## Facts

- Childs Co. issued debentures governed by an indenture that created a sinking fund and appointed an indenture trustee.
- The indenture required Childs Co. to make sinking-fund deposits in cash or marketable securities for the retirement of debentures.
- Childs Co., instead of depositing cash or marketable securities, delivered additional unissued debentures to the trustee as a purported substitute for the required sinking-fund funding.
- Birn, an individual debenture holder, alleged that delivering unissued debentures violated the sinking-fund covenant and amounted to a default under the indenture.
- Birn gave the trustee written notice of the alleged default and requested that the trustee bring an enforcement action against Childs Co.
- The trustee declined to sue.
- The indenture contained a no-action clause limiting individual holder suits, including a condition that holders of at least 25% of the outstanding principal amount make a written request that the trustee commence litigation.
- Birn could not locate other debenture holders to obtain the required written request, in part because the debentures were payable to bearer and the owners were not readily identifiable.
- Birn filed suit directly against Childs Co. in the New York Supreme Court to enforce the sinking-fund obligation, and Childs Co. sought dismissal based on the no-action clause.

## Issues

1. Whether the indenture’s no-action clause—requiring a written request by holders of at least 25% of the debentures—bars an individual debenture holder’s suit when the trustee refuses to sue and the holder cannot practically obtain the required percentage request.

## Decision

- The court refused to dismiss Birn’s action based on the no-action clause.
- The court permitted the individual debenture holder to proceed with a direct suit against Childs Co. to litigate the claimed sinking-fund default.
- The court treated the trustee’s refusal to sue, combined with the practical inability to obtain a 25% written request, as grounds not to apply the clause in a way that would leave the holder without a workable remedy.

## Legal Principles

- No-action clauses in indentures are generally valid and are intended to channel enforcement through the trustee and to reduce multiple, competing holder lawsuits.
- A no-action clause is not applied as an absolute bar when its procedural prerequisites cannot reasonably be met and strict enforcement would effectively eliminate any realistic means of enforcing indenture duties.
- When a trustee, after notice of an asserted default, declines to bring suit, a court may allow a bondholder to sue directly where otherwise the issuer’s obligations would be insulated from enforcement.
- Courts may excuse performance of indenture pre-suit conditions where performance is impracticable (including situations where bearer securities make it effectively impossible to identify and assemble the required percentage of holders).

## Conclusion

Birn v. Childs Co. permitted an individual debenture holder to sue the issuer for an alleged sinking-fund default despite an indenture no-action clause requiring a 25% holder request, because the trustee refused to sue and the bearer form and dispersion of the debentures made obtaining the required written request practically impossible, which would have left the holder without an effective remedy.


Birn v. Childs Co., 37 N.Y.S.2d 689 (1942)