The Second Circuit Court of Appeals recently upheld a ruling in favor of the Tennenbaum Living Trust and Merkin Family Foundation against GCDI S.A., an Argentine construction company, for breach of contract. The court's decision, issued on July 20, 2026, revolves around a dispute concerning convertible debt notes that GCDI sold to the Trusts. This ruling is significant as it clarifies the standards for determining whether a company has met contractual obligations under New York law.
The case, Tennenbaum Living Trust v. GCDI S.A. (Docket No. 23-1247), began when GCDI sought to convert dollar-denominated convertible debt notes into equity. The Trusts, who held these notes, argued that GCDI's Board of Directors made a manifest error in determining that the conditions for conversion had been satisfied. The court's ruling impacts not only the parties involved but also sets a precedent for similar cases regarding contract interpretation and execution.
GCDI, previously known as TGLT S.A., faced financial difficulties starting in 2019, coinciding with the depreciation of the Argentine peso. To stabilize its finances, the company issued new preferred shares and sought to convert existing debt into equity. The indenture agreement, which governed the terms of the notes, allowed GCDI's Board to determine whether the conditions for conversion were met, provided there was no manifest error. However, the Trusts contended that the Board's determination was erroneous and not in line with the contract's terms.
The Trusts filed a lawsuit against GCDI after the Board decided to convert the notes into equity, claiming that the Board's decision constituted a manifest error. The case was heard in the United States District Court for the Southern District of New York, where Judge Cronan ruled in favor of the Trusts. The District Court found that GCDI's Board had indeed violated the terms of the indenture by failing to accurately assess whether the conditions for conversion were met.
In its ruling, the Second Circuit Court affirmed the lower court's decision, stating, "The Board's calculation constituted an error that is 'incontrovertible.'" The court emphasized that the Board had relied on metrics that did not accurately reflect the value of the equity sold, which was necessary to determine whether the conversion threshold had been met. The court's opinion highlighted that the Board's failure to measure the actual value of the equity sold constituted a manifest error under New York law.
The ruling also clarified the legal standard for what constitutes a manifest error, referencing the New York Court of Appeals' decision in the case of Matter of Hermance v. Bd. of Supervisors. The court stated that manifest errors are those that are "open, palpable, and incontrovertible," and that the Board's reliance on incorrect metrics failed to meet this standard.
This decision is significant for several reasons. It reinforces the importance of adhering to contractual obligations and accurately assessing conditions set forth in agreements. The ruling also impacts how companies interpret and execute similar contracts in the future, particularly in the context of financial restructuring and debt conversion.
Moving forward, this ruling may influence other companies in similar situations, ensuring that they carefully evaluate the terms of their contracts and the implications of their decisions. The case underscores the necessity for boards of directors to exercise due diligence when making determinations that affect the financial interests of stakeholders.
As for GCDI, the company has the option to appeal the ruling, although details regarding any potential appeal were not available in the court filing. The outcome of this case may also set a precedent for future disputes involving convertible debt and the standards of contract interpretation in New York.