Opinion ID: 3020094
Heading Depth: 3
Heading Rank: 2

Heading: Claim Against Republic

Text: Peak claims that Republic acted negligently when it entered the amount of gross interest collected into the line item for “Net Interest collected” on the Servicer Certificate, and that it admits as much. The District Court, however, never reached the merits of this argument because it held that Peak failed to comply with the Indenture’s “no-action” clause.11 Section 5.6 provides that “[n]o Holder of any Note shall have the right to institute any Proceeding . . . with respect to this Indenture . . . , or for any other remedy hereunder, unless” it (a) gives “written notice to the Indenture Trustee of a continuing Event of Default,” (b) 25 percent of the total noteholders request in writing that the Indenture Trustee “institute such proceeding . . . in its own name,” (c) the noteholders agree to 11 The District Court also held, and we agree, that Peak was not required to comply with the no-action clause with regard to its suit against U.S. Bank because it would have required “U.S. Bank, in effect, to sue itself.” (App. 2151.) See Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d Cir. 1992); Feldbaum v. McCrory Corp., No. 12006, 1992 Del. Ch. LEXIS 113, at - (Del. Ch. June 1, 1992) (applying New York law). 15 indemnify the Indenture Trustee for its costs, (d) the Indenture Trustee fails to institute a proceeding after 60 days of receiving notice, and (f) a majority of the noteholders do not request that the trustee not institute the proceeding. (App. 210-11.) The main function of a no-action clause is to “delegat[e] the right to bring a suit enforcing the rights of bondholders to the trustee, or to the holders of a substantial amount of bonds.” Feldbaum v. McCrory Corp., No. 12006, 1992 Del. Ch. LEXIS 113, at -  (Del. Ch. June 1, 1992) (applying New York law). This function is a central feature of an Indenture, the primary purpose of which “is to centralize enforcement powers by vesting legal title to the securities in one trustee.” Id. at  n.11. It is undisputed that Peak, holder of only 1.4 percent of the outstanding amount of Keystone notes, did not satisfy the requirements of the no-action clause. Peak contends, however, that the clause does not apply here because it only alleges that Republic breached a duty grounded in the SSA and, thus, its suit is not “with respect to this Indenture” and does not seek any “remedy” under the terms of the Indenture. As it points out, Republic is not a party to the Indenture. In Feldbaum, the plaintiff similarly argued that a no-action clause12 did not apply to its common law fraud claim against companies affiliated with issuer because it did not seek to remedy the breach of an express indenture provision. 1992 Del. Ch. LEXIS 113, at . The Court rejected this argument and held, under New York law, that “no matter 12 The no action clause in that case also contained the identical “with respect to this Indenture” language present here. Feldbaum, 1992 Del. Ch. LEXIS 113 at . 16 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, . . . is subject to the terms of a no action clause of this type.” Id. at - (citing New York cases). While the primary purpose of a no-action clause may be to protect an issuer from the expense of defending frivolous lawsuits, “[c]ourts have implicitly concluded that [a noaction] clause applies equally to claims against non-issuer defendants.” Id. at ,  (citing Levy v. Paramount Publix Corp., 266 N.Y.S. 271 (N.Y. Sup. Ct. 1933); Relmar Holding Co. v. Paramount Publix Corp., 263 N.Y.S. 776 (N.Y. Sup. Ct. 1932)). Thus, individual bondholder suits should be dismissed “no matter whom the bondholders sue,” as long as “the suits to be dismissed seek to enforce rights shared ratably by all bondholders.”13 Id. at . Here, as the District Court explained, if Republic’s alleged negligence adversely affected the value of the notes, all bondholders were harmed, not only Peak. U.S. Bank, had it been asked by the bondholders in accordance with the no-action clause, could have asserted tort claims against Republic for erring in the Servicer Certificates. Thus, Peak’s failure to comply with the no-action clause bars its claim against Republic. This result 13 Indeed, at least one commentator has said that the “scope of the no-action clause is rather broad,” noting that it applies to “most noncontractual claims . . . and to suits against defendants other than the company.” Marcel Kahan, Rethinking Corporate Bonds: The Trade-Off Between Individual and Collective Rights, 77 N.Y.U.L. Rev. 1040, 1051 (2002) (citing McMahan & Co. v. Wherehouse Entm’t, Inc., 859 F. Supp. 743, 746, 749 (S.D.N.Y. 1994) (holding no action clause bars claims against officers of issuer, underwriter of bonds, and issuer’s parent company), aff’d in part and rev’d in part, 65 F.3d 1044 (2d Cir. 1995); Feldbaum, 1992 Del. Ch. LEXIS 113, at ). 17 does not render Republic’s duties under the SSA “wholly illusory,” as Peak claims; it only forces individual bondholders to channel their grievances through the Indenture Trustee in accord with the policy underlying the inclusion of no-action clauses in Indenture agreements. The District Court correctly granted summary judgment to Republic.