Court Refuses to Enforce No Action Clause

As a threshold matter, Defendants assert that Plaintiffs do not have standing to assert their claims because they failed to comply with the amended no-action provisions requiring Plaintiffs to pre-fund a cash indemnity and request the Administrative Agent to initiate litigation on their behalf. The Court rejects that argument.

The Court of Appeals has cautioned that “no-action clauses are to be construed strictly and thus read narrowly“. The primary purpose of such provisions, which are found in a variety of multiparty financial agreements, is to protect issuers from the expense involved in defending individual lawsuits that are either frivolous or otherwise not in the economic interest of the corporation and its creditors. These limitations protect against the risk of strike suits and make it more difficult for individual bondholders to bring suits that are unpopular with their fellow bondholders.

Within those parameters, no-action clauses typically are not unenforceable as violative of public policy, given their salutary purpose of preventing undue expense to certificate holders and inconvenience to the investment vehicle in general, and are not unconscionable.

This is not, however, a typical case. The parties have not cited, and the Court has not found, any case in which a no-action provision was strategically deployed in the manner alleged here — by a subset of lenders, without notice or consent, as part of a larger scheme to breach and then exit the agreement. The amended no-action provisions were, according to Plaintiffs, purpose-built to prevent these Plaintiffs from suing these Defendants in connection with this transaction — a preemptive self-pardon, of sorts. Subtle this was not.

Moreover, in addition to prohibiting Plaintiffs from suing directly, the provisions require Plaintiffs to fund a cash indemnity with no upper boundary —not less than the costs of litigation plus the defendants’ potential damages with respect to unspecified counterclaims — that rests in the sole discretion of an entity hand-picked by the Lender Defendants for the task. That requirement is particularly burdensome here, according to Plaintiffs, because many of the lenders here are collateralized loan obligations whose investors may number in the hundreds, and which do not typically have the liquidity to post an indemnity of this magnitude or potentially even the legal right to do so, rendering the entire process futile. Finally, Plaintiffs allege that the amended no-action provisions are themselves integral components of Defendants’ broader scheme to deprive Plaintiff of sacred rights protections for which their consent is expressly required in the Amended and Original Agreements.

No-action provisions are enforceable, first and foremost, because they reflect an ex ante agreement to sacrifice certain individual rights for the salutary purpose of benefiting the venture as a whole.

Here, taking Plaintiffs’ allegations as true, there was no ex ante agreement to the no-action provisions or salutary benefit. Plaintiffs signed on to the substantially narrower no-action provisions in the Original Agreement and did not consent to the amendment. Moreover, the amended provisions lack any semblance of arm’s-length agreement because the Lender Defendants allegedly crafted them with a view to immediately exiting the contract, thus gaining the protective benefit of the no-action provisions’ amended terms without ever having to abide by them as parties to the contract. Even assuming the Original Agreement permitted (or at least did not expressly prohibit) “Required Lenders” to amend the no-action provision in some respects, it cannot reasonably be construed to give Defendants carte blanche to make it exorbitantly expensive, if not impossible, for Plaintiffs to enforce their un-amendable consent rights under Section 9.02 [b] of the Original Agreement.

Nor does the amendment of the no-action provisions serve the salutary purpose of preventing undue expense to certificate holders and inconvenience to the investment vehicle in general. Regardless of the ultimate merit of Plaintiffs’ claims, it cannot seriously be questioned — at least on this motion to dismiss — that Defendants’ amendment of the no-action provisions was an act of self-interest, not a consensual decision to promote the interest of the investment vehicle in general. And it certainly was not one to which the other First Lien Lenders willingly signed on.

The authorities on which Defendants rely are inapposite. Most of them simply interpreted or enforced no-action clauses that were unquestionably valid. Defendants also cite to Eaton Vance, in which the Court enforced an amended no-action provision because — as here — amendment of the no-action clause did not require unanimous consent of the Lenders, but only consent of the Required Lenders (which indisputably was procured). But that case is distinguishable in several respects. Most notably, the court in Eaton Vance did not address the argument, raised by Plaintiffs here, that the amendment itself was instrumental to the disputed transaction. Indeed, the disputed transaction in Eaton Vance (another debt restructuring) was being discussed (and objected to) by the plaintiffs months before the amendment occurred; they were not part of a single choreographed maneuver, as alleged here. In any event, the court in Eaton Vance found that both versions of the no-action clause barred at least some of the plaintiffs’ claims, which is not the case here.

For the foregoing reasons, and consistent with the mandate that such provisions be construed narrowly to reflect the agreement among the parties, the Court finds that the amended no-action provisions are unenforceable and inapplicable to the claims asserted in this action. They were never agreed to by the parties to the Original Agreement, do not serve the salutary purpose that generally supports enforceability of such restrictions on access to the courts, and are alleged to be an integral part of Defendants’ breach of contract. This holding is confined to the allegations made in the Complaint and does not reflect hostility to no-action provisions in general.