Aurelius Capital Master Ltd. v Hertz International Ltd.
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Attorneys and Parties
Brief Summary
This case arose from a COVID-19-era debt restructuring in the car-rental and corporate finance industry. The dispute concerned whether holders of unsecured notes were entitled to a 5% Alternative Financing Premium (AFP) under a backstop agreement after Hertz entities pursued replacement financing instead of issuing contemplated replacement notes.
After a nonjury trial, the Supreme Court, New York County, held that defendants triggered the AFP because, before the backstop agreement expired, they had committed to raise alternative financing even though the final binding commitment and funding came later. The court also held that plaintiffs were not entitled to attorneys' fees under the agreement's indemnification clause.
Nothing was overturned. The Appellate Division affirmed the judgment in full, including the award of the AFP and the denial of attorneys' fees.
The majority held that the phrase "raises, or commits to raise" unambiguously covered substantial affirmative steps toward obtaining alternative financing before the deadline, not only a final binding financing agreement. The court also held that defendants failed to prove the contract's impossibility exception because, although one restructuring condition failed, they did not show it was no longer possible to implement the scheme transaction. Finally, the indemnification clause did not clearly authorize prevailing-party fees in a suit between the contracting parties under Hooper Assoc. v AGS Computers.
Background
Plaintiffs held most of two series of unsecured notes issued by Hertz Holdings Netherlands B.V. (HHN). After the COVID-19 pandemic severely harmed The Hertz Corporation's business, The Hertz Corporation and certain United States affiliates entered Chapter 11 bankruptcy, triggering defaults on the HHN notes because United States debtors guaranteed them. HHN and related European entities urgently needed €250 million in liquidity to refinance and re-fleet vehicles. To avoid European insolvency proceedings, the parties negotiated a restructuring documented in a Lock-up Agreement (LUA) governed by English law and a Backstop Agreement governed by New York law, both executed on November 30, 2020. Under the structure, plaintiffs would backstop the issuance of new Hertz International Limited (HIL) notes if other noteholders did not subscribe. Section 3(b) of the Backstop Agreement entitled plaintiffs to a 5% Alternative Financing Premium if, before the restructuring effective date, defendants "raise[d], or commit[ted] to raise" alternative debt or equity financing in lieu of issuing the new HIL notes. The LUA contained milestones, including obtaining a bifurcation order in the United States bankruptcy proceedings by January 15, 2021. That order was delayed and ultimately not obtained. On March 29, 2021, the United States debtors disclosed in bankruptcy filings that two potential plan sponsors were prepared to provide a €250 million HIL facility and that plaintiffs' financing likely would not be needed. Plaintiffs terminated the LUA on March 30, 2021. HIL signed a commitment letter for alternative financing on April 3, 2021, and received the financing on April 30, 2021. Plaintiffs then sued for breach of contract, seeking the AFP and attorneys' fees.
Lower Court Decision
The trial court found for plaintiffs after a nonjury trial and awarded $15,899,653.51. It interpreted "commits to raise" in section 3(b) of the Backstop Agreement to mean more than just signing a binding financing contract; the court held that defendants had taken sufficient affirmative steps toward securing alternative financing before the March 31, 2021 expiration date. The court also rejected defendants' reliance on the contract's impossibility language, concluding that defendants had not shown it was no longer possible to implement the scheme transaction even if the bifurcation order milestone had failed. However, the court denied plaintiffs' request for attorneys' fees, holding that the indemnification clause did not authorize fee-shifting in a direct dispute between the contracting parties.
Appellate Division Reversal
There was no reversal. The Appellate Division affirmed the judgment and the challenged interlocutory orders. The court agreed that defendants triggered the AFP by committing to raise alternative financing before the agreement expired and that the premium became payable upon the later closing of that financing. It also agreed that the impossibility exception did not apply because defendants proved only that one condition could not be satisfied, not that the scheme transaction had become impossible. The court further affirmed the denial of attorneys' fees because the indemnification clause resembled a standard third-party indemnity and did not satisfy Hooper's strict requirement for unmistakable fee-shifting language in first-party litigation. Justice Friedman dissented in part, arguing that "commits" required a binding obligation and that the failed bifurcation condition made the agreed scheme transaction impossible.
Legal Significance
The decision is significant for New York contract law in complex financing and restructuring transactions. It emphasizes that undefined contractual terms are interpreted in context, not by dictionary definitions alone, and that disjunctive phrasing such as "raises, or commits to raise" can capture pre-closing financing conduct short of a final executed agreement if that reading best preserves the structure and economic purpose of the contract. The opinion also reinforces that a contractual impossibility carve-out will be read conjunctively where the text requires both the failure of a condition and resulting impossibility of the defined transaction. Finally, the case reaffirms Hooper Assoc. v AGS Computers, 74 NY2d 487 [requiring unmistakably clear contractual language before an indemnification clause will be read to shift attorneys' fees in litigation between the contracting parties themselves].
In New York, sophisticated parties to a restructuring backstop agreement may trigger a breakup-style premium by making concrete, substantial moves toward replacement financing before the contractual deadline, even if final financing documents are signed later, and broad indemnification language usually will not support prevailing-party attorneys' fees unless that intent is stated with unmistakable clarity.