By Rodney F. Tonkovic, J.D.
In a case hinging on the scope of the Trust Indenture Act, a Second Circuit panel concluded that an indenture was exempt from the Act's protections. In this case, a holder of debt securities argued that an amendment to the governing indenture was invalid under the Trust Indenture Act. The Act, however, does not protect private offerings of debt securities, and the court affirmed that that was the case here. Instead, the contract terms governed, and the claims were barred by a "no-action" clause (Chatham Capital Holdings, Inc. v. Conru, January 31, 2024, Wesley, R.).
Chatham Capital Holdings, a pair of affiliated private investment firms, holds debt securities issued by FriendFinder Networks. The debt securities were acquired via an exchange offer in May 2018 and are governed by an indenture.
Contractual roadblocks. At issue here, the indenture provides that certain amendments to any provision would require the consent of a supermajority of the holders. There was also a "no-action" clause preventing holders from seeking any remedy unless five pre-suit conditions are satisfied.
Alleged coercion. Several years after Chatham completed its exchange offer, the defendant in this action, a trust in the name of FriendFinder's founder, increased its stake to become the supermajority holder. The trust then allegedly began to "strong-arm" other investors into selling their stakes at steep discounts.
Chatham declined the offer. Soon after, the trust voted to amend the indenture in a way that devalued the securities by reducing core payment terms, cutting the interest rate, and extending the maturity date. The trust then made an even lower offer to Chatham, and Chatham again declined.
In the district court. Chatham filed an action in the New York state court, contending that the indenture was invalid and bringing claims for breach of indenture and breach of the covenant of good faith and fair dealing. FriendFinder removed the case to the federal district court, where it was dismissed. The judge reasoned that the indenture's no-action clause barred the suit and that the Trust Indenture Act did not apply.
No-action clause bars. On appeal, the court agreed that the no-action clause applied, and the Trust Indenture Act did not. Under New York law, no-action clauses are strictly construed and have been enforced in both state and federal courts. In this case, Chatham did not satisfy the first pre-suit condition—providing notice of an "event of default." Since there was no such event, Chatham did not, and could not, satisfy this condition and was thus unable to pursue any remedy.
The court went on to find that the Trust Indenture Act did not apply, and the indenture's provisions governed. The offering documents made it clear that the exchange offer was a completely private offering. As a result, the offer fell under the Securities Act's Private Placement Exemption (exempting it from registration requirements) and was likewise exempt under the Trust Indenture Act's protections. The court accordingly affirmed the district court's judgment dismissing the complaint.
The case is No. 23-154.