Sale of Bond Transfers All Claims Held by Previous Owner

On September 27, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Arrowhead Capital Fin., Ltd. v Cheyne Specialty Fin. Fund, L.P., 2019 NY Slip Op. 32867(U), holding that under the General Obligations Law, the sale of a bond transfers all claims held by the previous owner, explaining:

[A]fter Arrowhead's predecessor (ACG) was defrauded by its manager, in late 2008, ACG and Arrowhead entered into a Consent Judgment and Permanent Injunction which transferred to Arrowhead all of ACG's rights under the subject note and the Master Agreement. It is undisputed that tort claims were not expressly assigned to Arrowhead using the language ordinarily required by the Court of Appeals.

But the rule set forth in Commonwealth does not apply. Instead, General Obligations Law (GOL) § 13-107(1) applies and provides that
Unless expressly reserved in writing, a transfer of any bond shall vest in the transferee all claims or demands of the transferrer, whether or not such claims or demands are known to exist, (a) for damages or rescission against the obligor on such bond, (b) for damages against the trustee or depositary under any indenture under which such bond was issued or outstanding, and (c) for damages against any guarantor of the obligation of such obligor, trustee or depositary.

Simply put, the wording of (GOL) § 13-107 makes it eminently clear that the buyer of a bond receives exactly the same claims or demands as the seller held before the transfer. In other words, all of the seller's claims against the trustee are passed to the purchaser. Thus, Arrowhead has standing to sue Cheyne on all claims on which ACG would have had standing to sue before the transfer, including pre-transfer breach fiduciary duty claims. Cases applying (GOL) § 13-107(1) as interpreted by the Bluebird court make no distinction between bond-related contract claims and bond-related tort claims.

Commonwealth, which did not involve application of GOL § 13-107, did not purport to abrogate Bluebird. After all, a statute expressly governing a particular subject matter trumps a default common-law rule to the contrary. Thus, it is unsurprising that courts continue to apply Bluebird and GOL § 13-107.

The court also rejects Cheyne's argument, made without citation to supporting authority, that a note governed by a master agreement is so different from a bond governed by an indenture such that GOL § 13-107 is inapplicable. They are functionally the same. GOL § 13-107(2) defines bond to mean and include any and all shares and interests in an issue of bonds, notes, debentures or other evidences of indebtedness of individuals, partnerships, associations or corporations, whether or not secured. The Note here fits that description. The point of a debt structure involving an indenture and a trustee is to assign the responsibility of administering the secured assets to someone other than the investor. That was Cheyne's job here. Thus, Arrowhead has standing under GOL § 13-107.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in actions against issuers, underwriters, trustees and similar parties in financial structures like the one at issue here. If you or a client are investors and have questions regarding potential claims relating to financial structures like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.