A recent decision by an appeals court of the State of New York
highlights the deceptive complexity of bringing non-contractual
claims by or on behalf of noteholders under the seemingly
boilerplate remedies provisions in trust indentures. At issue was
the standard indenture language that defines the authority of a
trustee to bring claims under the indenture, and in particular
whether the trustee has the power to bring non-contractual claims
under its own volition (not directed by a majority in principal
amount of bondholders) against persons not party to the
indenture.
In Cortlandt St. Recovery Corp. v. Hellas Telecom.,
S.a.r.l., 2016 N.Y. App. Div. LEXIS 5932; 2016 NY Slip Op
06051 (September 15, 2016), the Appellate Division, First
Department, overturned the dismissal by the Supreme Court, New York
County (Marcy S. Friedman, J.) of claims for fraudulent conveyance,
unlawful corporate distribution and unjust enrichment brought by
the trustee relating to the failure of Hellas to make payments on
notes issued in a public offering. The proceeds of the offering
were used to fund a dividend recapitalization in which the private
equity sponsors and related shareholders of Hellas received cash
proceeds of over €1.5 billion in the aggregate, allegedly
leaving Hellas insolvent.
In dismissing the trustee's non-contractual claims, the
Supreme Court held that the indenture did not authorize the trustee
to pursue such claims under its own volition. The relevant language
in the indenture provides:
"If an
Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal, premium,
if any, and interest on the Notes or to enforce the performance of
provisions of the Notes or this
Indenture."
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The Supreme Court reasoned that despite the seemingly broad
authorization language of the indenture, absent an express grant of
authority to bring non-contractual claims, such authority will not
be assumed to be conveyed. According to the lower court, the
authority of a trustee to bring actions on the notes stems from a
breach of the contractual terms of the indenture, and claims for
fraudulent conveyance or similar claims are individual to
noteholders and can be brought regardless of a breach of the
indenture. The court noted that such authority would have been
found if, for example, the indenture authorized the trustee to
enforce "all of the rights of the holders" of the
notes.
In reversing, the Appellate Division held that the indenture
provision above "confers standing on the Trustee to pursue,
not only the breach of contract claims, but also the fraudulent
conveyance and other aforementioned claims, which seek recovery
solely of the amounts due under the notes, for the benefit of all
noteholders on a pro rata basis, as a remedy for an alleged injury
suffered ratably by all noteholders by reason of their status as
noteholders." "Significantly," the Appellate
Division noted, "the Trustee does not assert causes of action
for fraudulent misrepresentation or other claims seeking recovery
for particular injuries unique to individual noteholders, nor does
the Trustee seek a measure of damages other than the amounts due
under the notes."
Neither the Supreme Court nor the Appellate Division reached the
issue of whether holders of a majority of the principal amount of
notes could direct the trustee to bring an action for fraudulent
conveyance or other similar claims even if the grant of authority
to the trustee to bring claims on its own volition did not
encompass such non-contractual claims, although the Supreme Court
implies that the requisite holders could authorize the trustee to
do so. Under the language in the Hellas indenture:
"Holders of a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of
conducting any proceeding for exercising any remedy available to
the Trustee or exercising any trust or power conferred on
it."
Another issue not addressed by either court is whether the
"no action" clause in the indenture would prohibit
individual noteholders from bringing fraudulent conveyance claims
unless the holders comply with the requirements for individual
noteholder suits under the indenture: "Holders of at least 25%
in principal amount of the outstanding Notes have requested the
Trustee to pursue the remedy," and "the Trustee has not
complied with such request within 60 days after receipt thereof and
the offer of security or indemnity."
Hellas demonstrates the analysis noteholders must
undertake when determining the course of action with respect to
non-contractual claims under an indenture:
- Does the language of the indenture
authorize the trustee to bring such claims on its own volition
without majority noteholder direction? If the grant of authority
permits this, there are compelling cost advantages to coordinated
action by the trustee, particularly because the costs of the
trustee in pursuing the claims will most likely be a recoverable
claim against the issuer under the cost reimbursement and
indemnification provisions of the indenture. After Hellas,
assuming it is not modified on appeal, the typical language would
so authorize the trustee (although careful review of the indenture
would need to be undertaken).
- If nonetheless the indenture language
does not permit the trustee to bring the claim on its own volition,
the provisions of the indenture regarding majority noteholder
direction of the trustee would need to be analyzed to determine
whether and how the trustee may be directed to bring the claim and
avail itself of the cost reimbursement and indemnification
provisions of the indenture.
- Does the language of the indenture require a noteholder to comply with the "no action" clause prerequisites before bringing a non-contractual claim? If so, the holder must coordinate action with holders of the requisite percentage of principal amount of notes (typically 25%), offer indemnity to the trustee and wait the required period of time for the trustee to determine whether to pursue the claim before the noteholder can bring the claim in its individual capacity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.