- Plaintiff’s Complaint Dismissed for Lack of Standing Due to Bond Indenture’s No-Action Clause: Emmet & Co. v Catholic Health E.
- October 15, 2012 | Author: Adam M. Rafsky
- Law Firm: Farrell Fritz, P.C. - Uniondale Office
In a September 25, 2012 decision by Justice Kornreich, the Court granted the defendants’ motions to dismiss. The case arose out of tax-exempt municipal bonds (the “Bonds”) that were issued to finance hospital systems. Plaintiffs, who were bondholders, objected to and attempted to stop the defendant Catholic Health, who was acting on the advice of the defendant Merrill Lynch, from consummating a redemption transaction. Catholic Health sought to redeem at 100% of par value, plus interest, the remainder of the Bonds that bondholders failed to tender by a date certain for which Catholic Health had offered to pay the bondholders 101% of par value, plus accrued interest. The plaintiffs claimed that the transaction violated the terms of the Bonds’ indentures and brought this action for breach of contract and breach of the implied covenant of good faith and fair dealing against Catholic Health, and for tortious interference with contract against Merrill Lynch.
The defendants moved to dismiss arguing that the plaintiffs failed to plead that they complied with the “no-action” clauses contained in each of the indentures, which barred any bondholder from bringing suit to enforce the indenture unless certain conditions were met. In opposition, the plaintiffs argued: 1) that no-action clauses do not apply to wrongful redemption cases; and 2) that this action fell under an express exception to the no-action clause contained in each indenture which, the plaintiffs argued, allowed them to sue to enforce their right to the interest they would have been entitled to had the bonds not been called.
The court held that in New York, “a party cannot sure to assert its rights under an indenture while ignoring the indenture’s restriction on its ability to sue.” The court also rejected the plaintiffs’ second argument, citing First Department precedent for the proposition that “in an action for interest stemming from a redemption, an ‘express authorization of actions for unpaid interest’ is unavailing where plaintiffs are not seeking to recover ‘past due interest as such,’ but rather the future interest payments.” Accordingly, the court held that the plaintiffs’ suit was subject to the no-action clauses, that they therefore lacked standing, and thus, the court dismissed the complaint.
Emmet & Co., Inc. v Catholic Health E., Sup Ct, New York County, September 25, 2012, Kornreich, J., Index No. 651290/2011