United States: Delaware Court Blocks Sale Of Bank Stripped Of Its "Criticized Assets"

Determines that "good bank/bad bank" structure violates "boilerplate" successor obligor provisions of indenture

In In re BankAtlantic Bancorp, Inc.,1 the Delaware Court of Chancery recently permanently enjoined the proposed sale of a troubled financial institution via a "good bank/bad bank" structure on the basis that it would violate "boilerplate" successor obligor provisions in indentures governing the terms of outstanding public securities. As is typically the case, the indentures prohibited the transfer of "all or substantially all" of the issuer's assets unless the purchaser assumed the issuer's obligations under the related securities. The Court considered both quantitative and qualitative factors in determining that the proposed sale of only the bank's performing assets constituted a transfer of substantially all of its assets and, because the purchaser was not required to assume the payment and other obligations under the indentures, the transaction would trigger a default under the indentures. In so ruling, the Court conflated the three steps into which the sale transaction was separated and emphasized that so-called "boilerplate" indenture provisions will be given their accepted commercial meanings regardless of whatever nuances the issuer might build into the language.


BankAtlantic Bancorp, Inc. ("Bancorp"), whose stock trades on the New York Stock Exchange, was formed in 1994 to serve as a bank holding company for BankAtlantic, a federally chartered savings bank. Bancorp has no meaningful assets other than the stock of BankAtlantic, so its success depended on the bank's results. Bancorp's top two officers, Alan Levan and John Abdo, own a majority of the voting shares of Bancorp's controlling stockholder. Beginning in 2002, Bancorp sought to grow BankAtlantic's business by developing its brand and increasing core deposits.

To help finance its growth strategy, Bancorp raised approximately $285 million through the issuance of trust preferred securities ("TruPS") traded on the Nasdaq Stock Exchange. The TruPS were issued by 13 wholly-owned trust subsidiaries, the sole assets of which consisted of junior subordinated notes issued by Bancorp pursuant to the terms of substantially identical indentures – all but one of which was governed by New York law – with an institutional trustee. The terms of the TruPS mirrored the terms of the junior subordinated notes, such that interest payments on the junior subordinated notes could be used by the related trust subsidiary to make corresponding dividend payments on the TruPS. To protect the TruPS investors, the indentures "generally prohibit[] Bancorp from transferring all or substantially all of its assets" unless Bancorp complies with the "Successor Obligation Provision" requiring the purchaser to assume "the due and punctual payment of all payments due on all of the [junior subordinated notes] in accordance with their terms ...." Under then current banking regulations, Bancorp was permitted to treat the junior subordinated notes as equity capital while simultaneously deducting TruPS dividend payments as interest expense for tax purposes.

In the face of substantial losses in BankAtlantic's loan portfolio, which was concentrated in the hard hit Florida real estate market, Bancorp's stock price fell from $142.42 at the beginning of 2007 to a low of $1.39 in March 2009. In 2008, Bancorp began to defer interest payments on the junior subordinated notes, which in turn forced BankAtlantic to stop paying dividends on the TruPS. When Bancorp failed to raise much-needed capital through rights offerings and asset sales, and under intense pressure from the Office of Thrift Supervision, Bancorp embarked on a whole company sale process in the fall of 2010. The sale process had limited success, but did attract one bid that Levan found to be inadequate and was rejected by the Bancorp board of directors.

By July 2011, Levan and his financial advisors decided to employ a "good bank/bad bank" structure to make BankAtlantic more attractive to prospective bidders. Prospective bidders were advised that Bancorp would consider only offers with an "effective deposit premium" in excess of 10%, payable not in cash but rather through exclusion from the sale of "'criticized assets,' such as non-performing loans and foreclosed real estate." These assets would be retained and managed by Bancorp in a newly-established vehicle known as Retained Assets LLC. Bancorp also would retain the payment obligations in respect of the junior subordinated notes.

Only one bidder, BB&T Corporation, met Bancorp's demand for a 10% deposit premium, and on November 1, 2011, Bancorp announced the sale of BankAtlantic to BB&T. Three sequential steps would be required to accomplish this sale:

  • First, BankAtlantic would transfer the "criticized assets" to Retained Assets, LLC;
  • Second, BankAtlantic would distribute the membership interests in Retained Assets, LLC to Bancorp; and
  • Third, Bancorp would transfer the stock of BankAtlantic to BB&T.

The market reacted favorably to the announcement of the transaction and Bancorp agreed to bring current the deferred TruPS dividend payments. Nevertheless, later that month, both the indenture trustees and individual TruPS holders brought suit against Bancorp, alleging that the transaction violated the successor obligor provisions of the indentures. As a remedy, plaintiffs sought either an injunction of the sale of BankAtlantic to BB&T or an order requiring BB&T to comply with the successor obligor provisions.

Analysis of the Successor Obligor Provision

The Court first considered whether the sale to BB&T, as structured, would violate the successor obligor provisions of the indentures under principles of New York contract law. The Court explained that indenture provisions generally contain "market-facilitating boilerplate language" that is "not the consequence of the relationship of particular borrowers and lenders and do not depend upon particularized intentions of the parties ...." As such, "[c]ourts strive to give indenture provisions a consistent and uniform meaning because uniformity in interpretation is important to the efficacy of the capital markets." In interpreting such "boilerplate" provisions, the Court "will not look to the intent of the parties, but rather the accepted common purpose of such provisions."2 Further, the Court explained that successor obligor provisions are included in indentures "because, if the issuer transferred substantially all of its assets, then 'the obligor named in the indenture would cease to operate the business to which, in practical effect, the debentureholders have looked for payment of the debentures.'"

Against this backdrop, the Court embarked on both a "quantitative and qualitative" analysis of the relevant factors to determine whether the transaction constituted a sale of substantially all of the assets of Bancorp requiring BB&T to assume Bancorp's obligations under the indentures consistent with the successor obligor provisions. The Court explained that "[a]t times, the quantitative percentage of assets sold may be so low that examining the qualitative factors is unnecessary." But "[i]n the typical case involving a significant sale, however, a court will need to weigh both quantitative and qualitative factors as a totality."

Quantitative Analysis

Bancorp argued that the transaction would not constitute a sale of substantially all its assets on the basis that "BankAtlantic (the 'good bank') is worth nothing, while Retained Assets LLC (the 'bad bank') is worth $606.9 million." This argument was premised on Bancorp's contention that BB&T was delivering "zero consideration" for the assets it was receiving because no cash was changing hands.

The Court refused to view as separate the "three interrelated transactions" that would culminate with the sale of BankAtlantic – devoid of the "criticized assets" – to BB&T. To the contrary, "none of the transactions can take place unless all three take place." If it accepted Bancorp's argument, the Court explained, it "would pave an easily traveled superhighway around the substantially all test" that "future transaction planners" could utilize to "sidestep the restriction whenever a subsidiary had sufficient assets to distribute consideration to the parent."

Consistent with this approach, the Court cited book value data in Bancorp's public filings in determining that Bancorp was conveying between 85-90% of its assets to BB&T. The Court found that Bancorp's position that "BankAtlantic will be made less valuable, rather than more valuable, by shedding the Retained Assets is counterintuitive and inherently suspect." Rather than receiving "zero consideration"

for the BankAtlantic stock, the Court declared, "Bancorp gives the stock of BankAtlantic and gets membership interests in Retained Assets LLC. One is consideration for the other."

Qualitative Analysis

Bancorp argued that "Retained Assets LLC will continue most of the lines of business that [Bancorp's] subsidiaries have historically engaged in." In contrast, the Court pointed out that BankAtlantic was Bancorp's "only operating asset" and its sale to BB&T would "change fundamentally the nature of Bancorp's business." While there might be "high-level similarities between the lines of business that BankAtlantic currently conducts and the lines of business in which Retained Assets LLC will engage," the Court noted, "a continuing conceptual resemblance is not sufficient" to rebut the conclusion that Bancorp was proposing to sell substantially all of its assets. Rather, when all is said and done, Bancorp "would cease to operate the business to which, in practical effect, the holders of [TruPS] looked for payment." The Court characterized this as the "guiding inquiry when evaluating a transaction qualitatively ...."

Based on its analysis of these various quantitative and qualitative factors, the Court concluded that Bancorp's sale of BankAtlantic to BB&T "will constitute a transfer of substantially all of Bancorp's assets." Moreover, because BB&T is not assuming Bancorp's obligations under the junior subordinated notes, the transaction "will breach the Successor Obligation Provision" of each of the indentures.

Fashioning a Remedy

Because the sale as structured would trigger an event of default under the indentures, the Court recognized that the trustees would have the right to accelerate $290 million in payments on the junior subordinated notes. The Court also recognized that "Bancorp cannot pay off the accelerated debt." In the Court's view, this represented a threat of "irreparable harm" to the TruPS holders that warranted equitable relief.

Bancorp's contention that such a remedy would cause an even greater hardship to Bancorp did not dissuade the Court. According to the Court, "a party cannot 'abrogate a contract, unilaterally, merely upon a showing that it would be financially disadvantageous to perform it; were the rules otherwise, they would place in jeopardy all commercial contracts.'... This is particularly so for indentures, which provide the holders of unsecured debt with their only protections. Companies will find it more costly and difficult to raise financing if the contractual protections in an indenture can be ignored when the issuer faces financial difficulty. That is precisely when creditors most need their contract rights."

On this basis, the Court entered an order "permanently enjoining Bancorp from consummating the sale."


The BankAtlantic decision affirms that novel sale structures may not be used to evade the basic contractual rights of debtholders under an indenture. When a court labels the language of an indenture as "boilerplate," arguments that the parties intended a meaning contrary to accepted commercial expectations will likely fall on deaf ears. The recognition by the BankAtlantic Court of the sanctity of so-called "boilerplate" provisions should be of comfort to investors in public securities who are rarely given an opportunity to negotiate the terms of their investments, and will facilitate the ability of companies to utilize this important source of financing for their capital needs.


Less than one month after the Court enjoined the transaction, BB&T and Bancorp restructured their deal so as to avoid triggering the successor obligor provisions of the indentures. Under the revised terms, BB&T agreed to assume the payment obligations under the TruPS and, in return, will receive a 95% preferred interest in a new entity holding $500 million in risky loans that Bancorp originally planned to house in Retained Assets LLC.


1 Consol. C. A. No. 7068-VCL (Del. Ch. Feb. 27, 2012).

2 In this connection, the Court cited the recent decision of the Delaware Supreme Court in Bank of N.Y. Mellon Trust Co. v. Liberty Media Corp., 29 A.3d 225 (Del. 2011), also applying New York contract law. For a discussion of this important decision, please see our Client Alert entitled "Delaware Supreme Court Provides Guidance on Interpretation of 'Boilerplate' Indenture Provisions," dated November 2, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions