Commercial Division Blog

Posted: July 28, 2019 / Categories Commercial, Contracts

Indenture's No Action Clause Cannot Bar Claim for Unpaid Payments

On July 5, 2019, Justice Masley of the New York County Commerical Division issued a decision in Pala Assets Holdings Ltd v. Rolta, LLC, 2019 NY Slip Op. 32031(U), holding that an indenture's no action clause cannot bar a claim for unpaid principal and interest, explaining:

Rolta argues that attachment is barred by the 2018 and 2019 Indentures' noaction clauses. Section 6.06 of both Indentures ("Limitation on Suits") provides that

[a] Holder may not institute any proceeding, judicial or otherwise, with respect to this Indenture or the Notes, or for the appointment of a receiver or trustee, or for any other remedy under this Indenture or the Notes unless:

(a) the Holder has previously given the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy (c) such Holder or Holders offer the Trustee and the Security Agent indemnity reasonably satisfactory to the Trustee and the Security Agent against any costs, liability or expense, to be incurred in compliance with such request; (d) the Trustee does not comply with the request within (x) 60 days after receipt of the written request pursuant to Section 6.06(b) or (y) 60 days after the receipt of the offer of indemnity pursuant to Section 6.06(c), whichever occurs later; and (e) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request.

Barriers to action by individual bondholders serve an important purpose by both preventing expensive lawsuits that do not have the support of a substantial portion of the creditors while also centralizing the prosecution of lawsuits whose benefits should properly accrue to all bondholders. Indeed, here, Rolta objects to Pala's interference with Rolta's restructuring efforts; however, the plain terms of the Indentures provide Pala the right to seek provisional relief in connection with this lawsuit to enforce its undisputed right to recover on the Notes. Specifically, Section 6.07 of both Indentures provides that, notwithstanding anything to the contrary in Section 6, Pala has a right to receive payment of the principal of or interest on the Notes and affirms Pala's corresponding right to initiate an action for the enforcement of any such payment, which cannot be impaired or affected. Precluding Pala from seeking provisional remedies, including prejudgment attachment to help secure its ability to recover a judgment, would impair or affect Pala's right to pursue an action to recover under the Notes in contravention of the Indentures.

Pala also has the right to institute this action under Section 316 of the Trust Indenture Act, which provides that a noteholder's

right to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in actions against underwriters and indenture trustees and in related proceedings, such as trust instruction proceedings where a trustee seeks court guidance regarding the management of a trust. If you or a client are investors in an indenture trust and have questions regarding potential claims against a trustee or how to influence the trustee's prosecution of a claim, contact Schlam Stone & Dolan partner John Lundin at