Bank Of New York Mellon v. Realogy Corporation

Facts

The Bank of New York Mellon (P) is the indenture trustee for the 11.00%/11 .75% Senior Toggle Notes due 2014 (the “Senior Toggle Notes”) issued by Realogy (D). High River Limited Partnership (P) is controlled by investor Carl Icahn and purports to be a beneficial owner of an unspecified quantity of Senior Toggle Notes. Realogy Corporation (D) is a Delaware corporation with its principal place of business in New Jersey. D is a provider of real estate and relocation services and includes such well-known brands as Century 21, Coldwell Banker, and Sotheby's International Realty. D is the issuer of the Senior Toggle Notes. D was taken private by Apollo. Realogy issued a number of debt instruments to finance the transaction. The #1 position in its capital structure is a senior secured facility consisting of a $3.17 billion term loan facility (“Term B Loans”) and a $750 million revolving loan and letter of credit facility. These obligations are secured by a first lien on substantially all of the assets of D. The Credit Agreement also provides for an “accordion” feature which allows D to issue up to $650 million in additional term loans. These may be issued on either the same terms as the Term B Loans under the Credit Agreement or on such other alternative terms as JPM Bank should deem satisfactory. D has also issued several classes of notes. In the #2 position are $1.7 billion principal value of 10.50% Senior Notes due 2014 (the “Senior Cash Notes”) and the $582 million principal value of the aforementioned Senior Toggle Notes (collectively the “Senior Notes”). The Senior Cash Notes require cash payment of interest on a semi-annual basis. The Senior Toggle Notes allow the semi-annual interest payments to be paid-in-kind (“PIK”) with additional Senior Toggle Notes, effectively allowing D the flexibility to capitalize a portion of its interest expenses if it so chooses. The Senior Notes rank pari passu to the Credit Agreement indebtedness but are unsecured. In the #3 slot, D also issued $875 million principal value of 12.375% Senior Subordinated Notes due 2015 (the “Senior Subordinated Notes”), which are subordinated in right of payment to the Senior Notes and the Credit Agreement indebtedness. The Senior Subordinated Notes require semi-annual cash payment of interest and are unsecured. Both the Credit Agreement and the trust indentures governing the various notes contain negative covenants regarding the use of funds for the early redemption or refinancing of indebtedness. Because of the financial collapse of real estate markets in 2008, the Senior Cash Notes presently trade at just below 18 cents on the dollar, the Senior Toggle Notes at approximately 13 cents on the dollar, and the Senior Subordinated Notes at just below 12 cents on the dollar. D was taken private by Apollo. Realogy issued a number of debt instruments to finance the transaction. The #1 position in its capital structure is a senior secured facility consisting of a $3.17 billion term loan facility (“Term B Loans”) and a $750 million revolving loan and letter of credit facility. These obligations are secured by a first lien on substantially all of the assets of D. The Credit Agreement also provides for an “accordion” feature which allows D to issue up to $650 million in additional term loans. These may be issued on either the same terms as the Term B Loans under the Credit Agreement or on such other alternative terms as JPM Bank should deem satisfactory. D has also issued several classes of notes. In the #2 position are $1.7 billion principal value of 10.50% Senior Notes due 2014 (the “Senior Cash Notes”) and the $582 million principal value of the aforementioned Senior Toggle Notes (collectively the “Senior Notes”). The Senior Cash Notes require cash payment of interest on a semi-annual basis. The Senior Toggle Notes allow the semi-annual interest payments to be paid-in-kind (“PIK”) with additional Senior Toggle Notes, effectively allowing D the flexibility to capitalize a portion of its interest expenses if it so chooses. The Senior Notes rank pari passu to the Credit Agreement indebtedness but are unsecured. In the #3 slot, D also issued $875 million principal value of 12.375% Senior Subordinated Notes due 2015 (the “Senior Subordinated Notes”), which are subordinated in right of payment to the Senior Notes and the Credit Agreement indebtedness. The Senior Subordinated Notes require semi-annual cash payment of interest and are unsecured. Both the Credit Agreement and the trust indentures governing the various notes contain negative covenants regarding the use of funds for the early redemption or refinancing of indebtedness. The swaps would occur at the following prices in principal value; #3 notes, $277,477.484; #2 notes, $198,709.685; #1 notes, $212,030.086 in order to get $100,000 in the new class of notes. The new term loans would be pari passu to the existing indebtedness under the Credit Agreement as well as the Senior Notes. The #3 holders would be permitted to take $175 million of the new notes with the #2 holders up to $325 million and if any is remaining that could go to #1 holders. The security would give the holders of the new term loans an effectively higher priority in any potential bankruptcy proceeding than any of the Senior Notes or the Senior Subordinated Notes. The Trustee and High River (Ps) filed this complaint seeking a declaratory judgment that this arrangement was in violation of Section 4.12 of the Indenture. Before the court are motions for summary judgment. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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