United States: New York Court Closes Courthouse Doors To Unregistered Noteholders

Questions Standing of Indenture Trustees to Pursue Fraudulent Conveyance Claims

On September 16, 2014, a New York trial court (the New York Supreme Court) issued an important ruling for indenture trustees and assignees of indenture notes. In Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.a.r.l., No. 651693/2010, 2014 WL 4650231 (N.Y. Sup. Ct. Sept. 16, 2014), New York Supreme Court Judge Marcy Friedman ruled that an assignment of a right of collection alone to Cortlandt Street Recovery Corp. (Cortlandt) was insufficient to allow Cortlandt, as the assignee, to pursue claims against the issuer and guarantor of notes under the indentures. Judge Friedman ruled that the indentures in question did not support a claim to title or ownership of the notes — a required element of standing to sue on notes under New York law — because neither Cortlandt nor SPQR Capital (Cayman) Ltd. (SPQR), the assignor of note interests to Cortlandt, were "Holders" under the relevant provisions of the indentures.

Second, the Court held that while a PIK notes indenture did authorize Wilmington Trust Company (WTC), the indenture trustee, to pursue claims for payment of principal, interest, and WTC's expenses under the defaulted notes, and notwithstanding the seemingly broad scope of authority granted to the trustee in various common indenture provisions, WTC lacked standing to pursue fraudulent conveyance claims against the issuer and guarantors of the defaulted notes. The Court concluded that fraudulent conveyance claims belonged to the noteholders, and the indenture trustee was not provided authority and power to bring such claims. The Court also rejected WTC's argument that it was authorized by a majority of the noteholders, pursuant to the indenture, to pursue the fraudulent conveyance claims because Cortlandt and SPQR were not "Holders" under the indenture that could direct the trustee to bring such claims.


Hellas and its affiliates issued and guaranteed certain PIK notes and subordinated notes in 2006. WTC's predecessor as trustee declared an event of default under the PIK notes in 2009 due to the insolvency of the Hellas entities.

Cortlandt and WTC, as successor trustee, commenced four actions against various Hellas defendants under the relevant indentures. These actions included claims for recovery of principal, interest, and fees owed under the unpaid notes and fraudulent conveyance of over €1.5 billion in proceeds allegedly transferred for no consideration from certain Hellas defendants to alleged affiliates of Apax and TPG (Hellas' equity owners). The Hellas defendants filed motions to dismiss, arguing that Cortlandt and WTC lacked standing to pursue the actions. Cortlandt and WTC moved to amend and supplement the complaints to add SPQR as a plaintiff and to cure any standing defect.

Cortlandt claimed standing as the "assignee of ... PIK Notes with full rights under the assignments to collect principal and interest due and to pursue all remedies in its own name or in the name of all owners of the PIK Notes," because "the assignors of the PIK Notes owned book entry interests in the PIK Notes with a contractual right after default to exchange the Book Entry Interests for definitive notes." Since the Hellas defendants never established procedures for the exchange, Cortlandt requested a waiver of the requirement that they obtain definitive notes to gain "Holder" status under the indentures.

In the Amended Complaint, the plaintiffs alleged that SPQR assigned all of its interests in the notes to Cortlandt, as assignee and agent for collection. To evidence their interests in the notes, the plaintiffs also noted that SPQR (i) obtained a letter from the Liquidators in Hellas' UK insolvency proceeding specifying that SPQR had "individual creditor status," and (ii) entered into an addendum to the assignment with Cortlandt clarifying that Cortlandt received "all right, title, and interest" in the notes. The plaintiffs also alleged that Hellas, and later the Liquidators, refused to issue the definitive notes pursuant to its rights under the indenture to exchange book-entry interests.

The Court's Ruling

Despite the plaintiffs' efforts to cure the standing defects, the New York Supreme Court found that the indentures authorized only "Holders" of the notes to maintain an action to recover on the notes. The indentures define "Holder" as follows: "with respect to any Note, the Person in whose name such Note is registered in the register maintained by the registrar pursuant to the provisions of the Indenture." Neither Cortlandt nor assignor SPQR satisfied this requirement, and thus the plaintiffs lacked a sufficient title or ownership interest to satisfy the requirements of standing under New York law. The Court explained that "SPQR holds only book entry interests in the Sub Notes and is not a Holder of definitive notes within the meaning of the indenture (Definitive Notes) ... [O]nly a Holder (or the trustee) is authorized by the indenture to sue on the Notes. SPQR therefore could not assign its claim to recover on the Notes because SPQR itself lacked the authority to sue on the Notes." Cortlandt at *8. The Court also noted that it is "well settled that a beneficial holder of a note lacks standing to sue for payments due upon the note where, as here, the indenture reserves the right to sue to the registered holder of the note." Id.

Second, the Court ruled that WTC lacked standing to pursue fraudulent conveyance claims. To reach this result, the court analyzed several provisions of the indenture, including section 6.03 of the PIK Indenture, a common provision that provides that, in an Event of Default, an indenture 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 any provision of the Notes or this Indenture." The Court first looked for guidance on the question under New York law and, finding none, turned to Regions Bank v. Blount Parrish & Co., No. 01 C 0031, 2001 WL 726989 (N.D. Ill. June 27, 2001) and other decisions interpreting similar indenture provisions.

In Regions Bank, the US District Court for the Northern District of Illinois held that nearly identical indenture language did not provide a plenary grant of authority to pursue any noteholder claim relating to the note. Rather, the indenture trustee's authority was limited to actions seeking payment of principal, premium, and interest and enforcing any provision of the Indenture. Similarly, in Cont'l Bank, N.A. v. Caton, No. 88-1611-C, 1990 WL 129452 (D. Kan. Aug. 6, 1990), the US District Court for the District of Kansas ruled that the indenture in question did not permit the indenture trustee to "assert individual tort claims on behalf of the noteholders against third persons which are wholly extraneous to the rights and obligations created by the notes and the indenture agreements." Agreeing with those courts, Cortlandt held that the fraudulent conveyance claims were likewise tort claims not within the indenture trustee's authority to pursue under section 6.03.

The Cortlandt Court also rejected WTC's argument that WTC was authorized by a majority of the noteholders to pursue the fraudulent conveyance claims pursuant to indenture sections 6.05 (authorizing a majority of holders in amount to direct the trustee to exercise any remedy available to it) and 6.06 (the no-action clause, contemplating that holders can pursue remedies if certain procedural requirements are met). The Court rejected these arguments for the same reason that Cortlandt lacked standing to pursue its claims: "Cortlandt was authorized to act by SPQR, which is not a Holder within the meaning of the indenture. As SPQR lacked the authority to authorize Cortlandt to bring these causes of action, Cortlandt lacked the authority to direct the Trustee to bring the causes of action." Cortlandt at *17.


Cortlandt filed a notice of appeal on October 21, 2014. If the decision stands, it may affect claims trading and litigation strategies with respect to distressed indenture notes. After Cortlandt, indenture trustees and assignees of interests in notes will need to more carefully consider the nature of claims being asserted and whether indentures and assignments of notes under indentures permit them to pursue noteholder causes of action against issuers and guarantors of notes, if not authorized by the holders (as defined in the indentures) or otherwise expressly permitted under the terms of the indentures. Ultimately, the decision may restrict the ability of indenture trustees, individual noteholders, or other entities authorized by such holders (whether by partial assignment, proxy, agency, or power of attorney) to exercise remedies under indentures. For example, the decision brings into question the ability of investment advisors — who may be similarly situated to Cortlandt — to pursue claims arising under an indenture or from notes issued pursuant to such an indenture on behalf of the funds that they advise.

Further, the common language used to establish the authority of indenture trustees to bring claims may need to be recalibrated. The decision also highlights the importance of following proper registration procedures for ownership interests in notes, particularly when those interests are assigned in distress scenarios.

The Cortlandt Court did not reach the merits of the action commenced by the plaintiffs, so there are several open questions. These include whether holders that satisfy the requirements of indentures can direct a trustee to pursue fraudulent conveyance claims pursuant to indenture provisions such as 6.05 and the no-action clause at 6.06, and whether an indenture trustee's individual status as a creditor for fees and costs under indentures — whether at the time of the alleged conveyance or when the claim is brought — may provide standing under certain circumstances for fraudulent conveyance purposes. Courts will likely revisit questions of whether indenture trustees have authority under such provisions to commence actions for claims and causes of action other than payment of principal and interest. On the related question of whether no-action clauses authorize holders to bring fraudulent conveyance claims, some courts are concluding that those holders do have such rights for direct claims, and that no-action clauses do not prohibit holders from bringing claims that indenture trustees cannot bring under the terms of indentures.

What is clear after Cortlandt is that the standing of indenture trustees and holders should be carefully analyzed before commencing litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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