Friday, March 30, 2012

Sharon Steel Corp. v. The Chase Manhattan Bank, N.A. case brief

Sharon Steel Corp. v. The Chase Manhattan Bank, N.A.
691 F.2d 1039, cert. denied, 460 U.S. 1012, 103 S.Ct. 1253, 75 L.Ed.2d 482 (1983)

FACTS
Five indentures in contract, each included redemption premium prior to maturity and each contained a successor obligor clause allowing UV to assign debt to a corporate successor which purchased ‘all or substantially all’ of UV’s assets.
-UV was selling to Federal and selling the rest to Sharon Steel.  

RULES/TERMS
-Successor obligor clauses are boilerplate or contractual provisions which are standard in a certain genre of contracts.
-Are not the consequence of the relationship of particular borrowers and lenders to not depend on particularized intentions of the parties to an indenture.
Benefit: Efficiency of capital markets


ANALYSIS
A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets:  uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another, focusing only on the business provisions of the issue (such as the interest rate, the maturity date, the redemption and sinking fund  provisions in the conversion rate) and the economic conditions of the issuer, without being misled by peculiarities in the underlying instruments.
-The creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the working of capital markets.
Meaning of successor obligor clauses
-The debt securityholder can do nothing to protect himself against actions of the borrower which jeopardize its ability to pay the debt unless he establishes his rights through contractual provisions set forth in the indenture.
-A borrower which sells all its assets does not have an option to continue holding the debt.  It must either assign the debt or pay it off.
-One purpose of the clause was to insure that the principal operating assets of a borrower are available for satisfaction of the debt.
-The fact that piecemeal sales in the regular course of business are permitted thus does not demonstrate that successor obligor clauses apply to piecemeal liquidations, allowing the buyer last in time to assume the entire public debt. 



HOLDING
-An interpretation which satisfies a major interest of one of the parties while furthering only a marginal interest of the other should be rejected in favor of an interpretation which sacrifices marginal interests of both parties in order to protect their major concerns.
-Boilerplate successor obligor clauses do not permit assignment of the public debt to another party in the course of a liquidation unless “all of substantially all” of the assets of the company at the time the plan of liquidation is determined upon are transferred to a single purchaser.
-Court holds that here the successor obligor clauses are not applicable.  UV is in default on the indentures and the debentures are due and payable. 

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