“Manifest Error” Limits Board Conclusiveness Clauses: An Indenture Determination Is Incontrovertibly Wrong When It Measures the Wrong Contractual Metric

1. Introduction

In Tennenbaum Living Tr. v. GCDI S.A. (2d Cir. July 20, 2026), the Court of Appeals for the Second Circuit affirmed a post-bench-trial judgment for the Tennenbaum Living Trust and Merkin Family Foundation (the “Trusts”) against GCDI S.A., an Argentine construction company, for breach of a New York-law indenture. The dispute arose from a 2017 indenture governing U.S. dollar-denominated convertible notes (the “Notes”), amended in December 2019 to permit a mandatory conversion of the Notes into equity upon satisfaction of certain conditions.

The key contractual feature was Section 1301, which made the Board of Directors’ determination “conclusive absent manifest error” as to whether GCDI had met a “Qualified Public Offering Threshold”—i.e., whether, through one or more public offerings, at least U.S.$100,000,000 of common shares (and/or other equity interests) were “sold.” In 2020 the Board declared the threshold satisfied and stopped paying interest on the Notes. The Trusts sued, ultimately narrowing to the claim that the Board’s threshold determination was a “manifest error” and thus breached Section 1301.

The appeal required the Second Circuit to apply New York’s “manifest error” concept—principally drawn from Matter of Hermance v. Bd. of Supervisors—to an indenture clause that allocates decisional authority to a board but preserves a narrow backstop against plainly indefensible determinations.

2. Summary of the Opinion

The Second Circuit affirmed. Applying Matter of Hermance v. Bd. of Supervisors, the Court held that the Board made a “manifest” (i.e., “open, palpable, and . . . incontrovertible”) error because it did not determine the “value of the equity sold” as Section 1301 “plainly” required. Instead, the Board relied on (i) changes in shareholders’ equity on GCDI’s balance sheet (driven largely by debt extinguishment) and (ii) liquidation preferences of newly issued preferred shares— metrics that “have nothing to do with the actual value of the shares sold” and are not contemplated by the indenture’s text.

The Court rejected GCDI’s arguments that the district court rewrote the contract, improperly shifted the burden of proof, or should borrow the federal arbitration doctrine of “manifest disregard of the law.” The panel also declined to decide whether the transactions qualified as “public offerings” under New York law, noting People v. Landes’s statement that New York has no controlling authority defining “public offering,” and that the parties and district court did not squarely litigate that issue.

Judge Sullivan concurred in the judgment but would have affirmed on a different ground: the relevant transactions were private placements rather than any “public offering,” and treating them as public was itself an “incontrovertible” error.

3. Analysis

A. Precedents Cited

Matter of Hermance v. Bd. of Supervisors, 71 N.Y. 481 (1877)

Hermance is the opinion’s doctrinal anchor. Although decided in the tax-assessment context, it supplies New York’s core definition: “manifest” error is “open, palpable, and . . . incontrovertible,” “needing no evidence” to make it clearer. The Second Circuit treats the Board’s written determination and calculations as the functional equivalent of the “assessment-roll or return” in Hermance and uses Hermance to calibrate judicial review: courts do not correct “all errors of judgment, errors of fact, errors of law, [and] jurisdictional questions,” but they do correct errors that are plainly and objectively wrong on the face of what the decisionmaker purported to do.

Sempra Energy Trading Corp. v. BP Prods. N. Am., Inc., 860 N.Y.S.2d 71 (1st Dep't 2008)

Cited to reinforce the understanding that “manifest error” concerns errors not open to interpretation or question—consistent with the “incontrovertible” framing adopted by both sides at argument.

Ellington v. EMI Music, Inc., 24 N.Y.3d 239 (2014) and Glob. Reinsurance Corp. of Am. v. Century Indem. Co., 22 F.4th 83 (2d Cir. 2021)

These authorities provide the contract-interpretation baseline under New York law: courts aim to give effect to the parties’ expressed intentions by applying the agreement’s plain meaning. The panel uses them to justify a straightforward textual reading of Section 1301: the trigger is equity “sold” in an amount of at least U.S.$100,000,000, which “plainly means” the value of equity sold must reach that level.

Henry v. Champlain Enters., Inc., 445 F.3d 610 (2d Cir. 2006)

A standard-of-review citation: clear error for factual findings after a bench trial, de novo for legal conclusions. It frames the appellate posture without materially driving the substantive “manifest error” analysis.

Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383 (2d Cir. 2003) and Wallace v. Buttar, 378 F.3d 182 (2d Cir. 2004)

GCDI urged the Court to analogize the indenture’s “manifest error” clause to the highly deferential federal doctrine of “manifest disregard of the law” governing review of arbitration awards. The panel refused, distinguishing a New York-law contractual standard (informed by Hermance) from a doctrine derived from the Federal Arbitration Act and emphasizing that the arbitration standard is reserved for “exceedingly rare instances” and asks whether there is even a “barely colorable justification” for the award. The refusal matters because it prevents “manifest error” clauses from being treated as near-immunity provisions akin to arbitration finality.

Smarter Tools Inc. v. Chongqing SENCI Imp. & Exp. Trade Co., 57 F.4th 372 (2d Cir. 2023)

GCDI invoked Smarter Tools’ formulation about decisionmakers resting decisions on “reasoning” that could justify the result—again borrowing from arbitration sensibilities. The panel rejected the analogy and reiterated that the question here is not general reasonableness but whether the Board committed an error that is “incontrovertible” under Hermance.

People v. Landes, 84 N.Y.2d 655 (1994)

Landes is pivotal to the majority’s restraint on the concurrence’s “public offering” theory. The majority quotes Landes for the proposition that “there is no controlling New York authority establishing what constitutes a public offering.” On that basis—and given the limited attention to the issue below—the majority declines to affirm on a theory requiring the court to define an unsettled term of New York law when the case can be decided on valuation grounds.

Chatham Cap. Holdings v. Conru, 92 F.4th 107 (2d Cir. 2024)

Appearing in the majority as a contrast and in the concurrence as support, Chatham Cap. Holdings addresses “public offering” under federal securities law. The majority uses it to show that “public offering” has a long-established meaning under federal law, but cautions against importing that meaning into a New York-law indenture absent state-law guidance. The concurrence relies on Chatham Cap. Holdings to argue that the ordinary meaning of “public offering” tracks the federal distinction between general distribution to the public and limited distribution to sophisticated investors.

Bank of New York Tr. Co. v. Franklin Advisers, Inc., 726 F.3d 269 (2d Cir. 2013)

Cited for the proposition that the indenture is governed by New York law—supporting the majority’s refusal to default to federal securities-law meanings when construing disputed terms.

Donohue v. Cuomo, 38 N.Y.3d 1 (2022) and Kolbe v. Tibbetts, 22 N.Y.3d 344 (2013)

These cases appear in the concurrence to emphasize New York’s “plain meaning” approach to clear, unambiguous contracts—supporting the concurrence’s view that “public offering” can be applied as a matter of ordinary meaning even if New York courts have not precisely defined its contours.

B. Legal Reasoning

The majority’s reasoning proceeds in three steps:

  1. Identify the contractual task delegated to the Board. Section 1301’s trigger depends on whether at least U.S.$100,000,000 of equity interests were “sold” in qualifying offerings. The Board’s determination is “conclusive absent manifest error,” which narrows judicial review but does not eliminate it.
  2. Define “manifest error” under New York law. Under Matter of Hermance v. Bd. of Supervisors, the error must be “open, palpable, and . . . incontrovertible”—not merely debatable, interpretive, or a matter of judgment.
  3. Apply “manifest error” to what the Board actually measured. The Board did not measure the value of equity sold; instead it relied on balance-sheet equity changes (driven by extinguishing liabilities) and liquidation preferences (future priority rights that do not themselves measure market value and were disclosed as potentially unpayable). Because these metrics “incontrovertibly failed to measure the value of the new shares,” the Board committed a manifest error: it answered the wrong question.

Two clarifications sharpen the holding:

  • The Court did not hold that a particular valuation methodology was contractually required. The error was more fundamental: failing to determine the value of equity sold at all, as compelled by the text.
  • The Court treated the Trusts’ proof as sufficient where they presented multiple valuation methods yielding values below $100 million; the district court’s remark that GCDI offered no affirmative evidence above $100 million was taken as an observation about an unrebutted record, not a burden shift.

The concurrence’s reasoning is different. Judge Sullivan would characterize the Board’s error as misclassifying private, limited transactions (a privately negotiated RSA and a notes exchange limited to existing noteholders and eligible investors) as “public offerings.” The majority, however, saw that as requiring a potentially uncertain state-law definition and therefore opted for the valuation-based manifest-error determination.

C. Impact

The decision is likely to have three practical effects in New York-law finance disputes:

  • “Conclusive absent manifest error” is not a free pass. Boards, calculation agents, and issuers must ensure they are measuring the contractually specified variable. Even broad discretion clauses may not protect a determination that uses a metric the contract does not contemplate and that cannot objectively answer the contractual question posed.
  • Process cannot cure a category mistake. The opinion suggests that even “good faith” deliberation (and legal advice) will not shield an “incontrovertible” mismatch between what was required (value of equity sold) and what was measured (balance-sheet effects or liquidation preference).
  • Limits on importing arbitration-like deference. By rejecting analogies to “manifest disregard of the law” review, the panel resists treating “manifest error” clauses as near-equivalents of arbitral finality. Future litigants should expect courts to apply New York’s Hermance framing, not the Federal Arbitration Act’s exceptionally deferential posture.

The opinion also signals judicial caution on unsettled state-law terminology (here, “public offering”), especially where the issue was underdeveloped below and an alternative ground resolves the case. That restraint may encourage parties drafting New York-law indentures to define “public offering” and related securities terms if they want predictable triggers.

4. Complex Concepts Simplified

  • “Conclusive absent manifest error” clauses: Contract provisions that make a designated party’s determination binding except in a very narrow class of obvious mistakes. Courts will not redo the decision merely because they would have decided differently.
  • “Manifest error” (New York): Under Matter of Hermance v. Bd. of Supervisors, an error that is plain and indisputable—something objectively wrong on its face, not a close call.
  • Balance-sheet shareholders’ equity vs. value of equity sold: Shareholders’ equity on a balance sheet is an accounting residual (assets minus liabilities). It can rise dramatically if debt is extinguished, even if the market value of new shares issued is far lower. Section 1301’s trigger asked about the value of equity sold, not the accounting impact of a recapitalization.
  • Liquidation preference: A priority claim in a hypothetical future liquidation. It is not, by itself, a measure of what the shares are worth today, and may be aspirational if the issuer lacks sufficient assets.
  • Public offering vs. private placement (in general terms): A public offering is typically made broadly to the investing public; a private placement is limited to a defined group (often sophisticated or eligible investors). The concurrence would apply that ordinary distinction; the majority declined to decide its precise meaning under New York law in this case.

5. Conclusion

Tennenbaum Living Tr. v. GCDI S.A. reinforces that New York “manifest error” review—rooted in Matter of Hermance v. Bd. of Supervisors—permits courts to set aside a board’s “conclusive” indenture determination when the board commits an obvious category mistake: measuring something the contract does not ask for, rather than the contractual trigger itself. The decision narrows the safe harbor that issuers may assume exists under “conclusive absent manifest error” language and underscores the drafting and governance lesson: if a conversion or payment trigger turns on a specific economic fact (here, the value of equity “sold”), the determination must actually address that fact in a way the contract contemplates.