New York Judge Dismisses an Involuntary Petition Against a CDO

Holders of nonrecourse notes issued by a “static pool investment vehicle” do not have claims against the issuer and therefore are not eligible to be involuntary petitioners under Section 303(b), according to Bankruptcy Judge Mary Kay Vyskocil of New York City. Even if they were eligible petitioners, Judge Vyskocil said she would dismiss the involuntary chapter 11 petition for “cause” under Section 1112 because the senior noteholders were attempting to “increase their recovery at the expense of junior noteholders.” As described by Judge Vyskocil, the case involved a conventional “structured finance entity known as a collateralized debt obligation,” or CDO. The debtor issued 11 classes of 30-year notes, in descending order or priority, scheduled to mature in 2036. With funds from issuance of the notes, the debtor mostly purchased long-term securities issued by real estate investment trusts. The indenture trustee held a lien on the securities as collateral for the noteholders. Income from the REITs was intended to pay debt service on the notes.

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