Pending before this Court is an appeal from an order of the Delaware Court of Chancery dismissing a complaint. The plaintiff below, appellant, Quadrant Structured Products Company, Inc. (“Quadrant”), holds certain Notes issued by Ath-ilon Capital Corp. (“Athilon”), an allegedly insolvent Delaware corporation. The Notes are long term obligations covered by two separate trust indentures that are governed by New York law. The defendants-below are EBF & Associates, LP (“EBF”), which indirectly owns 100% of Athilon’s equity;
In a two paragraph order issued on June 5, 2012, the Court of Chancery granted the defendants’ motion to dismiss Quadrant’s complaint, on the ground that all claims alleged therein were barred for failure to comply with the “no-action” clauses in the Athilon trust indentures. The dismissal order, a copy of which is attached to this Certificate as Exhibit A, cited two Court of Chancery decisions that the court found “directly on point”: Feldbaum v. McCrory Corp.,
The plaintiff, Quadrant, appealed to this Court. By order dated February 12, 2013, this Court remanded the case to the Court of Chancery with directions to analyze the significance under New York law (if any) of the differences between the wording of the no-action clauses at issue in the two cited cases and in this Athilon case. A copy of this Court’s remand order is attached to this Certificate as Exhibit B.
On June 20, 2013, the Court of Chancery, in a detailed and highly textured analysis of relevant New York case law, issued a Report on Remand, a copy of which is attached to this Certificate as Exhibit C. In its Report, the Court of Chancery held that: (i) “the language of the Athilon no-action clause distinguishes this case from Feldbaum and Lange,” and (ii) the motion to dismiss should be denied except as to two (and part of a third) of the ten Counts of the Quadrant complaint. The matter was then returned to this Court, and was re-argued before us on October 23, 2013.
Section 500.27(a) of the Court of Appeals Rules of Practice authorizes cеrtification of cases to the New York Court of Appeals “[w]henever it appears to ... a court of
I. STATEMENT OF FACTS
A. Nature of the Case
Athilon, a Delaware corporation, was formed in 2004 and (through a subsidiary) sold credit derivative products — in the form of “credit default swaps”
Athilon’s organizational documents limit its permissible lines of business to selling credit default swaps, and require compliance with strict operating guidelines. Those guidelines mandate that if a “Suspension Event”
Before the financial crisis of 2008, Athi-lon underwrote over $50 billion in nominal credit default risk, but on a highly leveraged basis. Measured against Athilon’s equity, Athilon’s leverage ratio was a stratospheric 506:1. At that level, a 0.2% loss on the collateralized debt obligations covered by Athilon’s credit default swaps would wipe out its equity cushion and render Athilon insolvent, at least on paper. Even so, the rating agenсies gave Athilon “AAA/Aaa” counterparty credit ratings and investment grade debt credit ratings.
In 2008, Athilon found itself in distress and by the end of that year had lost its AAA/Aaa ratings. By 2010, Athilon had unwound two credit default swaps at a cost of approximately $370 million — more than three times Athilon’s equity capital. By August 2010, Athilon no longer held any investment grade debt or counterparty credit ratings. Under its operating guidelines, Athilon entered permanent “runoff’ mode.
With Athilon in distress, the trading prices of its debt securities fell precipitately. That enabled EBF to acquire a large
In its complaint Quadrant alleges that as of September 30, 2011, Athilon’s shareholders’ equity, measured according to GAAP, stood at a negative $660 million. Quadrant alleges that Athilon is insolvent and has no prospect of returning to solvency, because it can only sell credit default swaps and because the market for that business has collapsed for enterprises, like Athilon, that hold no collateral.
At the heart of Quadrant’s lawsuit is its claim that in these circumstances, a properly motivated board of directors would preserve Athilon’s value for orderly liquidation in 2014, when the last credit default swap expires. The EBF board designees, however, are (according to Quadrant) pursuing strategies designed to benefit EBF and its affiliates at the expense of the remaining classes of Note holders. Specifically, the directors have caused Athilon to continue paying interest on the junior notes (which EBF holds), even though Athilon had a contractual right to defer those interest payments and those notes would receive nothing in an orderly liquidation. Athilon’s directors also allegedly agreed to pay ASIA above-market fees to manage Athilon’s day-to-day operations. The Court of Chancery characterized Quadrant’s claim thusly:
Together, the EBF designees and ASIA have embarked on a high-risk investment strategy, contrary to the terms of Athilon’s governing documents, that amounts to а “heads EBF wins, tails everyone else loses” bet. If the high-risk investments succeed, then the underwater Junior Notes and equity will benefit. If the investments fail, then the more senior tranches of Notes will bear the loss.”6
In October 2011, Quadrant filed this Court of Chancery action against EBF and its affiliates and against Athilon and its officers and directors. As amended, the complaint contained ten Counts. For present purposes, the relevant fact is that only two of those Counts — Counts VII and VIII — and part of a third, Count X, seek to enforce rights under the Indenture.
B. Circumstances Out of Which The Questions of New York Law Arise
The circumstances out of which the questions of New York law arise are as follows: The basis of the defendant’s motion to dismiss the complaint was (and is) that all of the claims asserted in Quadrant’s complaint are barred by the no-action clause of the Indenture, which is governed by New York law. The no-action clause pertinently provides that:
No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of atrustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder ... [complies with specified conditions].
It is undisputed that Quadrant did not comply with the conditions set forth in the Athilon no-action clause before filing suit. In support of their motion to dismiss the complaint, the defendants relied on the two cases previously cited, Feldbaum v. McCrory Corp. and Lange v. Citibank, N.A. In those cases, the Delaware Court of Chancery, applying New York law, dismissed both actions on the ground that they were barred by the respective indenture no-action clauses. In its June 5, 2012 order (Exhibit A to this Certificate), the court granted the motion to dismiss, citing Feldbaum and Lange as “directly on point,” but without engaging in any analysis.
On appeal to this Court, Quadrant argued that the no-action clauses in Feldb-aum and Lange indentures were “substantially different” from the no-action clause in the Athilon Indenture. Specifically, the no-action clauses in Feldbaum and Lange barred actions to enforce not only rights arising under the respective indentures, but also “any remedy with respect to this Indenture or the Securities,”
By Order dated February 12, 2013 (Exhibit B to this Certificate), this Court determined that the current record was insufficient for appellate review, and remanded the case to the Court of Chancery with instructions “to issue an opinion analyzing the significance (if any) under New York law of the differences between the no-action clauses in the Lange and Feldbaum indentures and the Athilon Indenture.” The Remand Order further instructed that “[t]he analysis should include a discussion of decisions by New York courts, and other courts applying New York law, that bear on the issue presented here.” This Court retained jurisdiction to consider the implications of the Report on Remand.
On June 20, 2013, the Court of Chancery issued its 55 page Report on Remand (Exhibit C to this Certificate). In that Report the Court of Chancery, after extensively analyzing the New York case law, concluded — contrary to its earlier conclusion— that:
[A]s a matter of New York law, the differences between the Athilon [no-action] [c]lause and the Feldbaum/Lange clause are significant.... the Athilon Clause does not apply to Counts I through VI and IX of the Complaint, or to Count X to the extent it seeks to impose liability on secondary actors for violations of the other counts. The clause applies to Counts VII and VIII of the Complaint, subject to the outcome of Quadrant’s other arguments on appeal.10
The case was then returned to this Court, which held a supplemental oral argument on October 23, 2013, to enable the parties to argue the implications of the Report on Remand. Quadrant argued that the Report on Remand correctly decided the dispositive New York law issues, and that the order of dismissal should be modified to conform to the conclusions in that Report. The defendants, however, maintained that that Report was legally incorrect and that the Court of Chancery’s
II. THE QUESTIONS OF NEW YORK LAW, NOT CONTROLLED BY PRECEDENT, THAT MAY BE DETERMINATIVE
A resolution of the appeal before us depends upon the answer to two questions of New York law that are not controlled by precedent. This Court certifies the following questions to the New York Court of Appeals:
(1) A trust indenture no-action clause expressly precludes a security holder who fails to comply with that clause’s preconditions, from initiating any action or proceeding upon or under or with respect to “this Indenture,” but makes no reference to actions or proceedings pertaining to “the Securities.”
The question is whether, under New York law, the absence of any reference in the no-action clause to “the Securities” precludes enforcement only of contractual claims arising under the Indenture, or whether the clause also precludes enforcement of all common law and statutory claims that security holders as a group may have.
(2) In its Report on Remand (Exhibit C), the Court of Chancery found that the Athilon no-action clause, which refers only to “this Indenture,” precludes enforcement only of contractual claims arising under the Indenture. The question is whether that finding is a correct application of New York law to the Athilon no-action clause.
III. WHY THESE ISSUES SHOULD BE ADDRESSED BY THE COURT OF APPEALS AT THIS TIME
In our national securities markets, the law governing many (if not most) publicly traded debt securities is a creature of New York law. Important rights and requirements pertaining to those securities are expressed in indentures that are, and for over a century have been, governed by New York law. As a consequence, New York has a very strong interest in assuring that those markets function properly. An important requirement for properly functioning public debt security markets is that the rights pertaining to those securities be certain and predictable to both investors and issuers. The New York Court of Appeals is the most authoritative tribunal empowered to adjudicate definitively the rights and requirements contained in indentures governed- by New York law. For that reason, and because New York has the stronger interest in this issue, in con
Moreover, the certified questions, which test the boundaries of a no-action clause’s coverage, are most frequently raised in actions asserting non-contractual claims that arise under the law of the issuer’s state of organization. As a consequence, those questions are often decided by non-New York courts — as evidenced by the Delaware cases interpreting the no-action clauses contained in New York bond contracts. Because the certified questions have not been raised directly before New York courts (as the dearth of case law suggests) — but are raised frequently before courts in sister states — it is particularly important that the New York Court of Appeals give guidance to those latter courts by addressing these questions on certification at this time.
We direct the Clerk of this Court to send this opinion to the Clerk of the New York Court of Appeals, as our certificate, together with the parties’ briefs and appendices. We will take no further action in this appeal until after the New York Court of Appeals acts on this certification request.
EXHIBIT A
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE QUADRANT STRUCTURED PRODUCTS COMPANY, LTD., Individually and Derivatively on Behalf of Athilon Capital Corp., Plaintiff, v.
VINCENT VERTIN, MICHAEL SULLIVAN, PATRICK B. GONZALES, BRANDON JUNDT, J. ERIC WAGONER, ATHILON CAPITAL CORP., ATHILON STRUCTURED INVESTMENTS AD-VISORS LLC, and EBF & ASSOCIATES, LP, Defendants.
C.A. No. 6990-VCL
ORDER GRANTING MOTION TO DISMISS
WHEREAS the defendants have moved dismiss the complaint, the Court has reviewed the motions and related briefing and authorities, and oral argument is unnecessary in light of this Court’s precedents,
IT IS HEREBY ORDERED this 5th day of June, 2012, that
1. The complaint is DISMISSED in Light of the plaintiffs failure to comply with the no-action clauses in the indentures governing the debt instruments that the plaintiff holds. See Lange v. Citibank, N.A.,
2. The Court has not reached any of the other grounds asserted for dismissal.
/s/ Vice Chancellor Laster Vice Chancellor Laster
EXHIBIT B
IN THE SUPREME COURT OF THE STATE OF DELAWARE
QUADRANT STRUCTURED PRODUCTS CO., LTD., Individually and Derivatively on behalf of Athilon Capital Corp., Plaintiff Below, Appellant,
v.
VINCENT VERTIN, MICHAEL SULLIVAN, PATRICK B. GONZALEZ, BRANDON JUNDT, J. ERIC WAGONER, ATHILON CAPITAL CORP., ATHILON STRUCTURED INVESTMENT ADVIS-
No. 338, 2012
Court Below: Court of Chancery of the State of Delaware C.A. No. 6990 VCL
Submitted: Feb. 5, 2013
Decided: Feb. 12, 2013
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGE-LY, Justices, constituting the Court en Banc.
ORDER
This 12th day of February 2013, upon consideration of the briefs of the parties, and their contentions in oral argument, it appears to the Court that:
1.Quadrant Structured Products Co., Ltd., the plaintiff-below (“Quadrant”), appeals from a Court of Chancery order granting a motion to dismiss by the defendants, who are Athilon Capital Corp. (“Athilon”), Athilon’s officers and directors, EBF & Associates, LP (“EBF”), and Athilon Structured Investment Advis-ors LLC (“ASIA”) (collectively, “defendants”). We conclude that the current record is insufficient for appellate review. Accordingly, the case must be remanded to the Court of Chancery to issue an opinion stating its reasons for concluding that Quadrant’s claims are barred by the no-action clause in the indenture governing the Athi-lon securities that Quadrant holds.
2. In October 2011, Quadrant, a holder of Athilon debt securities, brought this action asserting claims against Athilon and its'officers and directors, and against EBF (a partnership that indirectly controls Ath-ilon) and ASIA (an EBF affiliate that manages Athilon on a day-to-day basis). On June 5, 2012, based solely on the parties’ briefs, the Court of Chancery granted the defendants’ motion to dismiss Quadrant’s Amended Complaint.
3. The order dismissing the Amended Complaint consists of two short paragraphs which conclude that dismissal was warranted “in light of the plaintiffs failure to comply with the no-action clauses in the indentures governing the debt instruments that the plaintiff holds.”
4. This Court reviews de novo a trial court’s grant of a motion to dismiss.
6. In Lange, the Court of Chancery granted the defendants’ motion for judgment on the pleadings, similarly because the plaintiffs, a group of debenture holders, had failed to comply with a no-action clause in the applicable indenture, which also was governed by New York law.
7. In this case, the Athilon Indenture, which is also governed by New York law, is worded differently from the indentures at issue in Lange and Feldbaum. The Athilon Indenture provides that “[n]o holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture,” unless certain conditions are first satisfied.
8. The Court of Chancery order of dismissal did not address the differences between the respective no-aetion clauses in the Lange and Feldbaum indentures and the Athilon Indenture. Presumably the court found those differences to be not legally significant, but the order does not explain why. Nor does the order cite to, or discuss, applicable New York case law that would support the court’s, implicit view that the New York courts would find those differences legally insignificant.
9. Accordingly, we remand this action to the Court of Chancery to issue an opinion anаlyzing the significance (if any) under New York law of the differences be
NOW, THEREFORE, IT IS ORDERED that the judgment of the Court of Chancery is REMANDED for further proceedings in accordance with this Order. Jurisdiction is retained.
BY THE COURT:
/s/ Jack B. Jacobs
Justice
EXHIBIT C
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE QUADRANT STRUCTURED PRODUCTS COMPANY, LTD., Individually and Derivatively on Behalf of Athilon Capital Corp., Plaintiff,
v.
VINCENT VERTIN, MICHAEL SULLIVAN, PATRICK B. GONZALEZ, BRANDON JUNDT, J. ERIC WAGONER, ATHILON CAPITAL CORP., ATHILON STRUCTURED INVESTMENT ADVIS-ORS LLC, and EBF & ASSOCIATES, LP, Defendants.
C.A. No. 6990-VCL
REPORT PURSUANT TO DELAWARE SUPREME COURT RULE 19(c)
Date Submitted: March 22, 2013
Date Decided: June 20, 2013
Lisa A. Schmidt, Catherine G. Dearlove, Russell C. Silberglied, Cory D. Kandestin, Robert L. Burns, Susan M. Hannigan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Harold S. Hor-wich, P. Sabin Willett, Samuel R. Rowley, BINGHAM McCUTCHEN LLP, Boston, Massachusetts; Attorneys for Plaintiff Quadrant Structured Products Company, Ltd.
Philip A. Rovner, Jonathan A. Choa, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Philippe Z. Selen-dy, Nicholas F. Joseph, Sean P. Baldwin, QUINN EMANUEL URQUHART & SULLIVAN, LLP; New York, New York; Attorneys for Defendants Vincent Vertin, Michael Sullivan, Patrick B. Gonzalez, Brandon Jundt, J. Eric Wagoner, Athilon Capital Corp., and Athilon Structured Investment Advisors LLC.
Collins J. Seitz, Jr., Garrett B. Moritz, Eric D. Selden, SEITZ ROSS ARON-STAM & MORITZ LLP, Wilmington, Delaware; Attorneys for Defendant EBF & Associates, LP.
LASTER, Vice Chancellor.
Plaintiff Quadrant Structured Products Company, Ltd. (“Quadrant”) owns notes issued by defendant Athilon Capital Corp. (“Athilon”). Before filing this lawsuit, Quadrant did not comply with the no-action clauses in the indentures governing its notes. The defendants moved to dismiss on that basis, and Quadrant responded with arguments that this Court rejected in Feldbaum v. McCrory Corp.,
On appeal, Quadrant argued that the Athilon clause differs critically from the Feldbaum/Lange clause because the former refers only to claims under the indenture, but the latter referred to both the indenture and the notes. By order dated
For the reasons set forth herein, Quadrant has persuaded me that the language of the Athilon no-action clause distinguishes this case from Feldbaum and Lange. Had Quadrant previously made this argument, I would have relied on the no-action clause to dismiss only Counts VII-VIII and part of Count X, and then reached the defendants’ other grounds for dismissing the remaining counts.
I. FACTUAL BACKGROUND
The facts are drawn from Quadrant’s verified amended complaint (the “Complaint” or “CC”) and the documents it incorporates by reference, including (i) an indenture dated as of December 21, 2004, between Athilon аnd Deutsche Bank Trust Company Americas, as Trustee, governing the Subordinated Deferrable Interest Notes, Series A and B, and (ii) an indenture dated as of July 26, 2005, between Athilon and The Bank of New York, as Trustee, governing the Senior Subordinated Deferrable Interest Notes, Series A, B, C and D. For present purposes, the indentures are substantively identical, so I refer to them singly as the “Indenture.” Quotations are from the 2004 indenture.
A. Athilon’s Corporate Structure And Business Model
Athilon is a Delaware corporation with its principal place of business in New York, New York. Athilon and its wholly owned subsidiary, Athilon Asset Acceptance Corp. (jointly, the “Companies”), were formed in 2004 to sell credit default swaps to financial institutions. Through its subsidiary, Athilon wrote credit default swaps covering senior tranches of collater-alized debt obligations. At the parent level, Athilon guaranteed the swaps.
Athilon was financed originally with $100 million of equity capital. It raised another $600 million of debt capital, comprising $850 million in senior subordinated notes, $200 million in subordinated notes, and $50 million in junior notes (collectively, the “Notes”). The Notes are long-term obligations that will mature, depending upon the series, in 2035, 2045, or 2047. Interest payments on the Notes are de-ferrable for up to five years at Athilon’s option. All of the Notes rank in priority below Athilon’s credit default swap obligations.
The Companies’ organizational documents limit their permissible lines of business to selling credit default swaps and require compliance with strict operating guidelines. The Companies only can invest in high quality securities of short duration, and their portfolios must be sufficient at all times to cover any credit default swaps and the Notes. The guidelines mandate that if a “Suspension Event” occurs and remains uncured, then the Companies must enter “runoff’ mode. When in that status, the Companies cannot write new business and must pay off existing credit default swaps as they mature.
B. The Business Model Fails.
Before the financial crisis of 2008, market participants discounted the risks faced by credit derivative product companies, enabling Athilon to underwrite over $50 billion in nominal credit default risk. Measured against its $700 million in committed capital, Athilon operated with a vertiginous leverage ratio of 71:1. Measured against Athilon’s equity, Athilon’s leverage ratio was a stratospheric 506:1. At that level, a 0.2% loss on the collateralized debt obligations covered by Athilon’s credit default swaps would wipe out its equity cushion
In 2008, the Companies found themselves in distress, and they lost their AAA/ Aaa ratings at the end of that year. By early 2009, the Companies had sustained several Suspension Events. In 2010, Athi-lon unwound two credit default swaps at a cost of $870 million, more than three times its equity capital. By August, the Companies no longer held any investment grade debt or counterparty credit ratings. Under the operating guidelines, the Companies entered permanent runoff mode.
C. The EBF Takeover
With Athilon in distress, the trading prices of its debt securities fell precipitously. EBF & Associates, LP (“EBF”) seized the opportunity to purchase a large position in the riskiest tranche of Notes (the “Junior Notes”) at a significant discount. In August 2010, EBF acquired 100% of Athilon’s equity. EBF installed the current board of directors, which the Complaint alleges is dominated and controlled by EBF. In May 2011, nine months after EBF took control, Quadrant acquired its position in the Notes.
Quadrant alleges that Athilon is insolvent. Excluding its outstanding credit default swaps, Athilon continues to carry $600 million of debt, but its assets allegedly have a fair market value of only $426 million. As of September 30, 2011, Athi-lon’s shareholder’s equity, measured according to GAAP, stood at negative $660 million. The Complaint alleges that Athi-lon has no prospect of returning to solvency because it can only sell credit default swaps, and the market for that business has collapsed.
Quadrant argues that under the circumstances, a properly motivated board of directors would preserve Athilon’s value for orderly liquidation in 2014, when the last credit default swap expires. The EBF designees on the Athilon board, by contrast, are pursuing strategies designed to benefit EBF and its affiliates. They have caused Athilon to continue paying interest on the Junior Notes, notwithstanding the right to defer those payments and the fact that the Junior Notes would receive nothing in an orderly liquidation. They also agreed to pay Athilon Structured Investment Advisors LLC (“ASIA”), an EBF affiliate, above-market service fees to manage Athilon’s day-to-day operations. Together, the EBF designees and ASIA have embarked on a high-risk investment strategy, contrary to the terms of Athilon’s governing documents, that amounts to a “heads EBF wins, tails everyone else loses” bet. If the high-risk investments succeed, then the underwater Junior Notes and equity will benefit. If the investments fail, then the more senior tranches of Notes will bear the loss.
D. Thb Quadrant Complaint
In October 2011, Quadrant filed suit against Athilon, its officers and directors, EBF, and ASIA. As amended, the Complaint contained ten counts:
• Count I asserted a derivative claim on behalf of Athilon against the individual defendants for breaching their fiduciary duties by (i) continuing to pay interest on the Junior Notes; (ii) paying above-market service and license fees to EBF; (iii) departing from an appropriately conservative capital investment strategy; and (iv) causing Athilon to violate its organizational documents and operating guidelines.
• Count II asserted a derivative claim against EBF for aiding and abetting the breaches of fiduciary duty alleged in Count I.
• Count III sought a permanent injunction barring the individual defendants from causing Athilon to pay the interest and fees identified in Count I.
• Counts IV and V challenged the payment of interest and fees under the Delaware Fraudulent Transfer Act (“DFTA”).
• Count VI sought a permanent injunction under the DFTA against the continuing payment of interest and fees.
• Count VII contended that by taking the actions detailed in Count I and elsewhere in the complaint, Athilon breached the implied covenant of good faith and fair dealing that inheres in the Indenture.
• Count VIII asserted that EBF had tortiously interfered with Athilon’s obligations under the Indenture.
• Count IX asserted that Athilon paid constructive dividends in violation of Delaware law and sought to recover those payments from the individual defendants.
• Count X asserted a claim for civil conspiracy against EBF and ASIA for actions taken in concert with the individual defendants.
Quadrant brought Counts I — III derivatively in its capacity as a creditor of an insolvent corporation. Quadrant brought Counts IV-VIII directly in its capacity as a creditor. Quadrant brought Counts IX and X both directly and derivatively. In Counts I-VI and IX, Quadrant relied solely on its status as a holder of the Notes. In Counts VII and VIII, Quadrant relied on the Indenture. In seeking to impose secondary liability under Count X, Quadrаnt relied on the Notes and the Indenture to the same degree as the related primary counts.
The defendants moved to dismiss the Complaint on a variety of substantive and procedural grounds. In their lead argument, the defendants invoked the no-action clause in the Indenture, which states:
Limitations on Suits by Securityholder. No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default in respect of the series of Securities held by such Securityholder and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 50% of the aggregate principal amount of the relevant series of Securities at the time Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or théreby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceedings and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.08 hereof within such 60 days....
Dkt. 32 Ex. A. § 7.06 at 51-52 (the “Athilon Clause”). Quadrant admittedly did not comply with the Athilon Clause before filing suit. Relying on Feldbaum, Lange, and their progeny, the defendants pointed out that no-action clauses have resulted in pleadings-stage dismissals of precisely the types of claims that Quadrant asserted.
After reviewing the briefing and the authorities cited by the parties, I concluded that Feldbaum and Lange addressed the points Quadrant had raised. By order dated June 5, 2012, I dismissed the action with prejudice, observing that Feldbaum and Lange were “directly on point.” Dkt. 60 (the “Dismissal Order”).
E. The Appeal
Quadrant appealed. Before the Delaware Supreme Court, Quadrant reiterated the arguments rejected in Feldbaum and Lange, noting that both were Court of Chancery decisions and that the issues presented questions of first impression for the high court. See Appellant’s Op. Br. at 1. Quadrant also argued for the first time that Feldbaum and Lange “construed substantially different contracts” and that the Athilon Clause applied “only to claims that arise from the governing indenture itself.” Id. at 2. In support of this new contention, Quadrant observed that the Feldb-aum/Lange clause “applied not only to rights under its indenture, but also to ‘any remedy with respect to ... the Securities.’ ” Id. at 16-17 (quoting Feldbaum,
By order dated February 12, 2013, the Delaware Supreme Court determined that “the current record is insufficient for appellate review.” Quadrant Structured Prods. Co. v. Vertin, No. 388, 2012, ¶ 1 (Del. Feb. 12, 2013) (the “Remand Order”). The Delaware Supreme Court explained that “[o]n appeal, Quadrant claims that Lange and Feldbaum are not controlling, because the no-action indenture clause in those cases were [sic] critically different from the no-action clause in the Athilon indenture at issue here.” Id. ¶ 4. The high court observed that the no-action clauses in both Lange and Feldbaum provided that “[a] Securityholder may not pursue a remedy with respect to this Indenture or the Securities ” without satisfying the conditions set forth in the clause. Id. ¶ 5
II. LEGAL ANALYSIS
In accordance with the Remand Order, this opinion first considers the plain language of the Athilon Clause and the Feldb-aum/Lange clause. It then reviews (i) authorities that have construed no-action clauses under New York law, (ii) other instructive Delaware precedents, and (iii) authoritative commentary. Because the linguistic distinction that Quadrant raised on appeal appears to have analytical heft, the opinion concludes by applying the language of the Athilon Clause to the ten counts in the Complaint.
A. The Plain Language Of The Clauses
“[U]nder New'York law interpretation of indenture provisions is a matter of basic contract law.” U.S. Bank Nat’l Ass’n v. U.S. Timberlands Klamath Falls, L.L.C.,
For purposes of plain language analysis, the Athilon Clause can be parsed as follows:
No holder of any Security
1.0 shall have any right by virtue or by availing of any provision of this Indenture
2.0. to institute any action or proсeeding at law or in equity or in bankruptcy or otherwise
8.0 upon or under or with respect to this Indenture, or
4.0 for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder,
unless [the holder complies with specified conditions].
See Dkt. 32 Ex. A. § 7.06 at 51-52. The Feldbaum/Lange clause used different language: “A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless [the Securityholder complies with specified conditions].” Feldbaum,
Subpart 1.0 of the Athilon Clause defines the sources of rights governed by the clause. Under this subpart, no “holder of any Security shall have any right by virtue or by availing of any provision of this Indenture.” As a matter of plain language, the Athilon Clause does not speak to other rights that the holder of a Security may have, such as rights under or by virtue of the Security itself. It likewise does not address rights that might exist under the common law, state statutes, or federal statutory schemes like civil RICO or the federal securities laws. The Feldb-aum/Lange clause does not contain language resembling subpart 1.0 and is not limited to any subset of potential rights. It applies to any right that any Security-holder might have, regardless of its source, to the extent the Securityholder invokes it to “pursue any remedy with respect to this Indenture or the Securities.” In this respect, the Athilon Clause is narrower than the Feldbaum/Lange clause.
Subpart 2.0 of the Athilon Clause identifies the types of actions or proceedings that would fall within the clause if the “holder of any Security” asserted a right “by virtue or by availing of any provision of this Indenture.” This aspect of the Athilon Clause encompasses “any action or proceeding at law or in equity or in bankruptcy or otherwise” that falls within the scope of the clause. The Feldbaum/Lange clause does not contain language resembling subpart 2.0. Just as the Feldb-aum/Lange clause is not limited to any subset of potential rights, it is not limited to any particular type of action or proeeed-ing. It rather applies to any action or proceeding that any Securityholder might bring to the extent the Securityholder “seeks to pursue any remedy with respect to this Indenture or the Securities.” Along this dimension, given the broad language of the Athilon Clause, the two provisions appear equivalent.
Subparts 3.0 and 4.0 of the Athilon Clause impose additional limitations on its scope. As noted, under subparts 1.0 and 2.0, the Athilon Clause extends to any “action or proceeding” in which the plaintiff asserts a “right by virtue or by availing of any provision of this Indenture.” Under subparts 3.0 and 4.0, the “action or proceeding” also must be one in which the plaintiff (i) sues “upon or ■with respect to this Indenture” (3.0) or (ii) seeks as a remedy “the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder” (4.0). As a matter of plain language, the Athilon Clause only applies to actions or proceedings involving certain types of claims (those “upon or under or with respect to this Indenture”) or those seeking certain types of remedies (“the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder”). The plain language of the term “hereunder” refers to the Indenture, which appears in both the immediately preceding subpart (3.0) and in the first subpart (1.0). The Feldbaum/Lange clause does not contain any language limiting the types of claims a Securityholder might bring, nor does it call out specific remedies. Rather, it applies broadly to any action or proceeding to the extent that a Securityholder “seeks to pursue any remedy with respect to this Indenture or the Securities.” Here too, the Athilon Clause is narrower than the Feldbaum/Lange clause.
B. Cases Addressing Athilon Clauses Under New York Law
The Remand Order calls for “a discussion of decisions by New York courts, and other courts applying New York law, that bear on the issue presented here.” Remand Order ¶ 9. New York courts have been interpreting no-action clauses for over one hundred years.
Before the adoption of the Trust Indenture Act of 1939 (the “TIA”), New York courts frequently considered whether a no-action clause in an indenture could restrict a bondholder from seeking to recover on the bond for past due payments of principal and interest.
Anyone who has purchased a home using traditional bank financing will recognize the distinction between a debt instrument and the security instrument: the borrower signs a debt instrument in the form of a promissory note reflecting the debt, and the borrower separately executes a mortgage that secures the debt by creating a lien against the home. See 1 Mortgages and Mortgage Foreclosure in N.Y. § 4:8 (2012) (“[A] corporation bond is a promise to pay, exactly as is the mortgage bond signed by the individual homeowner; the mortgage securing it is a securing lien on designated property in exactly the manner of the mortgaged homestead.”). If the borrower defaults, the bаnk can proceed in rem by foreclosing on the mortgage, sue the borrower in personam on the promissory note, or both. See, e.g., Manley v. MAS Assocs., LLC,
Nineteenth century lawyers used the traditional real estate mortgage as a model when their corporate clients needed to raise long-term debt to fund major infrastructure projects like canals and railroads. See Commentaries, supra note 3 at 4. “The adaptation of the traditional real estate mortgage to this purpose was a work of marvelous ingenuity and a development of the greatest significance in the economic growth of the United States.” Id. at 5. A further practical problem for publicly traded debt was the need to
afford bondholders the benefits of a mortgage lien on the assets and yet provide in an orderly fashion for a multiplicity of bondholders holding ... securities, subject to change of ownership through trading in the bonds. The answer was found in the conveyance of the real estate and other mortgageable assets of the corporation to a trustee for the benefit of all bondholders.
Id.; see 1 Ralph A. McClelland & Frederick S. Fisher, Jr., The Law of Corporate Mortgage Bond Issues In Conjunction With A Typical Indenture Of Mortgage And Deed Of Trust Securing Bonds 2 (1937) [hereinafter Bond Issues ] (“The use of trustees to take and hold the mortgaged property as security for the benefit of the bondholders affords a device for unified action which otherwise would be impossible, especially since the holders of the bonds are numerous and of changing identity.”). Over time, a true corporate mortgage that recorded a lien on real property “was found to be awkward if not impossible for many types of corporate borrowers,” and it was “dispensable in many cases if adequate contractual protections were included in the debt instrument or the related indenture.” Commentaries, supra note 3 at 6. “The solution was to
Because of the distinction between debt instruments and security instruments, New York courts held that if the bond did not contain language making it subject to the indenture or sufficiently incorporating the terms of the indenture by reference, then the creditor could sue freely on the bond.
For example, in General Investment Co. v. Interborough Rapid Transit Co.,
merely denied the holders of the notes “any right to institute any suit, action or proceeding in equity or at law for the enforcement of this indenture.” But the action at bar is not to affect, disturb, or prejudice the lien of the collateral indenture or to enforce any right thereunder. The action is solely for the purpose of recovering on defendant’s primary obligation to pay said moneys, with interest.... The remedies are entirely separate and distinct.... [T]he present action is not barred by the clause in question, as the action is not to enforce the indenture or any rights thereunder, or to secure any remedy or relief therein provided.... Said clause relates solely to the enforcement of the collateral security for the payment of said notes, and in no manner affects the action upon the notes themselves.
Id. at 909 (emphasis in original) (citation omitted). By contrast, if the note sufficiently referenced the terms of the indenture and the no-action clause encompassed the rights of holders under the bonds, then the no-action clause аpplied to a suit on the bonds.
The first major decision was Cruden, where holders of debentures sought to assert fraud and civil RICO claims. The no-action clauses in the governing indenture provided that unless its procedural requirements were followed, the holders did not have
any right by virtue or by availing of any provision of this Indenture to institute any action or proceedings at law or in equity or in bankruptcy or otherwise, upon or under or with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder....
Cruden II,
action clause did not bar the fraud and RICO claims: “Plaintiffs’ other claims are not made under the Indenture, such as the RICO and fraud claims. The Court finds that plaintiffs do have standing to bring suit on these claims as well, any restrictive provision of the Indentures being inapplicable to these claims.” Cruden v. Bank of N.Y.,
The next significant decision was Victor v. Riklis,
Victor relies on the district court’s decision in Cruden, which held that a deben-tureholder’s RICO and fraud claims were not barred by a no-action provision. Cruden is distinguishable from this case, however, because that no-action clause was not as broad as the one contained in the E-II indentures.... Accordingly, we find that the E-II indenture’s reference to actions with respect to the seсurities as well as the indenture itself broadens the scope of the no-action clause to include Victor’s RICO and fraud claims.
Perhaps the most influential decision for no-action clause jurisprudence was Feldb-aum, in which Chancellor Allen applied New York law. Bondholders whose securities were governed by the same indentures considered in Victor v. Riklis contended that a restructuring (i) breached the implied covenant of good faith and fair dealing in the indentures, (ii) violated New York’s prohibition against fraudulent transfers, and (iii) was the product of fraudulent misrepresentations. See Feldbaum,
Given the purposes for which no-action clauses are designed, I cannot accept plaintiffs’ position. No principled reason or factual particularity of this case is advanced that would justify this view.
In my opinion, no matter what legal theory a plaintiff advances, if the trustee is capable of satisfying its obligations, then any claim that can be enforced by the trustee on behalf of all bonds, other than a claim for recovery of past due interest or [principal], is subject to the terms of a no-action clause of this type.
Id. at *6. Chancellor Allen later explained that the trustee would not be “capable of satisfying its obligations” if the suit alleged misconduct by the trustee. Absent such circumstances, “courts systematically conclude that, in consenting to no-action clauses by purchasing bonds, plaintiffs waive their rights to bring claims that are common to all bondholders, and thus can be prosecuted by the trustee.... ” Id. at *7.
Turning to the claims before him, Chancellor Allen held that the no-action clause governed the plaintiffs’ implied covenant claims and the fraudulent conveyance claims. The harms those claims sought to address affected all bondholders proportionately, so it was up to the trustee to prosecute the claims on behalf of all bondholders. Id. at *7-8. The Chancellor reachеd the same conclusion about the fraud claims to the extent the complaint alleged that the bondholders were deprived of an opportunity to seek injunctive relief against the restructuring. Id. at *9. Such an injunction would have been sought on behalf of and inured to the benefit of all bondholders, making it relief that only the trustee could seek. To the extent the complaint alleged fraud that deprived the bondholders of an opportunity to sell their bonds in the market, the Chancellor held that the no-action clause would not apply. In Feldbaum, however, the alleged fraud consisted of the defendants’ failure to disclose that the restructuring violated the indentures. The fraud claim therefore constituted an effort “to transmute a contract claim litigable only by the indenture
In Lange, another decision by this Court interpreting New York law, Chancellor Strine, then-Vice Chancellor, relied on Feldbaum when confronted with an identical no-action clause. Lange,
Per Feldbaum, the particular nature of a claim that is asserted on behalf of the Debentureholders as a class is not determinative of the applicability of [the no-action clause]; what is determinative is whether the claim is one with respect to the Indenture or .the Debentures themselves. Each of the claims pled in the amended complaint clearly satisfies that test, as the Debentureholders’ ability to press those claims depends entirely on their ownership of the Debentures and the adverse effect that certain actions have allegedly had on each Debenture-holder, pro rata to her ownership of those securities.
Id. at *7. Because each of the claims could be asserted by the trustee, the plaintiffs could not proceed without complying with the no-action clause.
Two more recent decisions followed Feldbaum and Lange. In the Where-house Entertainment litigation, the issuing corporation failed to redeem outstanding debentures at a premium after the occurrence of an event that the plaintiffs contended triggered the redemption obligation. The plaintiffs asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract, and fraudulent conveyance. See McMahan & Co. v. Wherehouse Entm’t, Inc.,
Similarly in the Akanthos litigation, bondholders argued that certain transactions engaged in by the issuing corporation constituted illegal fraudulent transfers. See Akanthos Capital Mgmt., LLC v. CompuCredit Hldgs. Corp.,
Consistent with the pre-TIA decisions, the foregoing authorities indicate that the effect of a no-action clause depends on its language. In Crwden, where the no-action clause paralleled the Athilon Clause and
For their part, the defendants rely on two inapposite cases: Walnut Place LLC v. Countrywide Home Loans, Inc.,
C. Other Instructive Delaware Precedents
In Feldbaum and Lange, this Court interpreted expansive no-action clauses that were governed New York law. In other decisions, the Delaware Supreme Court and this Court have commented on narrower clauses and .suggested that bondholders could bring claims that fell outside of the language of the clause. Unfortunately, these decisions have not made clear whether the indentures in question were governed by New York law. I discuss them for three reasons. First, they represent the only extant indications of the Delaware Supreme Court’s views; second, given the prevalence of New York law in this area, some of the indentures may have been governed by New York law despite the absence of any reference in the opinion; and third, this Court has observed that there are no pertinent distinctions between New York law and Delaware law in this area. See Tang Capital P’rs, LP v. Norton,
This line of Delaware decisions begins with Harff v. Kerkorian,
In ruling on the debentureholders’ class claims, Chancellor Quillen noted that “[t]he authorities cited by plaintiffs for the proposition that creditors can maintain an action against management for violation of rights which exist independently of the Indenture Agreement all involved either fraud or insolvency.” Id. at 221. The Chancellor observed that the plaintiffs had not alleged that the corporation was insolvent, asserted any violation of a Delaware statute, or pled that the dividend amounted to fraud. Id. He concluded that “no fiduciary duties existed as between the parties and that the rights of the convertible debenture holders ... are confined to the terms of the Indenture Agreement.” Id. at 222. In light of this holding, the Chancellor held that “[t]he effect of the ‘no-action clause’ ... need not be determined.” Id.
On appeal, the Delaware Supreme Court affirmed the dismissal of the derivative claim, but reversed the dismissal of the direct claims. Harff II,
Harff II implies that the Delaware Supreme Court believed a no-action clause with the same scope as the Athilon Clause would not bar the noteholders’ individual claims for damages under a theory of fraud. In Continental Illinois, Justice Jacobs, then a Vice Chancellor, read Harff II in this fashion: “By recognizing that the debenture holders were entitled to proceed on a claim of fraud independent of the terms and limitations of the Indenture, the Supreme Court in Harff implicitly ruled that the no-action clause of the indenture would not bar an action for fraud.” Cont’l Ill. Nat’l Bank & Trust Co. of Chi. v. Hunt Int'l Res. Corp.,
In Mann v. Oppenheimer, Justice Walsh, then Vice Chancellor, reached the same conclusion about Harff. See Mann v. Oppenheimer & Co.,
Justice Berger, then Vice Chancellor, employed a similar analysis in Mabon, Nugent & Co. v. Texas American Energy Corp.,
It bears noting that in Lange, Chancellor Strine declined to read the Harff cases as expressing any view on the scope of a no-action clause.
[D]id the Harff case hold that a no-action clause could not bar a bondholder suit alleging fraud or that the issuer was insolvent? The answer to that question is no. In Harff, the Court of Chancery expressly avoided any ruling on the scope of applicability of the no-action clause, and the Supreme Court never addressed it any discernible, articulated way.
Taken together, the Harff cases and subsequent decisions indicate that the Ath-ilon Clause applies only to claims under the Indenture and does not extend to claims that rely on other sources of law. The limited reading that these cases give to narrow no-action clauses parallels the approach taken by the authorities that explicitly apply New York law.
D. Authoritative Commentary
Although New York law directs that indenture provisions be interpreted using standard principles of contract interpretation, “[c]ourts strive to give indenture provisions a consistent and uniform meaning because uniformity in interpretation is important to the efficiency of capital markets.” Concord Real Estate CDO 2006-1, Ltd. v. Bank of Am. N.A.,
The preparation of an instrument of security intended to provide with artistic completeness for the ramifications of the modern corporate entity imposes upon its author the obligation to use wording that is well defined among those engaged in the interpretation of such indentures. To depart from well understood verbiage is to invite criticism and possibly to plunge the investor into the field of the unknown.
Bond Issues at 4.
“Courts enhance stability and uniformity of interpretation by looking to the multi-decade efforts of leading practitioners to develop model indenture provisions.” Concord Real Estate,
The Commentaries “provide powerful evidence of the established commercial expectations of practitioners and market participants.” Concord Real Estate,
The Commentaries contain a model no-action clause that resembles the Athilon Clause:
No holder of any Debenture or coupon shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless [the holder complies with the conditions in the clause].
More recent authority confirms this interpretation. In 2000, the Ad Hoc Committee for Revision of the 1983 Modified Simplified Indenture, working under the aegis of the Committee on Developments in Business Financing of the American Bar Association’s Section of Business Law and assisted by members of the Committee on Trust Indentures and Indenture Trustees and the Business Bankruptcy Committee’s Subcommittee on Trust Indentures, produced a Revised Model Simplified Indenture. See Revised Model Simplified Indenture, 55 Bus. Law. 1115 (2000); see also Bank of N.Y.,
Like the Feldbaum/Lange clause, the model clause applies to any efforts by a Securityholder to “pursue a remedy with respect to this Indenture or the Securities.” Yet notwithstanding the broad language, the commentary to the provision states:
The 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.
Note that the introductory language requiring compliance prior to pursuing a remedy “with respect to this Indenture or the Securities ” indicates merely that claims to enforce the contractual terms of the Securities (which may include rights incorporated from the Indenture) are likewise subject to the no-action clause (subject to the exclusion noted in the preceding paragraph).
Id. at 1191-92 (emphasis in original) (citations omitted). Thus, according to authoritative commentators, even a clause like the Feldbaum/Lange clause should not extend beyond contract rights. For purposes of the issue presented by the Remand Order, this commentary confirms that the Athilon Clause should receive a narrow reading.
There is one line of cases that- cuts against the preceding authorities and favors equating the Athilon Clause with the Feldbaum/Lange clause. When considering bondholders’ petitions for a statutory receivership, judicial decisions have given a broad construction to no-action clauses paralleling the Athilon Clause. The defendants rely on Tang, which they say holds that the Athilon Clause must apply to any attempt by a noteholder to bring an action on a debt instrument. I read Tang and its predecessor cases as limited to statutory receiverships and not as speaking to other contexts, such as the claims in this case.
In Tang, noteholders petitioned for a statutory receivership under Section 291 of the Delaware General Corporation Law based on their status as creditors. See 8 Del. C. § 291 (“Whenever a corporation shall be insolvent, the Court of Chancery, on the application of any creditor or stockholder thereof, may, at any time, appoint 1 or more persons to be receivers of and for the corporation.... ”). Like the Athilon Clause, the no-action clause in Tang provided that
no Holder of any Note shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding ’in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar officiаl, or for any other remedy hereunder [without meeting specified conditions]....
Tang,
In support of their right to pursue a statutory receivership notwithstanding the no-action clause, the plaintiffs relied on Noble v. European Mortgage & Investment Corp.,
Noble was one of two opinions addressing whether a no-action clause applied to a claim for a statutory receiver that Chancellor Josiah O. Wolcott issued within a five month period. In Noble, Chancellor Wolcott considered whether a bondholder could obtain a statutory receivership in light of a no-action clause that applied to “any action or proceeding at law or in equity upon or in respect of this indenture, or for the execution of any trust or power hereof, or for any other remedy under or upon this indenture.”
Shortly thereafter, in Tietjen v. United Post Offices Corp.,
It is suggested by the complainant that the only sort of receiver which the prohibition referred to can be taken to contemplate is a receiver of the property under the indenture, and that inasmuch as the pending bill seeks a general receiver for the corporation and not of the property alone, the prohibition is not applicable. The answer to that suggestion I think is plain, for it is to be observed that the request and refusal are conditions precedent not only to the bondholders’ right to sue for a receiver but as well to the bondholders’ right to enforce any power or remedy given to the trustees. Now among those powers which are given to the trustees is the one found in Section 5 of the same Article Seven, which is that in case any one of the defaults occurs under Section 2 (which defaults accelerate the maturity of the bonds) the trustees are “entitled as of right, without notice, to the appointment of a receiver ... of each and every [of] the rights and properties of the corporation, with power to operate and continue the business of the corporation, and with all other rights and powers of rеceivers in equity.” This language clearly shows that the sort of receiver which the bondholders are forbidden to seek without satisfying the conditions precedent, is not of the limited type which operates only in a custodial capacity over the mortgaged property.
Id. at 847-48. Because the type of statutory receiver that the bondholders sought was one that the trustee could obtain under the indenture, Chancellor Wolcott dismissed the petition. Id. at 848.
Tietjen reached the same result as two contemporaneous New York decisions. See Greene v. N.Y. United Hotels,
[i]n order to promote and protect the equal and ratable rights of every holder of the Debentures and to avoid multiplicity of suits, all the Debentures shall be subject to the condition that no holder of any Debenture or coupon appertaining thereto shall have any right to institute any action, at law or in equity, under or growing out of any provision of this Indenture, or for the enforcement thereof, [without meeting its conditions].
Ernst involved the same indenture litigated in Relmar Holding Co. v. Paramount Publix Corp.,
In order to promote and protect the equal ratable right of every holder of the bonds and to avoid multiplicity of suits, all the bonds shall be subject to the condition that all rights of action thereon, or in respect thereof, or on or in respect of the coupons thereto appertaining, are vested exclusively in the trustee under this indenture, and that no holder of any bond or coupon appertaining thereto shall have any right to institute any action, at law or in equity, upon the bonds or any of the appurtenant coupons, or growing out of any provision thereof, or of this indenture, or for the enforcement of this indenture [without complying with its conditions].
Relmar,
In Ernst, the plaintiffs sought the appointment of a receiver on the grounds that the same issuance constituted a fraudulent conveyance.
What [the plaintiffs] seek is a receiver in a representative action to set aside a transfer as fraudulent. The nature of their action shows that they are presuming to speak for all the bondholders and not for themselves alone. They are attempting to protect their rights under the indenture, but .to be permitted to do so they must not contravene its terms.... As soon as the plaintiffs presumed to speak for all other bondholders, they necessarily brought in the collateral indenture, their right to do which is challenged as a question of fact.
Id. at 229. The court seemingly could have reached the same result simply by citing the plain language of the no-action clause, which encompassed not only rights
The outcomes in Tietjen, Greene, and Ernst reflected the rule at the time in most jurisdictions. See Smith, supra note 1 (collecting cases). By contrast, contemporaneous decisions from the New Jersey Court of Chanсery held that no-action clauses must be interpreted strictly such that when a clause referred to a right of action by virtue of the indenture or a remedy under its terms, it did not bar a suit for a statutory receiver. See Jennings v. Studebaker Corp.,
Against this backdrop, Justice Berger decided Elliott Associates. The plaintiffs held debentures and sought the appointment of a receiver for the issuer, Bio-Response, Inc under Section 291. They also claimed that Bio-Response had committed fraud and violated the implied covenant of good faith and fair dealing. Elliott Assocs.,
This left the claim for a receiver, which Justice Berger held was barred by the no-action clause. Like the Athilon Clause and the provision in Tang, the no-action clause at issue in Elliott Associates stated:
No Holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder unless such Holder previously [complies with specified conditions].
Id. at *6. Justice Berger held that “[u]n-like the relevant clause in Noble, there is nothing in this Indenture reserving to plaintiffs the right to commence an action, ‘so long as the procedure they adopt is not under the [IJndenture’ ” and that “as in Tietjen, Debenture holders are expressly denied the right to bring an action for the appointment of a receiver without first following the specified procedure....” Id. at *7.
In Tang, Vice Chancellor Glasscock followed Elliott Associates on grounds of stare decisis. He noted that “[t]he language of the indenture’s no-action clause in Elliott was nearly identical to that [in Tang].”
In my view, the defendants are correct to point out the tension between the rulings in the Dеlaware statutory receivership cases and the plain language of the ■no-action clauses at issue. After excising the inapplicable language, the relevant portions of the Tang and Elliott Associates clauses stated: “No Holder of any Securi
Elliott Associates relied on Tietjen, focused on the reference to “the appointment of a receiver” in the no-action clause, and did not dilate on the apparent limitation of the clause to claims “by virtue of or by availing of any provision of this Indenture.”
As demonstrated by this authorities discussed in this opinion, some no-action clauses refer to claims under “the Indenture” while others refer to claims under “the Indenture or the Notes.” The Tang approach eliminates any distinction between the two usages by transforming a no-action clause like the Athilon Clause into the functional equivalent of the following provision, in which the italicized language reflects alterations:
No Holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture or the Notes to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or the Notes, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder or under the Notes.
If applied to a no-action clause that already included the italicized references, the reasoning in Tang would render them meaningless because the phrase “by virtue of ... the Indenture” takes care of note-based claims. The no-surplusage rule thus contradicts itself: by not treating the phrase “by virtue of ... the Indenture” as surplusage, the phrase “or the Notes” becomes surplusage.
Under Cruden II, Victor v. Riklis, and pre-TIA decisions, including the phrase “or the Notes” changes the scope of the no-act ion clause. These authorities indicate that if one of the two phrases is redundant, it is “by virtue of.” It consequently seems preferable to regard the compound prepositional phrase “by virtue of’ or by availing of as an example of the law’s hoary tradition of deploying joint terms, such as “indemnify and hold harmless,” where technically one term would suffice. See, e.g., Majkowski v. Am. Imaging Mgmt. Servs., LLC,
The Complaint does not seek a statutory receivership, so for purposes of the issue raised by the Remand Order, this Court is not required to follow the decisions in Ti-etjen, Elliott Associates, and Tang on grounds of stare decisis. Rather, the tension between these opinions and other decisions suggests that the receivership cases should not be relied upon to expand the scope of the Athilon Clause to include claims under the Notes.
F. Applying The Athilon Clause To Quadrant’s Claims
The foregoing review of cases and authorities indicates that each noteholder claim must be measured against the particular language of the no-action clause in question. In this case, the Athilon Clause applies to Counts VII and VIII in their entirety and to Count X to the extent it alleges a conspiracy to engage in the wrongs alleged in Counts VII and VIII. Otherwise, the Athilon Clause does not apply to the Complaint.
1. Count I: Breach Of Fiduciary Duty
In Count I of the Complaint, Quadrant asserts a derivative claim on behalf of Ath-ilon against the individual defendants for breach of fiduciary duty. In Feldbaum and Lange, this Court held that the no-action clause at issue in those cases barred similar claims for breach of fiduciary duty. See Feldbaum,
The Athilon Clause, however, only extends to actions or proceedings where a noteholder claims a right “by virtue or by availing of any provision of this Indenture.” In Count I, Quadrant relies on its status as a creditor under the Notes, its allegation that Athilon is insolvent, and the doctrine of creditor standing articulated by the Delaware Supreme Court in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla,
Levy v. Paramount Publix Corp.,
2. Count II: Aiding and Abetting A Breach Of Fiduciary Duty
In Count II of the Complaint, Quadrant asserts a derivative claim on behalf of Ath-ilon for aiding and abetting the breaches of fiduciary duty alleged in Count I. In Feldbaum, this Court held that a no-action clause “applies equally to claims against non-issuer defendants as to claims against issuers.”
3. Count III: Permanent Injunction Based On Breach of Duty
In Count III of the Complaint, Quadrant seeks a permanent injunction barring the individual defendants from causing Athilon to make interest payments on the Junior Notes or to pay the service and license fees identified in Count I. For purposes of the Athilon Clause, the analysis is the same as Count I, both as to the initial ruling in the Dismissal Order and for purposes of the Remand Order.
4.Counts IY And V: Fraudulent Conveyance
In Counts IV and V, Quadrant challenges the payment of interest on the Junior Notes and the service and license fees paid to EBF and ASIA as fraudulent transfers. In Lange and Feldbaum, this Court held that the no-action clause at issue in those cases barred similar claims for fraudulent transfer. See Feldbaum,
The Athilon Clause only extends to actions or proceedings where a noteholder claims a right “by virtue or by availing of any provision of this Indenture.” In Counts IV and V, Quadrant relies on its status as a creditor under the Notes, its allegation that Athilon is insolvent, and provisions of the DFTA. See 6 Del. C. §§ 1304(a)(1), 1305(b). Quadrant does not rely on any provision of the Indenture. It therefore appears, based on the argument Quadrant made on appeal and the authorities considered on remand, that Lange and Feldbaum are not controlling.
Lange and Feldbaum cited New York cases for the proposition that no-action clauses can bar fraudulent transfer claims. Clearly this is so, but whether it is true in a particular case depends on the specific language of the clause. Feldbaum relied on the Ernst case, and Lange relied on both Levy and Ernst. See Feldbaum,
5. Count VI: Permanent Injunction Based On Fraudulent Conveyance
Count VI seeks a permanent injunction under the DFTA against continuing payments of interest on the Junior Notes and service and license fees to EBF and ASIA. For purposes of the Athilon Clause, the analysis is the same as Counts IV and V, both as to the initial ruling in the Dismissal Order and for purposes of the Remand Order.
6. Count VII: Implied Covenant Of Good Faith And Fair Dealing
Count VII contends that by taking the actions detailed in Count I and elsewhere in the Complaint, Athilon breached the implied covenant of good faith and fair dealing that inheres in the Indenture. In Feldbaum, this Court held that the no-action clause at issue barred a claim for breach of the implied covenant. See Feldbaum,
“New York law recognizes an implied duty of good faith and fair dealing as part of its contract law.” Rossdeutscher v. Viacom, Inc.,
By invoking the implied covenant, Quadrant sued to enforce an implied term of the Indenture. Count VII of the Complaint even references the Indenture. The Athilon Clause applies to any action or proceeding “upon or under or with respect to this Indenture.” Dkt. 32 Ex. A. at 51. Quadrant’s failure to comply with the Athi-lon Clause is fatal to its implied covenant claim. Simons,
7.Count VIII: Tortious Interference With The Implied Covenant
Count VIII contends that EBF tortiously interfered with Athilon’s obligations under the implied covenant of good faith and fair dealing that inhеres in the Indenture. Such a claim on its face asserts a right “by virtue or by availing of any provision of [the] Indenture” and constitutes an action “upon or under or with respect to [the] Indenture.” It is therefore covered by plain language of the Athilon Clause.
Two New York cases support this result. In RJ Capital, the United States District Court for the Southern District of New York interpreted a no-action clause which provided that “[n]o Holder of any Note shall have any right to institute any Proceedings, judicial or otherwise, with respect to his Indenture, or for the appoints ment of a receiver or trustee, or for any other remedy hereunder [without comply
8. Count IX: Constructive Dividends In Violation Of Delaware Law
Count IX asserts that Athilon paid constructive dividends in violation of Delaware law and seeks to recover those payments from the individual defendants. Under the reasoning of Feldbaum and Lange, such a claim should be barred. See Feldbaum,
Unlike the Feldbaum/Lange clause, the Athilon Clause only extends to actions or proceedings where a noteholder claims a right “by virtue or by availing of any provision of this Indenture.” In Count IX, Quadrant relies on its status as a creditor under the Notes and Sections 170,173, and 174 of the Delaware General Corporation Law. See 8 Del. C. §§ 170, 173, 174. The Athilon Clause does not reach such a claim. See Regan v. Prudence Co.,
The defendants cite Norte & Co. v. Manor Healthcare Corp.,
Count IX does not allege constructive dividends that violated the Indenture; rather, it alleges constructive dividends that violated the General Corporation Law. It therefore appears, based on the argument Quadrant made on appeal and the authorities considered on remand, that Lange and Feldbaum are not controlling.
9. Count X: Civil Conspiracy
Count X asserts a claim for civil conspiracy against EBF and ASIA for actions taken in concert with the individual defendants. In Feldbaum, this Court held that a no-action clause “applies equally to claims against non-issuer defendants as against issuers.”
III. CONCLUSION
As directed by the Remand Order, this opinion has analyzed the significance under New York law of the differences between the no-action clauses in the Lange and Feldbaum indentures and the Athilon indentures. The analysis has included a discussion of decisions by New York courts and other courts applying New York law. This opinion has not addressed other arguments about the Athilon Clause that Quadrant raised on appeal but which were not the subject of the Remand Order.
It appears that as a matter of New York law, the differences between the Athilon Clause and the Feldbaum/Lange clause are significant. Based on the analysis presented, the Athilon Clause does not apply to Counts I through VI and IX of the Complaint, or to Count X to the extent it seeks to impose liability on secondary actors for violations of the other counts. The clause applies to Counts VII and VIII of the Complaint, subject to the outcome of Quadrant’s other arguments on appeal.
Notes
. EBF disputes that it is the ultimate parent of Athilon.
. N.Y. Comp.Codes R.' & Regs., tit. 22 § 500.27(a) (2013).
. The facts are drawn from the allegations of the complaint filed in the Court of Chancery.
. Athilon and its subsidiary are referred to collectively as "Athilon.” Credit swaps are contracts in which a credit derivative product company, such as Athilon, promises to make one or more defined payments should a specified degree of losses be sustained on a refer: ence portfolio, as a result of defaults or other "credit events” by one or more designated obligors during a specified (typically, multi-year) period of time.
.Generally, a Suspension Event involves, inter alia, capital shortfalls, leverage ratios, or insolvency.
. Report on Remand, Exhibit C, at p. 5.
. Count VII claimed that Athilon breached the Indenture's implied covenant of good faith and fair dealing, and Count VIII asserted that EBF had tortiously interfered with Athilon’s obligations under the Indenture. Count X charged EBF and ASIA with civil conspiracy for actions taken in concert with the individual defendants.
. Italics added.
. Italics added.
. Exhibit C to this Certificate, at 54-55.
. Gen. Inv. Co. v. Interborough Rapid Transit Co.,
. Quadrant v. Vertin, C.A. 6990-VCL, slip op. (Del. Ch. June 5, 2012) (Laster, V.C.).
. Id.
. Id.
.
.
. Account v. Hilton Hotels Corp.,
. Feldbaum,
. Id. (italics added).
. Id. at *3.
.
. Id. at *5-6 (italics added).
. App. to Appellant's Op. Br. at A-229 (emphasis added) (§ 7.06 of the Indenture).
. Id.
. Both Lange and Feldbaum cited federal and New York cases concerning the interpretation of no-action clauses in contracts and indentures governed by New York law. In this case, the Court of Chancery order did not cite, or discuss the applicability of those decisions or any other New York cases decided after Feldbaum and Lange.
. See, e.g., McClelland v. Norfolk S. R.R. Co.,
. McMahan & Co. v. Wherehouse Entm't, Inc.,
.The issue rarely arises today, because Section 316(b) of the TIA establishes that the holder of a note governed by the act has an absolute and unconditional right to sue on the note for past due payments of principal and interest. See 15 U.S.C. § 77ppp(b). Since the passage of the TIA, even those indentures not covered by the act typically contain language paralleling Section 316(b). See generally American Bar Association, Commentaries on Model Debenture Indenture Provisions 1965, Model Debenture Indenture Provisions All Registered Issues 1967, and Certain Negotiable Provisions 233-34 (1971) [hereinafter Commentaries ]; Churchill Rodgers, The Corporate Trust Indenture Project, 20 Bus. Law. 551, 563, 565-66 (1965).
. See, e.g., Enoch v. Brandon,
Other jurisdictions reached the same result. See, e.g., Kimber v. Gunnell Gold Mining & Milling Co.,
. See, e.g., Hibbs v. Brown,
. See, e.g., Lidgerwood v. Hale & Kilburn Corp.,
. See RJ Capital, S.A. v. Lexington Capital Funding III, Ltd.,