Top Ten Document Concerns for Indenture Trustees

Risk Mitigation & Document
Issues Facing Indenture
Presented By:
David Fernández
Always Remember the Three Monkeys:
Hear No Evil, See No Evil, Speak No Evil
Hear No Evil
Discretion over Investments
• What to avoid: Trustee discretion or responsibility
over investment selection (even if exculpated from
loss) of funds held in trust accounts (and related
“Eligible Investments” or “Permitted Investments”
– Example: “Funds held in the [_____] Account shall be
invested in Eligible Investments selected by the Trustee…”
or “Funds held in the [_____] Account shall be
invested in Eligible Investments selected by the
Borrower or, if the Borrower shall fail for three (3)
consecutive Business Days to so instruct the
Trustee, by the Trustee.”
– This is unacceptable language!
Discretion over Investments
Dodd-Frank Act’s Definition of “Municipal Advisor”
Pursuant to the Dodd-Frank Act, Section 15B of the Securities Exchange Act of
1934 provides for the registration and regulation of “municipal advisors”
Section 15B(4)(e) defines the term “municipal advisors” in part:
(4) the term “municipal advisor” –
(A) means a person (who is not a municipal entity or an
employee of a municipal entity) that –
(i) provides advice to or on behalf of a municipal entity or
obligated person with respect to municipal financial
products or the issuance of municipal securities,
including advice with respect to the structure, timing,
terms, and other similar maters concerning such financial
products or issues …” (emphasis added)
Discretion over Investments
While the Rule is not explicit when it comes to the inclusion of Trustees, the
definition does contemplate the regulation of the following persons with respect
to municipal entities and obligated persons:
- Persons that provide advice with respect to guaranteed investment
contracts and investment strategies
- Persons that provide advice with respect to municipal derivatives
It is the inclusion of “on behalf of” in the definition which should give us pause.
The inclusion of these words indicates advice for another person in their best
interests, as contrasted with advice solely at an arms length. It is unclear how
the SEC will rule on the terms, but we should be wary of how we approach our
relationships and avoid circumstances which could be interpreted as a variation
away from our typical trustee roles and into one of “municipal advisor.”
Discretion over Materiality
• What to avoid:
Terms calling for
“Material adverse affect on bondholders”
to be determined by the Trustee.
– Example:
permitting amendments meeting stated criteria,
followed by something like: “Notwithstanding any
term hereinto the contrary, the Trustee shall not
enter into any amendment having a material
adverse effect on bondholders.”
• The Solution is to always receive direction from
another party.
See No Evil
Affirmative Review of
• What to avoid: Responsibility to affirmatively
review or evaluate the terms or mechanics of
the agreement (i.e. construction fund
requisitions) or to exercise discretion
regarding the same.
– Example:
Terms allowing withdrawal upon
requisition “approved by the Trustee” or “in form
and content acceptable to the Trustee” or “upon
such requisition and supporting materials as the
Trustee may require” or calling for surveys, title
reports, etc to be “acceptable to the Trustee or as
it may require.”
– The Fix: NEVER accept this role.
Affirmative Review of Documentation
• What to avoid: Responsibility to affirmatively review or
evaluate borrower financial reports, management reports,
rebate certificates or continuing disclosure reports.
– Example: Terms stating or implying review or approval by the
Trustee, or calling for the same to be “in form and content
acceptable” to the Trustee; or failing to state affirmatively that
the Trustee is not under a responsibility to review or examine the
– The Fix: Never
accept the
responsibility to
find form and
content acceptable.
Speak No Evil
Waiver of Bondholder Rights
• What to avoid: The Trustee may waive any Event of
Default hereunder and its consequences and rescind any
declaration of maturity of principal of and interest on the
Bonds; provided however that the Trustee shall not waive
any Event of Default, if there is a draw under a Credit
Facility until such time as the stated amount of the Credit
Facility shall be reinstated.
– Correct Language: The Trustee may waive any Event of
Default hereunder and its consequences and rescind any
declaration of maturity of principal of and interest on the
Bonds upon the written request of the Owners of a
majority in aggregate principal amount of all the Bonds
then Outstanding; provided however that the Trustee shall
not waive any Event of Default, if there is a draw under a
Credit Facility until such time as the stated amount of the
Credit Facility shall be reinstated.
Waiver of Bondholder Rights
Novation requests
Be aware of recent requests by insurers for novations with
respect to their transfers to successor insurers. Many of
these requests contain blanket waivers of the resigning
insurer and “inadvertent” gaps created by the obligations
assumed by the new insurer. Here’s an example:
“By signing this Certificate of Consent to Transfer, as the
duly authorized representative of the Bondholders, you
hereby consent and agree on behalf of the Bondholders:
(1) To the transfer by X to Y (the “Transfer”) and the
assumption by Y from X (the “Assumption”), of all of
X’s rights, title and interest and all future liabilities and
obligations, in, to and under the Policy; …”
If you consent, you have consented to a gap in coverage
without obtaining Bondholder consent, potentially
exposing the Trustee to large liability claims.
UCC Perfection
• Stated or Implied Responsibility for
Initial UCC Perfection
– What to avoid: “The Trustee shall take such action
as may be necessary to perfect the security interest
granted hereunder” or “The Trustee shall prepare
and file the Initial UCC Statements, and shall take
such other actions, as may be necessary to
perfect and priority of the security interests
granted hereunder.”
– It is permissible and standard practice to have the
Trustee prepare and file the UCC Continuation
Trustee as “Lender”
• What to avoid: Terms treating
the Trustee as a “Lender”
exercising business discretion
administration of a loan (unless
accompanied by a clear
objective standard
to apply):
Example: Covenants prohibiting
or restricting actions “unless
consented to by the Trustee”
or allowing actions “upon
such terms as the Trustee
may approve” or calling for
required opinions or similar
deliverables to be “as may be
required by the Trustee.”
Add language stating
the Trustee is acting
solely in its capacity as
the Trustee.
Standard of Care
• Avoid any deviation from the
commonly accepted pre-default (strictly contractual)
and post-default ("prudent person“) Trustee standard
of care.
– Example: “The Trustee shall take whatever action is necessary
to protect the interests of Noteholders.”
– The correct statement should read: “Except upon the
occurrence and during continuance of an Event of Default the
Trustee shall have only such duties as are expressly set forth
in the Indenture… Upon the occurrence and during
continuance of an Event of Default, the Trustee exercises
such of the rights and powers vested in it by the Indenture,
using the same degree of care and skill in their exercise, as a
prudent person would under the circumstance in the
conduct of his or her own affairs.”
Jurisdiction &
Governing Law
• Governing Law of Documents
& jurisdiction of lawsuits
(these must match)
1. New York Law
2. The law of any State in which the Trustee has an
3. The law of the State of the Issuer of the Bonds
• Helpful Tip: Always check companion documents
to transactions (i.e. Deposit Account Agreements),
sometimes those Third Party Providers may try to
slip in foreign or other state laws (which may be
more bank friendly) as governing law. Do not
accept this!
Jurisdiction & Governing Law
• Arbitration
– The Trustee should never accept a provision
limiting its remedies in arbitration, nor should
it ever have to accept arbitration as the only
means for dispute resolution.
• Trial by Jury
– This right should be
waived by ALL parties.
Lack of appropriate indemnification, expense recovery
or charging lien. Trustee should be provided complete
indemnification from any expense, loss and liability
(including attorneys fees and expenses) incurred in the
acceptance or performance of its duties or
administration of the trusts which it has been charged to
administer (often qualified to exclude losses caused by
its own [gross] negligence or willful misconduct);
recovery of amounts owing to the Trustee should be
included as a secured obligation in all granting
language; and Trustee should be granted a charging
lien ahead of bond holders.
Save yourself a headache later,
and watch out for provisions like
In the event the Trustee incurs
expenses or renders services in the
course of performing its duties
hereunder, the Trustee shall apply
to the Borrower for reimbursement
under Section [___] of the
The correct language should read:
“The Borrower has covenanted and
agreed, pursuant to the Agreement to
pay to the Trustee compensation for
all services rendered by it hereunder
and under the other agreements
relating to the Bonds to which the
Trustee is a party in accordance with
the terms agreed to from time to time,
and, subsequent to default, in
accordance with the Trustee’s thencurrent fee schedule for default
administration (the entirety of which
compensation shall not be limited by
any provision of law regarding
compensation). The Trustee shall
have a lien prior to the lien securing
the Bonds, which it may exercise
through a right of setoff, upon all
property or funds held or collected by
the Trustee pursuant to this
Terms to Identify & Remove
• The Trustee must NEVER give any
indemnification to another party
– Example:
[From a Deposit Account Control Agreement
“. . . To the
extent such obligations of indemnity are not
satisfied by Company within five (5) days after
demand on Company by Bank, Secured Party
will indemnify.”
where the Trustee is the Secured Party]:
• Complete removal from the document is the
suggested action.
Terms to Identify & Remove (Continued)
• “Sovereign Immunity”
– Example: From time to time, Issuer’s will
affirmatively state their sovereign immunity as
a quasi-governmental agency.
– To fix this statement, the Trustee has two
• Complete removal of the statement
• Add a waiver with respect to the Trustee
Absence of Trustee Protections
• There should be an express recitation of the standard,
commonly accepted Trustee immunities and protections,
such as: Trustee ability to rely on documents it receives in
good faith without investigation; ability to receive and rely on
advice of counsel; not liable for errors of judgment unless
negligent in ascertaining facts; not obliged to take action
unless indemnified to its satisfaction against expense and
liability (including attorney’s fees); etc.
– Example: The correct language should always include:
“The Trustee is not required to make any inquiry or
investigation into the facts or matters stated in any
resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent,
order, approval, bond, debenture or other paper or
document other than those created by the Trustee.”
Trustee Resignation
• Limitations to the time period in which a
successor will be appointed after resignation
or removal of the Trustee are important
– 60 Day Maximum
– The Trustee must have the right to petition a court
of competent jurisdiction to appoint a successor (at
the expense of another party such as the Issuer or
the Borrower)
Implied or Express terms of
Responsibility for Tax-Exempt Qualification
•Example: “Notwithstanding any term herein to
the contrary, the Trustee will not take any action
that would cause interest on the bonds to fail to
be exempt from federal taxation.” Or similar
terms, in different contexts.
– The best solution is to remove this language
Notice Via Electronic Means
Helpful Tips
1. Be vigilant as to how notices are permitted under
the documents
2. The Trustee can agree to accept and act upon
instructions or directions sent by unsecured e-mail,
facsimile transmission or other similar unsecured
electronic methods as long as the Trustee is
3. Many types of language can be acceptable, but be
careful that the language is not too generic.
Notice Via Electronic Means
Specific Language to include:
– The Party giving directions to the Trustee must
provide an incumbency certificate listing the
designated persons with authority to provide such
instructions (including updating the list as needed).
– The Trustee has sole discretion to elect to act upon
such instructions, and the Trustee’s understanding
of such instructions shall be deemed controlling.
– The Trustee shall not be liable for any losses, costs
or expenses arising directly or indirectly from the
Trustee’s reliance upon and compliance with such
– The Party agrees to assume all risks arising out of
the use of such electronic instructions and
directions to the Trustee.
For more information please contact:
David J. Fernandez
Carter Ledyard & Milburn LLP
2 Wall Street
New York, New York 10005
[email protected]
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