Jump to Navigation


Bite in the Boilerplate: Governing Law is no Longer Just Miscellaneous

April 27, 2007

Litigation arising out of the Le-Nature’s bankruptcy case raises issues on the effectiveness of assignment provisions in the standard LSTA trade documents.  Regardless of the ultimate outcome, the case should remind participants in the secondary loan market to have regard for the terms of the underlying credit documents, particularly as they relate to governing law. 

The Trade Form Documents 

The standard LSTA trade documents are customarily used for executing trades in the secondary loan market, allowing buyers of syndicated loan claims to acquire an economic interest in the underlying debt as well as an assignment of any related enforcement/litigation rights.  The LSTA trade documents purport to transfer all claims against the borrower possessed by the seller, including (subject to applicable law) all contract and tort claims relating to the underlying bank debt.  Notably, these LSTA form documents are governed by New York law.

The Wachovia Case

In Wachovia Bank, National Association v. Harbinger Capital Partners Master Fund I, Ltd., et al., Civ. A. No. 07 CVS 5097 (March 14, 2007), Wachovia, the agent under Le-Nature’s $265 million credit facility, obtained a temporary restraining order enjoining a group of funds from bringing personal tort claims against Wachovia.  Wachovia sought an injunction to prevent the funds from asserting personal tort claims against it, even though such claims would have been assigned to the funds under the standard LSTA trade documents.  Relying on the choice of North Carolina law in the credit agreement, and reasoning that this choice of law should govern the issue, Wachovia argued that any assignment of personal tort claims is prohibited by North Carolina's champerty doctrine.  On April 12, 2007, the North Carolina state court entered the injunction, with a final decision on assignability held for a future date.

The Facts

In September 2006, Wachovia and a syndicate of bank lenders provided Le-Nature’s with a $265 million credit facility to refinance an existing loan.  Following revelations that Le-Nature’s founder and CEO had engaged in fraud and manipulated earnings, a bankruptcy was commenced against the company.  A receiver was appointed to operate the company during the case.

After the fraud was exposed, members of the bank syndicate sold approximately $250 million of bank claims under the standard LSTA trade documents.  Various funds that had acquired claims formed an ad hoc committee and publicly revealed that they were investigating claims that Wachovia was complicit in the fraud.  Based on these statements and to prevent the filing of a lawsuit in another forum, Wachovia preemptively filed a motion in the North Carolina General Court of Justice for a temporary restraining order and injunction enjoining eight of the more vocal funds from bringing a lawsuit.  

Wachovia’s suit was substantially based upon North Carolina's application of the centuries-old doctrine “champerty,” which curtails trading in litigation.  Wachovia argued that, even though the LSTA trade documents provide for New York law, the credit agreement's choice of North Carolina law should govern the assignment of personal tort claims.  Unlike New York’s champerty statute, North Carolina’s champerty doctrine has been applied more broadly to prohibit the assignment of all personal tort claims, without regard to the purchaser’s underlying intent.

Take Aways

As the Wachovia case makes clear, buyers should not assume that the standard LSTA trade documents by themselves transfer all rights relating to a seller’s bank debt.  Rather, buyers must be mindful of the provisions of the underlying credit documents and the law governing these documents.  The public policy against bringing champertous claims is not limited to North Carolina and is recognized by many states, albeit to different degrees.  Therefore, it is imperative for a buyer in the secondary marketplace to understand the governing law in the credit documents so that it is not surprised to find itself in a foreign court using unfriendly rules.  At the end of the day, while a buyer cannot ensure that all claims will survive transfer under the standard LSTA trade documents, it certainly can adjust expectations and tactics (i.e. the purchase price) accordingly.