“No Action” Clause In a Trust Indenture Interpreted Narrowly Under Established Principles of Contract Interpretation—The Clause Did Not Preclude Suit By Securityholders Based Upon Their Common Law and Statutory Rights In an Action Stemming from the “Credit Default Swap” Crisis

In an action arising out of the credit default swap crisis, the Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that a “no action” clause, which imposed restrictions on actions brought by securityholders, must be construed narrowly according to its terms.  The “no action” clause stated in pertinent part:  “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… .”  The “Indentures” were agreements entered into with trustees who served as third party administrators of the issuance of securities.  The Court of Appeals held that the clause related solely to actions “with respect to this Indenture” and did not affect the common law and statutory actions brought by securityholders to enforce their rights:

A trust indenture is a contract, and under New York law “[i]nterpretation of indenture provisions is a matter of basic contract law” … .

In construing a contract we look to its language, for “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” … . As the case law further establishes, we read a no-action clause to give effect to the precise words and language used, for the clause must be “strictly construed” … .

Applying these well established principles of contract interpretation, and with the understanding that no-action clauses are to be construed strictly and thus read narrowly, we turn to the language of the no-action clause presented by the certified question. The no-action clause here states that no securityholder “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 . . .”. The clear and unambiguous text of this no-action clause, with its specific reference to the indenture, on its face limits the clause to the contract rights recognized by the indenture agreement itself. Further supporting this construction of the clause is the sole textual reference to securities, which is contained in the clause's provision for a Trustee-initiated suit for a continuing “default in respect of the series of Securities.”[FN11] This part of the no-action clause permits the trustee to sue in its name, after notice by a securityholder of a continuing default and upon approval of the suit by a majority of securityholders. Thus, the clear import of the no-action clause is to leave a securityholder free to [*10]pursue independent claims involving rights not arising from the indenture agreement. Quadrant Structured Prods Co Ltd v Vertin, 2014 NY Slip Op 04114, CtApp 6-10-14