Hyperbole in the Capital Stack: Are We Misreading Lender Intent? Liability Management Transactions and the Implied Covenant of Good Faith and Fair Dealing

Authors

• Daniel R. Janel, Benjamin N. Cardozo School of LawFollow

Abstract

The hasty characterization and overall sentiment surrounding Liability Management Transactions (“LMTs”) as “hostile” strategies that promote “lender-on-lender violence” attempt to misapply the implied covenant of good faith and fair dealing under New York law, which serves as a gap-filler rather than a “contract buster.” Although the covenant’s proper function is to protect parties’ reasonable expectations that they will receive the fruits of their bargain, it does not purport to rewrite or impose on carefully negotiated credit agreements. Sophisticated parties enter into meticulously crafted credit agreements with full awareness of the breadth and scope of their provisions. Only after finding themselves disadvantaged do nonparticipating lenders attempt to weaponize the implied covenant beyond its intended scope, challenging actions that are either explicitly or implicitly permitted under the original agreement.

While claims alleging breach of the implied covenant remain viable in appropriate circumstances, courts should specifically look for conduct demonstrating particularized intent to deprive counterparties of their contractual benefits. This requires evidence beyond mere disadvantage—showing bad faith requires demonstrating actions taken primarily to harm the other party rather than to advance legitimate business interests. However, courts should reject any presumption that bad faith motivates all LMTs.

By analyzing the shifts in the capital markets that propelled the use of LMTs, examining the strengths and weaknesses of credit provisions, and illustrating recent litigation, this Note ultimately argues that transactions executed within credit agreement parameters should be presumed compliant with good faith obligations, encouraging sophisticated lenders to mitigate risks through careful drafting while promoting less aggressive restructuring alternatives without necessitating judicial intervention.

Disciplines

Banking and Finance Law | Contracts | Securities Law

Recommended Citation

Daniel R. Janel, Hyperbole in the Capital Stack: Are We Misreading Lender Intent? Liability Management Transactions and the Implied Covenant of Good Faith and Fair Dealing, 47 Cardozo L. Rev. 1397 (2026).
Available at: https://larc.cardozo.yu.edu/clr/vol47/iss4/19