On March 17, 2023, Justice Borrok of the New York County Commercial Division issued a decision in Antara Capital Master Fund LP v. Bombardier Inc., 2023 NY Slip Op. 50206(U), holding that a no-action clause barred suit when the plaintiff failed to show that demand under the clause would be futile, explaining:
It is undisputed that the Plaintiffs did not comply with the “no-action” clause of the Indenture because it failed to offer the Trustee the requisite indemnification or wait the required 60 days before initiating this lawsuit. Thus, without pleading particularized facts demonstrating demand futility (which Plaintiffs will be given an opportunity to do), the Plaintiffs simply lacks standing to bring claims other than claims sounding in breach of the Indenture as discussed below.
Where a trustee is given the power to bring suit on behalf of the trust, a beneficiary of the trust may only bring an action if it makes a showing (i) of a demand on the trustee to bring suit and a refusal by the trustee that is so unjustifiable as to constitute an abuse of the trustee’s discretion, or (ii) that it is futile to make such a demand on the trustee because of the trustee’s conflict of interest. To show demand futility, the complaint must set forth with particularity the efforts to secure the initiation of the action by the trustee or the reasons for not making such effort. Thus, pursuant to the “no-action” clause described above, the Plaintiff was required to make a demand on the Trustee, offer proper indemnification and wait the proper time period for the Trustee to sue, to sue to compel the Trustee to bring suit against Bombardier, or if appropriate to allege demand futility because of the Trustee’s breach such that making a demand on the Trustee would amount to demanding that the Trustee sue itself as to the claims not sounding in breach of the Indenture requiring their waiver of / consent to such breach. Inasmuch as the Plaintiff has not adequately done this in the AC, the AC must be dismissed without prejudice as to the Plaintiffs claims not sounding in breach of the Indenture requiring their consent to / waiver of such breach.
For completeness, the Plaintiff’s reliance on Eaton Vance Management v Wilmington Sav. Fund Soc., FSB, 2018 WL 1947405 (Sup Ct, NY County 2018) for their argument that non-breach of Indenture causes of action (i.e., their declaratory judgment causes of action) do not require either (x) compliance with the “no-action” provision of the Indenture or otherwise (y) do not require the Plaintiffs to plead demand futility fails.
In Eaton Vance, the plaintiffs who were senior creditors of J. Crew Group owned approximately 10% of the Company’s term loan were at odds with the holders of the majority of the term loan. Many of those other creditors also owned Senior PIK Toggle Notes that were issued by the parent and controlling shareholder of the parent of J. Crew.
Following the issuance of the PIK Notes, the parties restructured the debt pursuant to an Amended Restate Credit Agreement which prohibited the transfer of any of the collateral to an entity that was not a Restricted Subsidiary. Significantly, Article IX of the Amended Credit Agreement contained an exculpation clause for the Administrative Agreement for any action taken (i) with the consent of the Required Lenders or (ii) in the absence of its own gross negligence or willful misconduct. Article X defined Required lenders as having more than 50% of the sum of the (a) outstanding Loans and the (b) the aggregate unused commitment. Notwithstanding the foregoing, Section 10.01(e) and (f) required written consent of each Lender to a transaction or series of transactions that involved a transfer of substantially all of the collateral or the guaranty. Section 10.19 contained a “no-action” provision pursuant to which the lenders agreed that they would not sue without the prior written consent of the Administrative Agent.
Subsequently, J. Crew and certain subsidiaries restructured their debt pursuant to which the collateral was transferred to Unrestricted Subsidiaries. There were a number of objections from term lenders and then J. Crew filed an action (i.e., not the Eaton Vance case) seeking a declaration that the transactions did not violate the agreement. The lenders filed an answer and asserted counterclaims challenging the legitimacy of the disputed transactions. Subsequently, J. Crew executed a private exchange offer in which the PIK Notes would be swapped for new senior secured notes and preferred stock and J. Crew simultaneously solicited consent from its lenders to ratify the disputed transactions. Ultimately, 85% of the term lenders consented. 12% refused to consent and filed the Eaton Vance lawsuit.
Initially they sought a TRO and preliminary injunction. The court denied the TRO. The transaction closed and the parties discontinued the other action. In the Eaton Vance lawsuit, the plaintiffs alleged that the disputed transactions constituted a transfer of all or substantially all of the collateral requiring their consent. The defendants moved to dismiss alleging lack of standing. The motion was withdrawn and the plaintiff filed an amended complaint where among other things it brought a cause of action sounding in intentional fraudulent conveyance under section 276 and 278 of the New York Debtor and Creditor Law and a fraud claim that the plaintiff argued did not require application of the “no action” clause because making a demand on the Administrative Agent would have been futile.
The court (Kornreich, J.) held that the plaintiffs fail to allege any bad faith, gross negligence or willful misconduct on behalf of the Administrative Agent such that the exculpation provision described above would not apply because as a neutral agent its duties were ministerial to carry out its specified obligations and the plaintiffs argument that the Administrative Agent was just wrong to accept J. Crew’s position that majority and not unanimous consent was necessary to ratify the transfers also did not form a basis to hold the Administrative Agent liable because at most this constituted ordinary negligence (and this conduct was covered by the exculpation clause).
As to the J Crew defendants, the Court indicated that “no-action” clauses are strictly enforced citing Quadrant Structured Prods. Co. v Vertin, 23 NY3d 549, 560 (2014), among others. Thus, the Court held that inasmuch as the fraudulent conveyance and fraud claims concern the collateral, Section 10.19 — the “no action” clause — would bar the plaintiffs from maintaining the claims. Relying on Cypress Assocs., LLC v Sunnyside Cogeneration Assocs. Project, 2006 WL 668441 (Del Ch 2006) (Strine, V.C.) where the court held that a finding of demand futility would allow a bondholder subject to an indenture’s “no-action” clause to proceed with its ability to enforce its consent rights, the plaintiffs argued that demand would be futile to seek permission from the Administrative Agent and they should nonetheless be entitled to proceed on their claims. The court disagreed however and held that neither Cyprus nor any other authority cited by the plaintiffs permitted the plaintiff to proceed on its fraud claims against J. Crew. In addition, the Court noted that even if the Administrative Agent’s status as a conflicted decisionmaker could justify a finding of demand futility, the plaintiffs had failed to demonstrate that the Administrative Agent was conflicted and given the broad exculpation clause, it was hard to see how they could be conflicted. Thus, because the plaintiffs had not alleged the Administrative Agent faced a credible threat of a non-exculpated act, the plaintiffs had no basis to contend that the Administrative Agent could not have impartially considered a demand for permission to sue. Accordingly, the court held that plaintiffs lacked standing and dismissal was required.
Upon appeal, the Appellate Division held that
The motion court correctly found that the no-action clause in the amendment to the Term Loan Agreement (TLA) barred all but the breach of contract claims, which allege that all or substantially all of the TLA collateral was transferred without unanimous approval; claims alleging the transfer of substantially all of the collateral without unanimous approval are a specifically delineated exception to the no-action clause. That the underlying factual basis for the fraud claims is the same disputed transaction underlying the contract claims does not bring the fraud claims within that narrow exception.
Eaton Vance, 171 AD.3d 626 (2019).
In other words, Eaton Vance does not stand for the general proposition that the “no-action” clause does not apply to certain of the causes of action asserted in this case. Indeed, the case indicates that “no-action” clause apply to all of the causes of action other than the claims sounding in breach of the Indenture requiring the Plaintiffs’ waiver of (consent to) such breach and that compliance with the “no action” clause is otherwise excused only where demand futility can be properly alleged. The Court notes that, significantly in that case, the plaintiffs did allege demand futility and did sue the Administrative Agent but nonetheless lacked standing based on the broad exculpation clause which only permitted suit against the Administrative Agent based on gross negligence and willful misconduct. In this case, (i) the Plaintiffs have not complied with the “no-action” clause, (ii) have failed to allege particularized facts to suggest demand futility, including that the Trustee could face exposure for its own breach, and (iii) have otherwise pursuant to the AC not sued the Trustee to compel the Trustee to sue Bombardier. Thus, the Plaintiffs lack standing as to the claims that do not sound in breach of the Indenture and the AC must be dismissed without prejudice as to those claims.
(Internal citations omitted) (emphasis added).