Court’s ‘No-Action’ Clause Holding May Surprise Bond Issuers

In Quadrant Structured Products v. Vertin, the New York Court of Appeals recently made clear that no-action clauses in trust indentures will be “strictly construed” to give precise meaning to the words and language used in the agreements. The court found that a no-action clause that specifically precludes minority bondholder enforcement of claims arising “by virtue or availing of” the indenture but does not expressly reference claims relating to “the Securities,” must be read narrowly to preclude only contractual indenture claims and not common law or statutory claims relating to the securities governed by the indenture. This ruling may surprise some bond issuers who have assumed that this commonly-used form of no-action provision precluded all minority bondholder suits, which are often viewed as “strike suits” and can be unpopular with other bondholders.

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