Introduction

In a recent case, In re BankAtlantic Bancorp., Inc. Litigation (Del.Ch. February 27, 2012), indenture trustees under multiple indentures of trust, as well as individual holders of trust preferred securities, sued to enforce certain successor obligor provisions that prohibited a bank holding company from selling “all or substantially all” of its assets unless the acquirer assumed the debt. The indenture trustees and certain holders argued that a sale transaction where the bank holding company would (a) sell 100 percent of its equity interest in its regulated savings bank, (b) receive 100 percent equity of a newly formed entity owning the savings bank's “criticized assets” and (c) no longer continue functioning as a federally regulated bank holding company, constituted a sale of substantially all of its assets. In response, the bank holding company argued that through its ownership of a newly formed entity with assets of significant book value, the lines of business historically engaged by its subsidiaries would continue. The Court of Chancery in Delaware found that the sale transaction was in fact a sale of substantially all of the bank holding company’s assets, thereby triggering the successor obligor provisions and an event of default under the trust indentures. Given the irreparable harm to the plaintiffs upon the sale, the Court permanently enjoined consummation of the sale.

BankAtlantic

The plaintiffs, Hildene Capital Management, LLC et. al, Wells Fargo Bank, N.A. and Wilmington Trust Company (collectively the “Plaintiffs”) asserted claims against BankAtlantic Bancorp, Inc. (“Bancorp”), a bank holding company located in Ft. Lauderdale, Florida, that a sale transaction (the “Sale Transaction”) where Bancorp would sell 100 percent of its equity interest in BankAtlantic, a traditional commercial bank, to BB&T Corp. (“BB&T”), violated certain boilerplate successor obligor provisions (the “Successor Obligor Provisions”) in the various trust indentures (collectively, the “Indentures”). The Successor Obligor Provisions required an acquirer to assume the debt securities issued under the Indentures and enter into supplemental indentures if Bancorp were to sell, convey or transfer all or substantially all of its assets. Under the Sale Transaction, BB&T was to acquire BankAtlantic, with $3.4 billion of liabilities (consisting mostly of deposits) and $3.1 billion in assets, consisting of $2.1 billion in performing loans, 78 branches, 1000 employees and 180,000 square foot headquarters. Bancorp would retain a 100 percent equity interest in a subsidiary comprised of certain “criticized assets” of BankAtlantic that had a book value of approximately $600 million (the “Retained Assets”) and would remain obligated to make payments of principal and interest on the notes to the trusts, which trusts would then in turn make payments to holders of the trust preferred securities (the “TruPS”). The Plaintiffs argued that despite Bancorp’s ownership of the Retained Assets, under both qualitative and quantitative measures, the Sale Transaction constituted a sale of substantially all of the assets of Bancorp and triggered the Successor Obligor Provisions. Bancorp responded that the Sale Transaction was not a sale of substantially all of the assets because Bancorp would own assets worth approximately $600 million and would continue to operate the same lines of business, including investing and managing a commercial real estate portfolio, residential loans and tax certificates.

The Court of Chancery in Delaware rejected Bancorp’s argument. The Court, in applying the boilerplate Successor Obligor Provisions in the Indentures, looked to the established case law and the Commentaries on the Model Debenture Indenture and reiterated that such debt covenants were necessary to ensure that borrowers have flexibility to sell entire business segments so long as the debt transfers along with substantially all of the assets or is otherwise paid and satisfied. The Court noted that when applying successor obligor provisions to evaluate a transaction, courts generally consider both quantitative and qualitative factors.

When considering quantitative factors, the Court determined that the Sale Transaction constituted a sale of 85-90 percent of Bancorp’s assets, even using conservative estimates based upon Bancorp’s most recent public filing, which showed Bancorp’s assets had a total book value of $341.4 million, of which $306 million was attributable to BankAtlantic. The Court noted it could have also considered other factors such as earning potential and goodwill, which add economic value to a company sold as a going concern. When considering the qualitative factors, the Court explained that the Sale Transaction would have the effect of fundamentally changing the nature of Bancorp’s business and would completely transform Bancorp’s operations. The Court recognized that Bancorp’s public filings focused overwhelmingly on the assets and operations of BankAtlantic—even identifying BankAtlantic as Bancorp’s principal asset—and minimally on Bancorp’s other assets. The Court stated that upon consummation of the Sale Transaction, Bancorp would exit the banking business, lose its status as a federally regulated bank, divest itself of BankAtlantic and all while it would own 100 percent of an entity with no brand, no banking franchise, no deposit base, no branches, only eight employees and a portfolio of criticized assets. For these reasons, the Court concluded such a result would have a clear qualitative impact on Bancorp.

Ultimately the Court held that Bancorp would cease to operate the business to which, in practical effect, holders of TruPS looked for payment. Because BB&T was not assuming the debt securities and not entering into supplemental indentures after a sale of substantially all of the assets, the Sale Transaction breached the Successor Obligor Provisions, thus causing an event of default under the Indentures. The Court determined that the Sale Transaction would cause irreparable harm to the Plaintiffs, since upon acceleration of the debt securities, Bancorp would be unable to pay the debt. For these reasons, the Court permanently enjoined the Sale Transaction.

Conclusion

The Court of Chancery’s holding in BankAtlantic is consistent with past case law interpreting indentures. The decision further emphasizes how courts will consider the quantitative and qualitative effects of a sale transaction, regardless of the transaction’s form, to uniformly enforce successor obligor provisions in indentures.