## Facts

- Graham-Page Motors Corporation (Graham-Page) issued approximately $11.5 million in debentures under a trust indenture naming Bank of America as trustee.
- The indenture included a sinking-fund provision requiring Graham-Page to pay the trustee each year an amount equal to 25% of Graham-Page’s net earnings for the prior calendar year.
- Graham-Page sold its automotive assets to Kaiser-Frazer Corporation as part of a transaction in which Kaiser-Frazer agreed to assume the debentures’ interest payments.
- The sale agreement also stated that Kaiser-Frazer did not assume Graham-Page’s other indenture obligations beyond interest (including the sinking-fund obligation).
- After the asset sale, Graham-Page’s financial results produced negative net income, leaving Graham-Page unable to make the 25% sinking-fund payment.
- The indenture contained a “no-action” clause limiting debenture holders’ ability to sue, including a requirement that holders of at least 25% of the total principal request in writing that the trustee bring suit.
- Joseph Rabinowitz, who held only a small fraction of the debentures, sued in New York state court against Graham-Page, Kaiser-Frazer, and Bank of America.
- Rabinowitz alleged, among other things, that Bank of America failed to prevent a foreseeable breach of the sinking-fund provision and that the bank’s loans connected to the asset sale created a conflict between its role as creditor and its duties as indenture trustee.
- Kaiser-Frazer moved to dismiss the claims against it.

## Issues

1. Whether an individual debenture holder who has not satisfied an indenture’s no-action clause (including the minimum-holder written-demand requirement) may maintain suit to enforce rights arising under the indenture.
2. Whether Kaiser-Frazer could be held liable for the sinking-fund payment where it agreed to assume only interest on the debentures and expressly declined to assume other indenture obligations.
3. Whether allegations of trustee conflict or failure to act, without satisfaction of the indenture’s stated preconditions, permit a single holder to bypass the no-action clause and sue directly.

## Decision

- The court granted Kaiser-Frazer’s motion to dismiss.
- The court treated the indenture’s no-action provision as enforceable and as a contractual bar to an individual holder’s suit where the holder had not met the clause’s conditions precedent.
- The court declined to impose sinking-fund liability on Kaiser-Frazer based on an agreement that limited Kaiser-Frazer’s assumption to interest and excluded other indenture duties.
- The court concluded that the pleaded circumstances did not justify disregarding the indenture’s contractual allocation of enforcement authority to the trustee acting on the required bondholder request.

## Legal Principles

- A trust indenture may validly require that enforcement litigation be brought by the trustee, and may condition any holder-initiated suit on specified steps such as notice, demand on the trustee, and support from a stated percentage of outstanding principal.
- A no-action clause operates as a condition precedent: a holder who does not meet the clause’s requirements generally lacks authority to sue to enforce indenture-based rights.
- A purchaser of assets or related party is not liable for an issuer’s indenture obligations absent an assumption of those obligations; an agreement limited to assuming interest payments does not, by itself, extend to other payments such as sinking-fund contributions.
- Allegations that the trustee faced conflicting interests do not automatically permit a single holder to sue contrary to the indenture’s enforcement terms; a plaintiff must show a legally recognized basis to bypass the contractual limits.

## Conclusion

Rabinowitz held debentures issued under an indenture that centralized enforcement in the trustee and restricted individual suits through a no-action clause requiring written requests from holders of at least 25% of the principal. When Rabinowitz sued Kaiser-Frazer and others over the failure to fund the sinking fund after an asset sale in which Kaiser-Frazer assumed only interest, the court enforced the no-action provision and dismissed the claims against Kaiser-Frazer, refusing to impose sinking-fund liability beyond the obligations Kaiser-Frazer expressly assumed.


Rabinowitz v. Kaiser-Frazer Corp., 111 N.Y.S.2d 539 (1952)