Pillsbury Winthrop Shaw Pittman

‘No-action’ clause in indenture strictly construed by New York’s highest court

By Edward Flanders, F Joseph Owens Jr, Bart Pisella and Tanner Mathison

The importance of careful drafting was recently reiterated by the New York Court of Appeals in Quadrant Structured Products Co v Vertin (2014 NY Slip Op 04114). The court held that a no-action clause missing any reference to ‘securities’ was held to apply exclusively to contractual claims arising from the indenture. The contested no-action clause only precluded claims arising under the indenture and did not apply to common law and statutory claims relating to ‘the securities’.

As part of its business model, Athilon Capital Corp sold credit derivative products designed to give credit protection to financial institutions. Quadrant and other investors purchased notes issued by Athilon. In connection with the issuance of the notes, Athilon entered into trust indentures with two trustees. These indentures describe Athilon’s duties, as well as the rights of the security holder in the event of default. Each indenture also contains a no-action clause that 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…’ unless certain conditions were first met (i.e. notice of default given to trustee, holders of the majority of notes request that the trustee initiate action and offer trustee indemnity in connection therewith, and trustee fails to take action within 60 days, etc)…

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