Windstream and Contract Opportunism

Abstract

Few recent cases in finance have attracted as much interest — and vitriol — as last year’s decision in U.S. Bank National Association v. Windstream Services, LLC v. Aurelius Capital Master, Ltd. (S.D.N.Y. 2019). This brief summary explores some of the larger debates in corporate finance and contracts raised by the case. The Windstream opinion made waves not because it was (arguably) incorrectly decided, but because it hastened creditors’ recognition that no amount of contractual armor can fully protect them from opportunistic behavior in today’s markets. Although the specific objectionable behavior in Windstream is already being addressed by new contract provisions, the reality is that sophisticated hedge funds, other creditors, and borrowers will always find ways to exploit contract language to their advantage. And that task may ironically be made easier by today’s style of contract drafting. The more detailed and complex contracts become, the more easily they can be exploited ex post, when the state of the world and the parties’ incentives have changed.

Keywords: contract arbitrage, opportunism, borrower-creditor conflict, net-short debt activism