ndenture trustees are a seeming fixture of chapter 11 practice. These trustees are often the largest secured creditors in chapter 11 cases, particularly those involving health care, gambling and other regulated industries. Although large banks may have a trust department specifically set up to serve as an indenture trustee, a trustee is neither a bank nor a primary lender. Rather, trustees are intermediaries between the borrowers and the lenders, and are charged with certain obligations under the indentures with collecting the funds from the borrower, distributing those funds to the individual security holders and, in general, administering the underlying loan.

Any professional working in the chapter 11 arena without a thorough understanding of what indenture trustees are and how they function is at a severe handicap. Indenture trustees stand squarely at the junction of two competing federal statutory schemes, securities and bankruptcy laws. Professionals will often have expertise in one of these areas, but not the other. For bankruptcy professionals, Corporate Trust Administration and Management provides an excellent understanding of this area of overlap, and in a way that bankruptcy lawyers, accountants, borrowers and bankers can easily comprehend.

Trust indentures emerged in the late 19th century as a way of raising capital for railroads and the emerging capital-intensive industries like coal and steel. Individual banks were often not sufficiently large to lend the money required, and so indentures were developed whereby many lenders would pool their funds, and one trustee would be responsible for collection and administration of the loan, as well as paying the collected funds to each of the lenders. In the beginning, courts had considerable difficulty in interpreting the exact nature of this arrangement, which resulted in complex contractual provisions designed to cope with every possible eventuality. Despite federal legislation (the Trust Indenture Act of 1939) and 100 years of case law and industry practice, trust indentures remain some of the most complex and confusing of all legal documents.

Indentures fall into two broad categories: corporate and municipal. Corporate bond financing may be public and subject to registration with the Securities and Exchange Commission, or private and thus exempt from registration. Municipal bonds, typically tax-exempt financing, have become increasingly prevalent during recent years; common uses for municipal financing include hospitals, nursing homes, educational facilities and multi-family housing projects. The conduct of indenture trustees may be governed by the Trust Indenture Act of 1939. The different types of indentures, and the statutory and regulatory schemes applicable to all of them, are discussed in detail in Corporate Trust.

Corporate Trust also serves as a playbill to identify the players involved in a trust indenture transaction. In a typical direct loan from a bank, there are only a few parties involved in the making of the loan—the borrower and the bank's loan officer, whose work is subject to review and approval by the bank's internal credit committee. Trust indentures involve many more parties, each with their own agendas, both in the origination of the deal and the workout of any default.

In a public offering, in addition to the borrower, there will be a financial advisor who assists the borrower in putting together the package; an investment banking firm to underwrite the issue, which will be paid a commission if the deal goes through; the trustee, who will administer the loan; and lawyers for everyone. The "lenders" may or may not be yet identified, for the individual bonds are sold after the closing and these bondholders will not be involved in the negotiation of the terms of the indenture or of the underlying loan.

A private placement, however, is much more like the typical bank loan: a borrower will negotiate the loan through its financial advisor, with one or more institutional or high-net-worth individuals in direct placement of the debt. The indenture trustee will function in a more ministerial capacity and will not be involved in the negotiation of the terms of the deal, such as collateral or repayment. Corporate Trust serves as a primer on the motivations and expectations of each of these different parties.

Indenture trustees, as creatures of contract, are bound to act in accordance with the indenture; that is, their authority to act, or to refuse to act, is limited by the rights and powers granted to them by the trust indenture. Corporate Trust covers typical covenants and clauses included in trust indentures, such as replacement of collateral, administration of collateral, payment and satisfaction. Significantly, Corporate Trust also provides insight on how trustees interpret their obligations in light of those covenants and clauses.

Once a default occurs, or a borrower declares bankruptcy, the indenture trustee becomes much more active. Corporate Trust devotes several chapters to an indenture trustee's response to a default or a bankruptcy, reviewing both the strategies available to the trustee and the concerns that the trustee must resolve in working through a default or a bankruptcy.

Indenture trustees can be frustrating to negotiate with because the trustee is acting in a fiduciary capacity for a number of investors, whose identity and interests may or may not be known to the trustee. A trustee is often subject to two competing interests: its fiduciary obligation to all of the bondholders, and its fear of being sued for violating that obligation. This is especially true when a substantial portion of the bonds are owned by one borrower whose overall interests in a restructuring may be different from those of the other bondholders. Corporate Trust provides substantial insight on how trustees manage these conflicts.

Ultimately, it is the bondholders who have their money at risk and to whom the trustee is responsible. In many private placements, there will be one or more bondholders who hold a majority of the securities and wish to direct the indenture trustee in the performance of its duties in negotiating with a chapter 11 debtor. Corporate Trust includes a chapter on the rights of security holders and discusses the more common issues that arise between trustees and security-holders, such as instructions to act in a certain manner given to the trustee by fewer than all of the bondholders.

Corporate Trust was written for the trust officer working for an indenture trustee. That does not mean that it is without relevance for the bankruptcy professional. On the contrary, it is the most comprehensive work on indenture trustees that I have seen, and it provides a much-needed education in this field for bankruptcy professionals.