United States: The Power Of A Negation Clause

A recent decision of an Illinois appeals court in Republic Bank of Chicago v. FBOP Corp. (Ill. App. April 29, 2016) addressed the effect of an indenture provision, commonly referred to as a negation clause, that denies the benefits of an indenture other than to its parties.


Using a typical trust-preferred financing structure, United Financial Holdings Inc., an Illinois bankholding company, created United Financial Holdings Trust I, a Delaware statutory trust (the "Trust"). United Financial owned 100% of the Trust's common equity, while the Trust's preferred equity in the amount of approximately $6 million was sold to Republic Bank of Chicago, the plaintiff in the action. The Trust in turn used the proceeds of the issuance of the preferred equity to acquire junior subordinate debentures from United Financial, issued pursuant to an indenture under which Wilmington Trust Co. served as trustee. The indenture was governed by New York law, although the court and the parties assumed that New York and Illinois law were the same for the purposes of the case, and the court cited both New York and Illinois precedents. United Financial was later merged into FBOP Corp., which assumed the obligations of United Financial under the indenture. Two years later, FBOP was placed into receivership by the FDIC, and FBOP's subsidiary banks were closed. Republic Bank commenced an action based upon Section 5.1(e) of the indenture, which enumerated as an event of default the consent of the issuer to the appointment of a receiver.

Republic Bank maintained that as a third-party beneficiary of the indenture — the structure was essentially a pass-through financing between Republic Bank and United Financial — it had the right to assert remedies upon the occurrence of an event of default. Indeed, under Section 5.8 of the indenture, holders of the trust-preferred equity had the right to sue the issuer directly to enforce payment of principal and interest on the debentures in the event of a payment event of default. 

The Court's Analysis

Beginning with the oft-stated premise that indentures are contracts that, absent ambiguity, must be enforced in accordance with their terms, the court focused on the negation clause of the indenture. That clause, titled "Benefits of Indenture," provided that nothing in the indenture either "express or implied shall give to any person other than the parties thereto and their successors or assigns ... any legal or equitable right, remedy or claim under this Indenture." Exception was made for provisions such as Section 5.8 that expressly provided to holders of the trust-preferred equity rights to pursue certain claims under the indenture. The court observed that while the indenture expressly afforded a holder of the debentures rights upon the occurrence of a payment event of default, there was no express provision affording the same rights upon the occurrence of an insolvency event of default.  Strictly construing the negation clause, the court held that only the Trust, and not a holder of the trust-preferred equity, could act upon an insolvency. Republic Bank, as a holder of the preferred equity issued by the Trust, simply had no standing. The appellate court therefore reversed and remanded the lower court's grant of summary judgment in favor of Republic Bank.


Like many boilerplate provisions of indenture documentation, negation clauses are often glossed over in the negotiation phase of a financing. But, as is often the case, boilerplate provisions can be of critical importance when it comes to enforcement of rights and remedies. Given the breadth of the negation clause in this case, and the distinction — whether or not intentional and whether or not rational — that the drafters made between payment defaults and insolvency defaults, it is not particularly surprising that the appellate court declined to take an equitable view of the plaintiff's position.

While the case provides a general lesson on the power of negation clauses, it should also focus investors in double-tiered financing structures, such as trust-preferred transactions, on their remedies. Without recourse against the ultimate credit, investors may be left out in the cold should the financing take a turn for the worse. In this case, the court's decision does not explain why Republic Bank chose to sue directly rather than instruct the trustee under the indenture to take action on behalf of the Trust. Apparently, there was a reason, and as a result of the negation clause, Republic Bank came up empty-handed on its direct claim as well. 

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 Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.