On November 8, 2018, the U.S. Bankruptcy Court for the Southern District of New York dismissed an involuntary petition filed against Taberna Preferred Funding IV, Ltd. ("Taberna"), a non-recourse collateralized debt obligation entity. The closely watched decision is significant in that noteholders of non-recourse securitizations will face obstacles if they attempt to invoke the involuntary bankruptcy process as a strategic tool to try to override bargained-for liquidation provisions in underlying transaction documents.
As described more fully in a Cadwalader Memorandum, the decision to dismiss the involuntary petition granted a motion filed by several of Taberna's junior noteholders who were resisting attempts by senior noteholders to use the chapter 11 process to liquidate Taberna's collateral in a manner inconsistent with the terms of the underlying indenture. The Court dismissed the senior noteholders' petition on the grounds that (i) the Petitioning Creditors did not have claims against Taberna and, as a result, were not eligible to file the involuntary petition and (ii) cause existed for dismissal.
Cadwalader, Wickersham & Taft LLP advised the Structured Finance Industry Group in connection with the case. Cadwalader argued via amicus brief that involuntary chapter 11 petitions against securitization vehicles such as Taberna (i) serve no reorganization purpose, (ii) violate public policy and (iii) were inconsistent with industry expectations that such vehicles are bankruptcy-remote.
Commentary / Michele Maman
This decision is important because it sends a strong message to the capital markets that noteholders of non-recourse securitizations will encounter material impediments if they try to invoke the involuntary bankruptcy process as a tool to override bargained-for liquidation provisions in underlying transaction documents.
The action taken by the Petitioning Creditors in filing the involuntary chapter 11 petition against Taberna was an attempt to undermine a foundation of the securitization industry, which is that securitizations are non-recourse vehicles that should be liquidated pursuant to pre-agreed terms in their respective transaction documents.
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