## Facts

- B&O issued convertible 4½% income bonds due February 1, 2010 under an indenture that defined bondholder enforcement rights and incorporated default and acceleration procedures.
- The bonds stated that, upon an “event of default” as defined in the indenture, principal could be declared due “in the manner and with the effect provided in the Indenture.”
- The indenture included a no-action clause placing enforcement authority in the indenture trustee and barring individual bondholder suits unless specified conditions precedent were satisfied (including notice to the trustee, demand that the trustee sue, offer of indemnity, and a waiting period).
- C&O acquired roughly 90% of B&O’s stock and thereby control of B&O; the ICC approved the transaction and found it was not a merger.
- Plaintiffs (B&O bondholders) contended the control transaction amounted to a merger or consolidation under the indenture, triggering an event of default and accelerating the bonds so principal and interest were immediately due.
- After the trustee refused to sue, plaintiffs filed a putative class action seeking recovery of principal and interest.
- Defendants asserted plaintiffs lacked standing because they did not comply with the indenture’s no-action clause conditions precedent.

## Issues

1. Whether the indenture’s no-action clause barred individual bondholders from suing where the bondholders did not satisfy the clause’s conditions precedent.
2. Whether Trust Indenture Act of 1939 § 316(b) invalidated or overrode the no-action clause by preserving an individual bondholder’s right to sue for payment of principal and interest.
3. Whether the Trust Indenture Act applied to B&O’s bonds given B&O’s status as an ICC-regulated common carrier.

## Decision

- The court held the no-action clause was valid and enforceable and that plaintiffs undisputedly failed to satisfy its conditions precedent.
- The court held the Trust Indenture Act did not apply because the securities were issued by an exempt ICC-regulated common carrier; therefore § 316(b) did not override the indenture’s no-action clause.
- Plaintiffs lacked standing to maintain the action, including as a class action, because enforcement prior to maturity depended on compliance with the indenture’s contractual prerequisites.
- Plaintiffs’ motion to strike the standing defense and for leave to amend was denied.
- B&O’s motion for summary judgment dismissing the complaint was granted.

## Legal Principles

- A bond indenture may validly require that enforcement actions be brought by the trustee and may bar individual bondholder suits unless express conditions precedent in a no-action clause are met.
- When bonds are not yet due, a claim for principal generally requires acceleration based on an event of default determined under the indenture’s terms.
- Trust Indenture Act § 316(b) does not protect bondholders of securities statutorily exempt from the Act; for exempt issuers, bondholder enforcement rights are governed by the indenture and applicable contract law.
- Failure to comply with an indenture’s no-action clause may be treated as a threshold standing defect warranting dismissal as a matter of law where noncompliance is undisputed.

## Conclusion

The court dismissed bondholders’ attempt to recover accelerated principal and interest because the indenture’s no-action clause barred suit absent compliance with its conditions precedent, and the Trust Indenture Act’s payment-right protections were unavailable due to the common-carrier exemption.


Friedman v. Chesapeake & Ohio Ry. Co., 261 F. Supp. 728 (S.D.N.Y. 1966)