## Facts

- Two special-purpose entities issued multiple tranches of CDO notes under an indenture for Concord Real Estate CDO 2006-1, with senior notes paid ahead of subordinated notes.
- A related noteholding vehicle held notes exceeding $66 million in principal (the “Subject Notes”).
- The indenture used over-collateralization and interest-coverage tests; failure would redirect cash flows and trigger senior-note paydowns.
- Deterioration in the collateral pool threatened an over-collateralization test failure that would have triggered more than $900,000 in payments to senior noteholders.
- To avoid the failure, the related holder surrendered the Subject Notes to the issuer for cancellation at no charge, and the issuer delivered them to the indenture trustee/notes registrar with instructions to cancel them on the register.
- The trustee refused, asserting (i) the indenture did not expressly authorize voluntary surrender-and-cancellation, and (ii) cancellation would defeat senior noteholders’ expected paydown if tests failed.
- The issuers sued for declaratory and injunctive relief compelling cancellation and exclusion of the Subject Notes from the coverage-test calculations.

## Issues

1. Whether, under the indenture and applicable debt-law principles, a noteholder could voluntarily surrender notes for cancellation despite the indenture’s lack of an express surrender-and-cancellation provision.
2. Whether notes delivered to the trustee for cancellation ceased to be “Outstanding” and therefore had to be excluded from coverage-test calculations.
3. Whether the indenture trustee was obligated to cancel the surrendered notes and reflect the cancellation on the note register.

## Decision

- The Court of Chancery entered judgment for the issuers.
- The court held the surrender and cancellation of the Subject Notes was permitted under the indenture and general principles allowing debt retirement by agreement of issuer and holder.
- Once delivered for cancellation, the Subject Notes were not “Outstanding” and could not be counted for the over-collateralization test.
- The trustee was required to recognize the cancellation and treat the Subject Notes as no longer outstanding for indenture purposes, including coverage tests.
- The Delaware Supreme Court summarily affirmed on the reasoning of the Court of Chancery.

## Legal Principles

- In indenture interpretation, defined terms (including “Outstanding”) control; if the definition excludes notes canceled or delivered to the trustee for cancellation, those notes are not counted in tests keyed to outstanding principal.
- Contractual silence is not, by itself, a prohibition; absent an express restriction, parties may use legally recognized methods of debt retirement consistent with the indenture’s text.
- Courts enforce the parties’ written allocation of risk in structured-finance documents; asserted investor “expectations” cannot override contractual language, and protections such as anti-manipulation limits must be bargained for and expressed.
- An indenture trustee’s register and cancellation functions are largely ministerial when the governing documents authorize the action; the trustee may not refuse performance based on policy concerns inconsistent with the indenture.

## Conclusion

The court required the indenture trustee to cancel voluntarily surrendered notes because the indenture’s definition of “Outstanding” and general debt-law principles permitted cancellation even without an express surrender clause, and the canceled notes therefore could not be included in coverage-test calculations.


Concord Real Estate CDO 2006-1, Ltd. v. Bank of America, N.A., 996 A.2d 324 (Del. Ch. 2010)