23 N.Y.3d 549 (2014)

A trust indenture’s no-action clause that bars enforcement of contractual claims arising under the indenture, but omits reference to “the Securities,” does not bar a security-holder’s independent common-law or statutory claims.

Summary

Quadrant, a security holder, sued Athilon and related parties for alleged wrongdoing. The defendants sought dismissal based on a no-action clause in the indenture agreement. The Delaware Supreme Court certified questions to the New York Court of Appeals regarding the interpretation of the no-action clause under New York law, specifically whether the omission of “the Securities” from the clause limited its applicability to only contractual claims arising under the Indenture, or if it extended to all common law and statutory claims. The Court of Appeals held that the no-action clause, limited to the “Indenture,” did not bar independent common-law or statutory claims.

Facts

Athilon issued securities, including subordinated notes purchased by Quadrant. Athilon entered into trust indentures with Trustees. Quadrant alleged that EBF, after acquiring Athilon, controlled Athilon’s Board and took actions favoring EBF’s interests to the detriment of senior securityholders like Quadrant. These actions included paying interest on junior notes despite an agreement to defer such payments and paying above-market-rate service fees to an EBF affiliate. Quadrant, as a security holder, then sued asserting breaches of fiduciary duty, seeking damages and injunctive relief, and fraudulent transfer claims.

Procedural History

Quadrant sued in the Delaware Court of Chancery, and the defendants moved to dismiss, arguing the suit was barred by the no-action clause in the indenture. The Court of Chancery dismissed the complaint, citing Delaware cases applying New York law. The Delaware Supreme Court reversed and remanded, asking the Court of Chancery to analyze the significance of the difference between the no-action clause in this case and those in the cited Delaware cases. Upon remand, the Court of Chancery concluded the clause applied only to contractual claims arising under the indenture. The Delaware Supreme Court then certified questions to the New York Court of Appeals.

Issue(s)

1. Whether, under New York law, a trust indenture no-action clause expressly precluding a security holder from initiating action regarding “this Indenture,” but omitting reference to “the Securities,” precludes enforcement only of contractual claims arising under the Indenture, or whether it also precludes enforcement of all common law and statutory claims.

2. Whether the Delaware Court of Chancery’s finding that the no-action clause precludes enforcement only of contractual claims arising under the Indenture is a correct application of New York law.

Holding

1. Yes, because under New York law, the absence of any reference to “the Securities” in the no-action clause precludes enforcement only of contractual claims arising under the Indenture, and not all common law and statutory claims.

2. Yes, because the Vice Chancellor’s Report on Remand correctly interpreted New York law by concluding that claims not based on default of the securities, which the Trustee cannot assert, are not barred by the no-action clause.

Court’s Reasoning

The Court of Appeals emphasized that a trust indenture is a contract, and under New York law, interpretation of indenture provisions is a matter of basic contract law. The court relied on the language of the contract, stating that “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” (Greenfield v Philles Records, 98 NY2d 562, 569 [2002]). The court reasoned that no-action clauses are to be “strictly construed.” Because the no-action clause only referred to actions “upon or under or with respect to this Indenture” and made no mention of suits “on the securities,” it was limited to indenture contract rights. The Court distinguished this from cases where the no-action clause referred to both the indenture and the securities, in which case the securityholder’s claims are subject to the terms of the clause regardless of whether they are contractual or arise from common law or statute. The court also rejected the argument that the purpose of the no-action clause was to prevent all individual securityholder suits, noting that some claims, like those against the trustee, cannot be prohibited by a no-action clause. The court also quoted the commentary to a model no-action clause from the Ad Hoc Committee for Revision of the 1983 Model Simplified Indenture, which stated: “[t]he clause applies, however, only to suits brought to enforce contract rights under the Indenture or the Securities, not to suits asserting rights arising under other laws”.