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Junior Noteholders Successfully Petition for Dismissal of Involuntary Filing
In June 2017, affiliated holders of the most senior class of notes in a CDO known as Taberna Preferred Funding IV, a CDO that held various issues of trust preferred securities known as TruPS, filed an involuntary petition under the Chapter 11 of the Bankruptcy Code. That noteholders did so on the purported ground that the CDO was in default and in need of immediate reorganization in order to preserve value. That justification, however, was a ruse, put forward by the noteholders in an attempt prematurely to force liquidation of all the CDO's collateral in order to earn an extraordinary return at the expense of every other class of noteholders. The filing of the petition understandably prompted a group of junior noteholders, the collateral manager and an industry group vigorously to oppose the filing and to seek dismissal of the petition.
After months of discovery, expert reports and an eight-day trial spanning several months, the Bankruptcy Court in the Southern District of New York dismissed the petition with prejudice. See, In re Taberna Preferred Funding IV, Ltd., No. 17-11628 (MKV), 2018 WL 5880918 (Bankr. S.D. N.Y. Nov. 8, 2018). The bankruptcy court held that the noteholders were not eligible to file an involuntary petition under Chapter 11 because they were non-recourse secured creditors under the terms of the CDO's indenture and such creditors are not eligible under Section 303 of the Bankruptcy Code to file an involuntary petition.
Prompted by a recent ruling of the Court of Appeals for the Second Circuit (In re Murray, 900 F.3d 53 (2d Cir. 2018)), the bankruptcy court invoked a second, independent ground for dismissal, and exercised its discretion to dismiss the proceeding for cause. The court held that no bankruptcy purpose would be served by the filing and that, in fact, it would be “an injustice for the Court to find that the Petitioning Creditors, sophisticated business entities who analyzed and bargained for Taberna's current liquidation scheme, are prejudiced by the contractual terms and conditions they freely sought out and entered.”
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