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A big win for Hunkemoller's plaintiffs today, as certain breach of contract claims have survived the company’s, Redwood’s, and the trustee’s motions to dismiss.

With the plaintiffs overcoming the lack of standing — which the company asserted on account of the indenture’s no-action clause — Judge Anar Patel ultimately denied the defendants’ motion to dismiss with respect to the breach of contract claims related to:

1. Section 2.01 — Issuable in series — plaintiffs alleged that this provision was violated when the company issued “Up-Tiered Notes that are not ‘substantially identical’ to the original Notes”;
2. Section 4.18 — Payments for consent — plaintiffs alleged that this provision was violated when the company extended “consideration in exchange for Redwood’s consents in connection with the Up-Tiering”;
3. Section 2.11 — Cancellation — plaintiffs alleged that this provision was violated when the company issued “new Notes to replace Notes that were redeemed and/or cancelled”;
4. Section 2.07 — Transfer and exchange — plaintiffs alleged that this provision was violated when the company “exchanged Redwood’s original Notes for Up-Tiered Notes that do not provide the same benefits as the surrendered Note.”

Notably, not all counts survived the motion to dismiss. All claims related to the trustee BNY Mellon and related to Redwood — the participating bondholder — were dismissed. As it relates to the company, the plaintiff’s claims for breach of contract under Sections 9.02 and 3.02 of the indenture, breach of the implied covenant of good faith and fair dealing, as well as all claims related to fraudulent transfer were also dismissed.

No action clause

Before walking through her reasoning on the breach of contract counts, Judge Patel first addressed the plaintiff’s standing. The court determined that the no-action clause does not bar the plaintiffs from bringing claims because it is not clear that Redwood’s counter-direction to the trustee was valid.

As she previewed prior to delivering her bench ruling, Judge Patel explained that the plaintiffs have sufficiently plead that the counter-directive from Redwood and subsequent waivers may not be valid due to lack of authorization.

The exhibits included in Redwood’s pleadings are not enough to show valid authorization, noted Judge Patel, specifying that the counter-direction letter, for example, presents only a certificate of holdings not a valid authorization. Accordingly, without further factual inquiry, the counter-direction at this stage was not clearly authorized and does not bar the plaintiff’s claims.

Breach of contract

Judge Patel, in allowing the breach of contract claims mentioned above to survive, first noted that the plaintiffs sufficiently plead facts to suggest a breach may have occurred. For example, regarding Section 4.18 — payments for consent — Judge Patel remarked that she was persuaded by plaintiffs’ argument that Redwood was paid consideration for the second transaction because that transaction could not have occurred without the removal of Section 4.18, and it is highly unlikely that they would have removed that provision without such consideration.

As it relates to the holders waiving those breaches, Judge Patel applied the same analysis as to the no-action clause — namely that the holders’ waivers may not have had the proper authorization. Accordingly, the company’s argument that whether or not there was an initial breach of contract within those sections does not matter because they can be waived by a majority were not persuasive, as Judge Patel was not able to determine that the majority of holders in fact authorized the waiver of those breaches.

The plaintiffs did not survive the motion to dismiss stage with respect to their argument that the company violated section 9.02 — the so-called “sacred rights” provision — of the indenture, which requires that 90% of the holders consent to certain amendments of the indenture, which includes the reduction of principal of the outstanding notes (section 9.02(c)) or the release of all or substantially all of the security interests (section 9.02(H)).

The plaintiffs argued that in cancelling Redwood’s notes, their principal was reduced to zero — and done without the consent of 90% of holders. Similarly, the plaintiffs alleged that the overall uptier transaction released all or substantially all of the security interests in the notes because the value of the collateral underlying the notes is likely insufficient to cover the up-tiered notes, “leaving the remaining subordinated notes effectively without any remaining security” which is “tantamount to a release of ‘substantially all’ of the security interests in the notes.”

Ultimately, the judge found the holders’ sacred rights were not implicated here. The sections of the indenture that were violated were not enumerated in Section 9.02 and, citing Mitel, Judge Patel said “if plaintiffs wanted these provisions as sacred rights they should have bargained for them when the indenture was negotiated; it is not for the court to expand the plaintiffs’ rights.” Accordingly, Judge Patel dismissed the breach of contract claim as it related to Section 9.02

Separately, the plaintiffs were also unsuccessful in asserting that the selection of only Redwood’s notes for redemption amounted to a redemption on a non-pro-rata basis and a breach under Section 3.02 of the indenture.

Specifically, the plaintiffs assert that in cancelling and delisting €186m of Redwood’s notes in exchange for the up-tiered notes, a “redemption” occurred, and under Section 3.02 of the indenture, if less than all of the notes are to be redeemed, they must be done so on a pro rata basis. As noted above, Judge Patel did not dismiss plaintiffs’ breach of contract claims related to cancellation and transfer and exchange (Section 2.11 and 2.07, respectively), but she noted that the plaintiffs did not sufficiently plead a breach of contract on account of a non-pro-rata redemption.

Good faith and fair dealing

As it relates to the implied covenant of good faith and fair dealing, Judge Patel reasoned that this indenture was negotiated by highly sophisticated parties and all rights were set out in the document. Accordingly, there was no violation of this implied covenant.

What’s next?

Parties have already begun discovery and are expected to commence depositions in August. Deposition are expected to be completed by 14 October and all discovery is expected to be completed by 22 December. Thereafter, parties will appear before Judge Patel for a trial readiness conference on 6 January 2026 at 9:30am in courtroom 428 at 60 Centre St, New York, NY 10007 to determine the scheduling for trial.

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