New York Law Review

Tag: Trust Indenture Act

  • Quadrant Structured Products v. Vertin, 23 N.Y.3d 549 (2014): Interpreting No-Action Clauses in Trust Indentures

    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”.

  • AG Capital Funding Partners, L.P. v. State Street Bank & Trust Co., 11 N.Y.3d 146 (2008): Indenture Trustee’s Negligence Liability for Ministerial Duties

    AG Capital Funding Partners, L.P. v. State Street Bank & Trust Co., 11 N.Y.3d 146 (2008)

    An indenture trustee owes a duty to perform its ministerial functions with due care and may be subjected to tort liability for negligence in performing these duties, even in the absence of a fiduciary relationship.

    Summary

    This case addresses the scope of an indenture trustee’s duties and liabilities to debt security holders. Plaintiffs, holders of debt securities issued by Loewen, sued State Street, the indenture trustee, for failing to deliver debt transaction registration statements, which allegedly diminished the securities’ value during Loewen’s bankruptcy. The New York Court of Appeals held that while a release barred contract and Trust Indenture Act claims, it did not preclude a negligence claim based on the failure to perform ministerial duties with due care. The court found no fiduciary duty existed prior to default, but reinstated the negligence claim, finding a factual issue regarding State Street’s duty of care.

    Facts

    Loewen issued debt securities (PATS and Notes) with State Street acting as indenture trustee. The Collateral Trust Agreement (CTA) allowed future debt holders to acquire secured-creditor status by delivering an Additional Secured Indebtedness Registration Statement (ASIRS) to Bankers Trust. State Street and Loewen executed ASIRS for the PATS and Notes, agreeing to be bound by the CTA. However, State Street never delivered the ASIRS to Bankers Trust. Loewen later filed for bankruptcy, creating uncertainty about the security status of the debt. Plaintiffs settled their claims against Loewen at a discounted value and agreed to release State Street from claims that would entitle State Street to indemnification from Loewen, except for claims based on State Street’s negligence.

    Procedural History

    Plaintiffs sued State Street for breach of contract, violation of the Trust Indenture Act, breach of fiduciary duty, and negligence. Supreme Court initially dismissed contract and Trust Indenture Act claims based on the release, but granted summary judgment to plaintiffs on fiduciary duty and negligence claims. The Appellate Division dismissed all remaining claims, deeming fiduciary duty and negligence claims duplicative of contract claims. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the release executed by the plaintiffs during Loewen’s bankruptcy proceedings bars their claims against State Street for breach of contract and violation of the Trust Indenture Act.

    2. Whether State Street, as an indenture trustee, owed a fiduciary duty to the plaintiffs, as holders of the debt securities, prior to Loewen’s default.

    3. Whether State Street can be held liable for negligence for failing to perform the ministerial task of delivering the ASIRS to Bankers Trust, even in the absence of a fiduciary duty.

    Holding

    1. No, because the release covers all claims for which Loewen would indemnify State Street, excluding claims based on State Street’s negligence, bad faith, or willful misconduct.

    2. No, because prior to default, the indenture trustee’s duties are defined by the indenture agreement and do not automatically create a fiduciary relationship.

    3. Yes, because an indenture trustee owes a duty to perform its ministerial functions with due care, and a breach of this duty can give rise to tort liability for negligence.

    Court’s Reasoning

    The Court held that the release barred the contract and Trust Indenture Act claims because these claims were not based on State Street’s negligence, bad faith, or willful misconduct, falling under the indemnification provision. Referencing the Trust Indenture Act of 1939, the Court stated that an indenture agreement cannot relieve the indenture trustee from liability for its own negligent action. Regarding fiduciary duty, the Court emphasized that prior to default, an indenture trustee’s duties are primarily contractual, and a fiduciary relationship does not automatically arise. Quoting Hazzard v Chase Natl. Bank of City of N.Y., the Court noted that the trustee’s status is more akin to a stakeholder than a traditional trustee. However, the Court recognized that an indenture trustee owes a duty to perform its ministerial functions, such as delivering the ASIRS, with due care. Failure to do so can result in tort liability. The Court found that issues of fact remained regarding whether State Street breached this duty and whether that breach caused the plaintiffs’ losses, precluding summary judgment on the negligence claim. The court emphasized that State Street could not reasonably rely on opinions of Loewen’s counsel when State Street itself had failed to perform its agreed-upon duty. As the Court stated: “[T]here are issues of fact as to whether State Street, separate and apart from its contractual duty under the ASIRS, undertook and breached a duty of care…to act in accordance with the ASIRS and the CTA registration requirements to protect plaintiffs’ security rights in the CTA collateral and whether plaintiffs sustained significant losses as a result of this alleged breach.”