenant of good faith and fair dealing, first developed in early twentieth-century New York law, to arm courts in policing lender violence. These transactions certainly have the potential to be abusive if they are not already. This Note identifies a recent trend in the Appellate Division of the New York Supreme Court enforcing the implied covenant claim in intercreditor disputes. Finally, this Note argues that this trend is instructive, and courts should evaluate the reasonable expectation of parties and the commercial reasonableness of the particular transaction.

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