The New York Supreme Court Bars Assertion of Fraudulent Transfer Claims by Beneficial Noteholders

Client Advisory

December 3, 2014

The latest developments involving the assertion of fraudulent transfer claims by holders of securities issued under indentures came in an opinion dated September 16, 2014 in which Justice Marcy Friedman of the New York Supreme Court, New York County held that beneficial Noteholders did not have the right to assert fraudulent transfer claims against transferees of assets from the indenture obligor. Cortlandt St. Recovery Corp. v. Hellas Commc’ns, S.a.r.l.[1] The decision is an extension of the New York Court of Appeals’ holding in Quadrant Structured Prods. Co. v. Vertin,[2] decided on June 10, 2014, that addressed the application of indenture no-action clauses to fraudulent transfer claims. 

Among the “boilerplate” language in almost all indentures are the “no-action” clause and provisions limiting the right to exercise remedies under the indenture and securities issued thereunder to the registered “Holders” of the securities. [3] The typical mechanics are that the Issuer signs the Notes, and the Indenture Trustee or Authenticating Agent authenticates the Notes that are registered in the names of the Securityholders.[4] The Registrar (usually the same institution serving as Indenture Trustee) maintains a list of the Securityholders.[5] For the purposes of the Indenture, the “Holder” or a “Securityholder” is the registered holder as evidenced by the Securities Register.[6] In actual practice, for most note issues there is only one registered securityholder, Cede & Co., as the nominee of Depository Trust Company (“DTC”). The institutions with “beneficial ownership” of the Notes have “book-entry” positions, [7] holding their interests in the Notes through banks, brokerage firms or other custodians who are “participants” in DTC. Remedies under the Indenture may be exercised by the Indenture Trustee or by the Holders, subject to the Indenture’s “no-action” clause, which requires that the Indenture Trustee first decline to take action upon the Noteholders’ demands before they can pursue their claims individually.[8]

In Cortlandt, Justice Friedman held that beneficial Noteholders lack standing to assert claims based on the Indenture because those claims must be brought by the Registered Holder (DTC), or the Indenture Trustee.[9] This ruling will require that either (1) the Notes be “certificated out” of DTC so that the beneficial Noteholders become registered Noteholders, or (2) DTC or the Indenture Trustee bring the claims.[10] The Indenture Trustee or DTC will only bring such claims upon having been directed by the necessary of the percentage of the Securityholders and having been indemnified for the liabilities and expenses that may be incurred in pursuing the claim. Another alternative is for the beneficial owner to obtain an assignment of the rights of the Registered Holder.[11]

The claims affected by the rulings are not only suits to recover the principal of and interest on the Notes from the Issuer. Both Cortlandt and Quadrant involved fraudulent transfer claims asserted against affiliates of the Issuer as well. While the payment of principal or interest has its basis in the Indenture’s contractual provisions, a cause of action for fraudulent transfer arises outside of the Indenture. In Quadrant, the Court of Appeals found that the fraudulent transfer claims at issue were not subject to the no-action clause in that Issuer’s Indenture.[12] But, in doing so, the court adopted the reasoning of prior New York cases that held that where the no-action clause applied by its plain terms to all claims arising “under the Indenture or the Securities,” it requires the Noteholders to make an unsuccessful demand upon the Indenture Trustee to bring the fraudulent transfer claims before they bring those claims themselves.[13] The potentially broad scope of no-action clauses described in Quadrant, taken in combination with the standing analysis applied in Cortlandt, taken to their logical extreme would markedly impact the ability of beneficial owners to vindicate their rights by requiring compliance with the exacting and time consuming Indenture requirements for seeking action by the Indenture Trustee and if the request is declined by the Indenture Trustee, obtaining the necessary cooperation from DTC to bring the action.


For more information concerning the matters discussed in this publication, please contact the author, James Gadsden (212-238-8607,, or your regular CL&M attorney.



[1]2014 NY Slip Op 24268 (N.Y. Sup. Ct. Sept. 16, 2014).

[2]23 N.Y.3d 549, 552 (2014).

[3]As illustrated by the model language appearing in the Revised Model Simplified Indenture. Ad Hoc Committee for Revision of the 1983 Model Simplified Indenture, Revised Model Simplified Indenture, 55 The Business Lawyer 1137, 1137–38, § 6.06, Limitation on Suits (2000) [hereinafter Model Simplified Indenture].

[4]Corporate debt securities have not been issued payable to bearer for over three decades.  See Tax Equity and Fiscal Responsibility Act of 1982, Obligations Required to be Registered, 97 Pub. L. No. 248, § 310, 96 Stat. 324 (1982); Model Simplified Indenture, supra note 3, § 2.02, Execution and Authentication.

[5]Model Simplified Indenture, supra note 3, § 2.05, Securityholder Lists.

[6]Model Simplified Indenture, supra note 3, § 1.01, Definitions.

[7]“Securities entitlements” under Article 8 of the Uniform Commercial Code.

[8]Model Simplified Indenture, supra note 3, § 6.06. A no-action clause will not be given effect where it runs counter to public policy or preemption principles.  See Quadrant Structured Prods. at 563–564, 566 (observing that a no-action clause’s scope is never so broad as to encompass such claims as those against the Indenture Trustee or arising under federal securities laws).

[9]2014 NY Slip Op 24268, 10 (N.Y. Sup. Ct. Sept. 16, 2014) (holding that without “certificated” notes, plaintiffs’ book entry granted a right to collect upon, but not a real interest in, the notes at issue).

[10]See id. at 9–10.

[11]Compare Springwell Navigation Corp. v. Sanluis Corporacion, S.A., 46 A.D.3d 377 (1st Dep’t 2007) (holding that the beneficial noteholder had no right to sue for interest payments under the indenture or the notes), with Springwell Navigation Corp. v. Sanluis Corporacion, S.A., 81 A.D.3d 557, 557–58 (1st Dep’t 2011) (holding that plaintiffs had cured their standing defect by obtaining assignments, which were specifically permitted under the indenture, from the registered noteholders prior to commencing their suit).

[12]23 N.Y.3d 549, 552 (2014).

[13]Since the indenture’s no-action clause in Quadrant did not make reference to the rights arising under “the Securities,” it did not bar individual noteholders from bringing a cause of action for fraudulent transfer. Id. at 560.

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