Court of Chancery Uses Contract Interpretation Principles to Determine Rights of Bondholder Against Borrower
Cypress Associates, LLC v. Sunnyside Congregation Associates Project
, C.A. No. 1607-N, 2006 WL 668441 (Del. Ch. Mar. 8, 2006).
This case involved a dispute between a bondholder and the borrower that succeeded to most of the issuer's duties and rights. The parties argued over the extent to which the borrower could amend certain contracts without approval from the bondholders. Plaintiff bondholder refused to provide its assent to an amendment the borrower desired because it believed that the amendment would lower the value of its bonds. The other bondholders supported the amendment. The Court of Chancery denied in part and granted in part the borrower's motion to dismiss.
The challenged amendment included floor and ceiling prices capping the downside and upside price at which the borrower sells energy. The amendment could have effected a major change in the borrower's potential profits, as the ceiling could have allegedly reduced the paid prices for energy to the borrower by more than 50%. Plaintiff believed that the ceiling would diminish or even eliminate annual payments to bondholders, therefore it refused to give its assent to the amendment.
The court denied borrower's motion to dismiss on the ground that the plaintiff bondholder lacked standing to sue. The court found that as a third-party beneficiary to the loan agreement, plaintiff had standing to sue. The court also found that the amendment was a material one that needed to be approved by the required percentage of bondholders, which depended on a reading of the loan agreement to be determined at trial. The court applied basic principles of contract interpretation to reasonably read the loan agreement as requiring 80% or more of the bondholders to approve the amendment and therefore granted borrower's motion to dismiss part of the count that sought a declaration that unanimous approval was required to adopt the amendment.
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Fotini Antonia Skouvakis