## Facts

- Windstream Services, LLC issued senior unsecured notes governed by a New York-law indenture, with U.S. Bank National Association serving as indenture trustee.
- The indenture restricted “Sale and Leaseback Transactions,” set an event-of-default process (including notice by holders of at least 25% of principal and a 60-day cure period), and limited Windstream’s ability to incur additional indebtedness or issue additional notes.
- In 2015, Windstream transferred network assets from certain subsidiaries to Communications Sales & Leasing, Inc. (later Uniti) and arranged for those assets to be leased back under a long-term master lease to a newly formed parent, Windstream Holdings, Inc.
- Although the lease ran to Holdings, Windstream’s operating subsidiaries continued using the same assets in the same business.
- In 2017, a noteholder (Aurelius Capital Master, Ltd.) holding more than 25% of the notes delivered a notice asserting the 2015 transaction breached the sale-leaseback covenant.
- Windstream did not unwind or otherwise remedy the 2015 transaction within 60 days and instead issued additional notes in 2017, seeking to reduce Aurelius’s holdings below 25% and to facilitate a waiver vote.
- The 2017 issuance increased Windstream’s indebtedness beyond the indenture’s debt-incurrence limits.
- U.S. Bank sued for declarations that (1) the 2015 transaction triggered an uncured default that became an event of default and (2) the 2017 notes were improperly issued and could not be counted for waiver purposes.
- After a bench trial, the district court entered judgment for the trustee.

## Issues

1. Whether the 2015 asset transfer and master lease constituted a prohibited “Sale and Leaseback Transaction” under the indenture, resulting in an event of default after notice and failure to cure.
2. Whether the 2017 additional notes were issued in violation of the indenture’s debt-incurrence limits and, if so, whether they were ineligible to vote to waive the event of default.

## Decision

- The court held the 2015 transaction fell within the indenture’s sale-leaseback prohibition and therefore breached the covenant.
- Because holders meeting the 25% threshold gave notice and Windstream failed to cure within 60 days, an event of default occurred under the indenture.
- The court held Windstream’s 2017 issuance violated the indenture’s limitations on additional indebtedness.
- The court further held the 2017 notes could not be treated as valid outstanding notes for purposes of calculating a majority waiver, and any purported waiver dependent on those notes was ineffective.
- Judgment entered for the indenture trustee on the requested declaratory relief.

## Legal Principles

- Under New York contract law, a court enforces an indenture’s plain meaning as a negotiated instrument among sophisticated parties, without rewriting terms based on business consequences.
- A sale-leaseback covenant may apply where the issuer’s enterprise, in substance, sells assets and continues to use them under a lease structure, even if an affiliated entity is inserted as the formal lessee.
- An indenture’s event-of-default provisions operate according to their contractual mechanics once a covenant breach, proper notice, and failure to cure are established; “cure” requires remedying the breach, not merely disputing it or changing the holder mix.
- Notes issued in violation of an indenture’s debt-incurrence restrictions may be disregarded for purposes of determining whether noteholders validly waived a default, where counting them would allow the issuer to negate covenant protections through an additional breach.
- The indenture’s enforcement rights generally do not depend on a holder’s motive or hedging strategy absent contractual language conditioning those rights.

## Conclusion

The court strictly enforced the indenture as written, concluding that Windstream’s 2015 transaction violated the sale-leaseback covenant and ripened into an event of default after notice and failure to cure, and that Windstream could not escape default by issuing additional notes in violation of debt limits and using those notes to manufacture a waiver majority.


U.S. Bank Nat’l Ass’n v. Windstream Servs., LLC, 2019 WL 948120 (S.D.N.Y. 2019)