Chatham Capital Holdings, Inc. v. Conru

Background

Chatham Capital Holdings, Inc. and Chatham Capital Management IV, LLC held debt securities issued by FriendFinder Networks, Inc. and Interactive Network, Inc. The securities were issued under an indenture titled 14% First Lien Senior Secured Notes due 2025. Andrew B. Conru, as trustee of The Andrew B. Conru Trust, and the two issuing companies were defendants.

The indenture allowed certain changes only with approval from holders representing specified percentages of the outstanding securities. The First Amendment reduced the interest rate from 14% to 7% and extended the maturity date from 2025 to 2035. The plaintiffs alleged that these changes were improper and asserted breach-of-contract and good-faith-and-fair-dealing claims. They also sought a declaration that the First Amendment was unenforceable.

The indenture contained a no-action clause. A no-action clause limits a security holder’s ability to sue over the indenture or securities unless specified conditions are met. One condition required the holder to give the trustee written notice that an event of default was continuing. The plaintiffs did not allege that they had satisfied the clause’s conditions. They argued that the clause applied only when an event of default had occurred and sought permission to add claims under the Trust Indenture Act of 1939.

Reasoning

Judge Cote held that the no-action clause barred the lawsuit. Applying New York contract law, she read the clause according to its plain wording and strictly construed it. The clause barred a holder from pursuing any remedy concerning the indenture or securities, subject to exceptions that the court found irrelevant. The complaint did not allege compliance with the clause or show that the clause did not apply.

The court rejected the plaintiffs’ argument that the clause imposed conditions only when there was an event of default. The clause did not contain that limitation. The court also held that the good-faith-and-fair-dealing claim could not avoid the no-action clause because that implied contractual duty cannot impose obligations inconsistent with the express terms of the agreement.

The court denied leave to amend to add Trust Indenture Act claims as futile. An amendment is futile when the proposed claims could not survive a motion to dismiss. The court stated that securities issued in private transactions under section 4(a)(2) of the Securities Act were exempt from the Trust Indenture Act, and that securities issued offshore under Regulation S were also exempt because they were not issued through a public offering. As a result, the proposed Trust Indenture Act claims would not survive dismissal and would not overcome the no-action clause.

Ruling

Judge Denise Cote granted the defendants’ March 11 motion to dismiss. She denied the plaintiffs’ May 13 motion for leave to amend. The Clerk of Court was directed to enter judgment for the defendants and close the case.