## Facts

- Realogy Corporation (Realogy) was acquired in April 2007 by funds affiliated with Apollo Management, L.P., and incurred substantial debt governed by a bank Credit Agreement and multiple note indentures.
- One set of notes was Realogy’s 11.00%/11.75% Senior Toggle Notes due 2014 (the “Senior Toggle Notes”), which allowed Realogy to pay interest in cash or in kind.
- The Senior Toggle Notes were issued under an indenture (the “Indenture”) that restricted Realogy’s ability to incur liens through a negative covenant, subject to enumerated “Permitted Liens.”
- The Indenture’s “Permitted Liens” exceptions depended in part on whether certain new debt qualified as “Permitted Refinancing Indebtedness,” a defined term incorporated by reference from the Credit Agreement.
- By late 2008, Realogy’s unsecured notes were trading at significant discounts, and Realogy sought to reduce its overall indebtedness by refinancing.
- On November 13, 2008, Realogy announced a refinancing/exchange proposal. Rather than raising new cash, it invited certain existing unsecured noteholders to participate as lenders by tendering existing notes.
- The proposal contemplated a new approximately \$500 million term-loan facility under the Credit Agreement, secured by a second-priority lien on substantially all of Realogy’s assets.
- The exchange would shift some creditors from unsecured status to second-lien secured status and would alter the relative priority among Realogy’s unsecured note classes.
- Holders of the Senior Toggle Notes objected, asserting that the exchange discriminated against them in favor of other unsecured noteholders whose notes paid cash interest and that the new second-lien structure was not allowed by the Indenture.
- The Bank of New York Mellon, acting solely as trustee under the Indenture (the “Trustee”), and High River Limited Partnership (a beneficial owner of Senior Toggle Notes) demanded Realogy terminate the proposal; Realogy refused.
- The Trustee and High River sued in the Delaware Court of Chancery seeking a declaratory judgment that the proposed transaction would violate the Indenture.
- Both sides moved for summary judgment, agreeing that New York law governed the relevant contract interpretation and that the dispute turned on the text of the Indenture and incorporated Credit Agreement definitions.

## Issues

1. Whether Realogy’s proposed term-loan debt—issued in exchange for existing unsecured notes and secured by a second-priority lien—qualified as “Permitted Refinancing Indebtedness” under the Credit Agreement definition incorporated into the Indenture.
2. If the proposed borrowing was not “Permitted Refinancing Indebtedness,” whether the second-priority lien securing the new term loan failed to qualify as a “Permitted Lien” under the Indenture and therefore breached the lien covenant.
3. Whether the contracts were unambiguous such that the dispute could be resolved on cross-motions for summary judgment under New York law.

## Decision

- The Court of Chancery granted summary judgment for the Trustee (and High River) and denied Realogy’s motion.
- The court held that the proposed term loan did not satisfy the definition of “Permitted Refinancing Indebtedness” because the refinancing debt would be secured by a second-priority lien while the debt being refinanced was unsecured, giving the new debt greater security than the old.
- Because the new indebtedness did not qualify as “Permitted Refinancing Indebtedness,” the second-priority lien securing it was not within the Indenture’s “Permitted Liens” exceptions.
- The court entered declaratory relief that Realogy could not proceed with the exchange offer and second-lien term-loan refinancing on the proposed terms without violating the Indenture.

## Legal Principles

- Under New York law, courts enforce unambiguous contract language as written, particularly in negotiated financing instruments such as indentures and credit agreements.
- Defined terms incorporated by reference must be applied as incorporated, and related documents must be read together so each provision has effect.
- Contract interpretation disfavors readings that render negotiated limitations meaningless or mere surplusage.
- A negative-pledge covenant permits liens only if the lien fits within an express “Permitted Lien” category; when an exception depends on a prerequisite definition (such as “Permitted Refinancing Indebtedness”), failure to satisfy that prerequisite defeats the exception.
- Summary judgment is appropriate in a contract dispute when no material fact is contested and the outcome turns on the plain meaning of the governing text.

## Conclusion

The Delaware Court of Chancery held that Realogy’s proposed note-exchange refinancing—substituting unsecured notes with a new second-lien secured term loan funded by exchanging existing notes—did not meet the Credit Agreement’s definition of “Permitted Refinancing Indebtedness” incorporated into the Senior Toggle Notes Indenture because it conferred greater security than the refinanced debt; as a result, the new second-priority lien was not a “Permitted Lien,” and the transaction would breach the Indenture.


Bank of New York Mellon v. Realogy Corporation, 979 A.2d 1113 (2008)