Court of Appeals recently held in response to a certified question presented by the Supreme Court of Delaware, held that “a trust indenture’s “no-action” clause that specifically precludes enforcement of contractual claims arising under the indenture, but omits references to “Securities,” does not bar a security holder’s independent common law or statutory claim.
An indenture is essentially a written agreement that bestows legal title of the securities in a single Trustee to protect the interests of individual investors who may be numerous or unknown to each other. Essentially, this type of agreement is one where the issuer of certain securities sets forth its obligations, the security holders’ rights and remedies in the case of the issuer’s default on the provisions of the indenture and the duties and obligations of the Trustee. Typically, any claims must be approved by a majority of investors and made under the name of the Trustee.
In Quadrant, the plaintiff sued the defendants, Athilon Capital Corp. (“Athilion”), the issuer of the securities and EBF & Associates (“EBF”) who became the majority shareholder by buying the requisite volume of Athilon’s securities. Athilon’s business was to sell credit derivative swaps (“CDS”) as form of insurance protection. By 2008, Athilion had undertaken approximately $50 billion in nominal default risk whereas it only it $700 million dollars in capital reserves. This $700 million comprised of $600 million in security debt (invested by entities such as the plaintiff) and $100 million in equity.
When EBF acquired the majority of shares, it installed and controlled the board of Athilon. While its status was that of a junior note holder, by virtue of its control of the board, the EBF-controlled board paid interest to the junior notes before paying Quadrant, who was a senior note holder.
Quadrant thus filed various individual claims inter alia for breach of fiduciary duty relating to the interest payments to the junior notes prior to the senior notes (thereby brining a claim as securityholder). EBF then moved to dismiss all claims as it argued that pursuant to no-action clause stated in the indenture agreement, Quadrant may only raise such claims through the Trustee. EBF relied on the reasoning held in Feldbaum v. McCrory Corp. (18 Del J Corp L 630 (1992) and Lange v. Citibank, N.A. , 2002 WL 2005728 where the court in both cases, interpreting New York law, dismissed based on a no-action clause stating that all claims must be brought via a trustee.
However, here the Court distinguished Feldbaum and Lange by reasoning that the “Athilion no-action clause when strictly construed and afforded its plain meaning, makes no reference to the securities and therefore does not apply to claims arising outside the scope of the indenture.” Simply put, since the term “securities” was not included in the no-action clause and the basis of the claim was for the securities and not the contract claims under the indenture, the suit may proceed.
While the Court acknowledged the public policy argument behind the establishment of such indenture agreements, nevertheless, it deferred to strict contract interpretation principles that emphasize the wording of the contract.