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RBC Capital Markets, LLC v. Education Loan Trust IV, C.A. No. 6297-CS (Dec. 6, 2011) (Strine, C.)

December 6, 2011

Chancellor Strine dismissed claims brought by the holder of 15% of the auction rate notes issued under an indenture of trust, finding that the claims against the issuer and the trust were derivative and thus barred by a “no-action” clause in the indenture.

The minority noteholders alleged that the issuer caused the trust to pay excessive operating and administration fees in violation of explicit limitations in the indenture.  The allegedly excessive payments caused a decrease in the interest rate applied to determine the interest payments due, and thus decreased the interest payments made.  Defendants argued that plaintiff’s claims were barred under the indenture’s no-action clause.  The no-action clause precludes a minority noteholder from suing for any remedy under the indenture unless it first makes a demand on the trustee.  No-action clauses exist to prevent individual noteholders from bringing capital-taxing suits unsupported by the majority or the trustee, and to ensure that all noteholders share equally in any remedy obtained for breach of an indenture.  Under New York law, which governs the indenture, no-action clauses are construed broadly such that regardless of a noteholder’s legal theory, any claim that can be enforced by the trustee on behalf of all noteholders is subject to the no-action clause.

Plaintiff argued that its claims fell within the one exception to the no-action clause.  The indenture contains a “payment-of-interest” exception, as required by the Trust Indenture Act, that permits a minority noteholder to bring a direct action for nonpayment of principal or interest when due.  Plaintiff admitted that it received timely payments and that the payments were calculated as specified in the indenture.  Thus, the Court, applying New York law, held that plaintiff’s true claim was not related to the payment of principal and interest when due, but was a derivative claim for excessive payment of management fees.  In so holding, the Chancellor reasoned that the primary injury caused by the overpayment was impoverishment of the trust.  Accordingly, the appropriate remedy would be a recovery of the excessive fees from the issuer, which recovery would be paid back into the trust and eventually increase returns to all noteholders.  Where plaintiff’s claim is based on a wrong independent of non-payment, such as a violation of another provision or a challenged transaction, that derivatively affects the amount of payments, the injury is to the trust and the no-action clause applies.

Because plaintiff’s claims were based on an independent wrong, rather than a direct violation of the payment requirements, the Court dismissed them pursuant to Rule 12(b)(6) for failure plead facts establishing that plaintiff complied with the no-action clause.

The full opinion is available here