Every once in a while, the Court of Appeals gifts the commercial litigator with an opinion that includes a useful discussion about the meaning and significance of a familiar and routinely used contract term. The most recent gift was the Court’s characterization of the term “notwithstanding” as one that “clearly signals the drafter’s intention.” CNH Diversified Opportunities Master Account, L.P. v Cleveland Unlimited, Inc. 2020 NY Slip Op 05976 (October 22, 2020) (“CNH Diversified”).

At issue in CNH Diversified was whether plaintiffs’ right to sue for payment on notes survived a strict foreclosure, undertaken by a trustee at the direction of a group of Majority Noteholders, over the objection of Minority Noteholders (plaintiffs), that purported to cancel the notes. The decision, which denied the Majority Noteholders’ motion for summary judgment and granted partial summary judgment to the non-consenting

Minority Noteholders, involved interpretation of certain provisions in indenture documents governing the rights of the noteholders to receive payment, the remedies available in the event of default, and the power of the Majority Noteholders to direct the trustee’s choice of remedy.

Section 6.05 of the indenture, relied upon by the Majority Noteholders in their summary judgment motion, conferred certain power upon the Majority Noteholders. In ruling for the non-consenting Minority Noteholders however, the Court of Appeals focused on section 6.07 which reads:
“[n]otwithstanding” any other provision in the Indenture, the rights of a Noteholder to “receive payment” of principal and interest on the Notes, and to “bring suit for the enforcement of any such payment … , shall not be impaired or affected without the consent of such Holder.”

Relying upon the notwithstanding clause, the Court found that the power conferred upon the Majority Noteholders by section 6.05 was subject to the limitations stated in section 6.07. “When a preposition such as “notwithstanding any other provision” is included in a contractual provision, that provision overrides any conflicting provisions in the contract (see Beardslee v Inflection Energy, LLC, 25 NY3d 150, 158 [2015]; accord Cisneros v Alpine Ridge Group, 508 US 10, 18 [1993] [“the use of … a ‘notwithstanding’ clause clearly signals the drafter’s intention that the provision of the ‘notwithstanding’ section overrides conflicting provisions of any other section”]). Therefore, the powers granted to the Majority Noteholders in section 6.05 cannot be used to extinguish the legal right to sue or the legal right to payment of non-consenting Noteholders protected in section 6.07.”

While the language and black letter law are not difficult to digest, the CNH decision shows that reliance upon notwithstanding provisions is not always a simple task. Whether the term “notwithstanding” overrides another contractual term requires a finding that the “notwithstanding” clause conflicts with another contractual term. In this case, the majority of the Court identified another section of the indenture as the conflicting term and granted relief to the non-consenting Minority Noteholders, noteholders who, as evidenced by the transaction were clearly subordinate to the Majority Noteholders. In reaching this conclusion, the Court ignored a collateral trust agreement that had been executed contemporaneously with the indenture.

The dissent acknowledged the legal significance of “notwithstanding” clauses but found fault with the majority’s analysis precisely because it ignored the collateral trust agreement. In other words, the dissent found that the notwithstanding clause was not triggered because there was no conflicting term and that the majority’s error lie in its failure to consider the collateral trust agreement. “The indenture, however, is not a lonely compact and it cannot be read in a vacuum. To do so would be to disregard the collateral trust agreement, which is connected to the indenture. The strict foreclosure in question was given ‘the consent of the holder’ by the collateral trust agreement.” (Dissent, J. Fahey).

The clarity seemingly provided by the CNH Diversified decision is diminished by the dissent. Notwithstanding, CNH Diversified provides valuable guidance to the commercial litigator, whether engaged to provide contract drafting advice, pre-litigation advice or devise a litigation strategy, not the least of which is the need to be familiar with all contract terms, particularly in the case of a commercial transaction that involves various types of agreements.

Mary Jo S. Korona is Senior Counsel to Adams Leclair, LLP, a litigation firm she helped form in 2007. Her litigation practice concentrates on business, warranty and employment disputes arising in cases filed in state and federal courts and the defense of Article 78 proceedings brought against municipalities.