Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

The Bankruptcy StrategistLJN NewslettersNewsSections

CDOs Are Less Bankruptcy Remote than You Thought

By Todd L. Padnos and Paul S. Jasper

The recent decision of the United States Bankruptcy Court for the District of New Jersey in In re Zais Investment Grade Limited VII, No. 11-20243 (RTL), 2011 WL 3795169, *3 (Bankr. D. N.J. 2011) took many holders of collateral debt obligations (“CDOs”) by surprise. In Zais, the court denied a group of junior noteholders' motion to dismiss an involuntary bankruptcy case commenced by a group of senior noteholders for the admitted purpose of circumventing provisions of the underlying indenture that prohibited liquidation without junior noteholder consent. The decision flies against market assumptions that CDOs are structured to be bankruptcy remote and that the terms of the indenture, rather than the issuer's plan of reorganization, will determine the disposition of the collateral in the event of default.

Despite the initial shock occasioned by the result, the Zais decision is not surprising on its facts. Upon close examination, the decision is primarily the result of two features of the underlying indenture. First, the indenture did not prohibit senior noteholders from filing an involuntary bankruptcy petition. Second, the indenture did not require the issuer to oppose an involuntary petition. What is more surprising than the decision in Zais is that these features are common to CDO indentures. In the wake of Zais, this article proposes drafting solutions designed to protect junior noteholders in future transactions.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Bankruptcy Sales: Finding a Diamond In the Rough Image

There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.

Judge Rules Shaquille O'Neal Will Face Securities Lawsuit for Promotion, Sale of NFTs Image

A federal district court in Miami, FL, has ruled that former National Basketball Association star Shaquille O'Neal will have to face a lawsuit over his promotion of unregistered securities in the form of cryptocurrency tokens and that he was a "seller" of these unregistered securities.

Why So Many Great Lawyers Stink at Business Development and What Law Firms Are Doing About It Image

Why is it that those who are best skilled at advocating for others are ill-equipped at advocating for their own skills and what to do about it?

Blockchain Domains: New Developments for Brand Owners Image

Blockchain domain names offer decentralized alternatives to traditional DNS-based domain names, promising enhanced security, privacy and censorship resistance. However, these benefits come with significant challenges, particularly for brand owners seeking to protect their trademarks in these new digital spaces.

Coverage Issues Stemming from Dry Cleaner Contamination Suits Image

In recent years, there has been a growing number of dry cleaners claiming to be "organic," "green," or "eco-friendly." While that may be true with respect to some, many dry cleaners continue to use a cleaning method involving the use of a solvent called perchloroethylene, commonly known as perc. And, there seems to be an increasing number of lawsuits stemming from environmental problems associated with historic dry cleaning operations utilizing this chemical.