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.”

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.