COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NO. 67966 ELAINE DRAGE, et al : : Plaintiff-appellants : : JOURNAL ENTRY vs. : and : OPINION SANTA FE PACIFIC CORPORATION : : Defendant-appellee : : : DATE OF ANNOUNCEMENT OF DECISION : JULY 3, 1995 CHARACTER OF PROCEEDING : Civil appeal from : Court of Common Pleas : Case No. 261,051 JUDGMENT : AFFIRMED. DATE OF JOURNALIZATION : _______________________ APPEARANCES: For plaintiff-appellants: JAMES F. KOEHLER M. TERENCE CAWLEY Attorneys at Law 1501 Euclid Avenue Cleveland, Ohio 44115 DENNIS E. MURRAY, SR. DAVID D. YEAGLEY Attorneys at Law 300 Central Avenue Post Office Box 29 Sandusky, Ohio 44871-0019 (Cont.) (Continued) For defendant-appellee: FRANK P. AUWARTER Attorney at Law 190 South LaSalle Chicago, Illinois 60603-3441 FRANCES FLORIANO GOINS Attorney at Law 4900 Society Center 127 Public Square Cleveland, Ohio 44114 - 3 - DONALD C. NUGENT, J.: Plaintiffs Elaine and David Drage (hereinafter collectively referred to as "the Drages") appeal from the judgment of the Cuyahoga County Court of Common Pleas dismissing their putative class action complaint against Santa Fe Corporation (hereinafter "Santa Fe") for failure to state a claim upon which relief can be granted. For the reasons which follow, we affirm the judgment of the trial court. I. The facts alleged in the complaint of the Drages are as follows: The Drages were at all times relevant to this action shareholders of common stock of Santa Fe. Santa Fe is a Delaware corporation which has operated, through its subsidiaries, three types of business: transportation, natural resources and real estate. Its real estate business was conducted through its subsidiary, Santa Fe Pacific Realty Corporation (hereinafter "SFP Realty"). In approximately January of 1988, Santa Fe undertook a major financial restructuring. Incident thereto, Santa Fe's board of directors declared a special dividend of $25 in cash, plus $5 in principal amount of newly issued debentures for each share of - 4 - common stock held. The newly issued debentures were titled "16% Senior Subordinated Debentures Due 2003." The trust indenture governing the debenture portion of the special dividend was issued in March, 1988. The trust indenture provided that "except under certain specified conditions, so long as the debentures remained outstanding neither the Company nor any of its subsidiaries would declare or pay any dividends as respects its capital stock, or purchase or redeem any of the capital stock of the Company or any subsidiary." Another provision stated that the terms of the trust indenture could be amended "with the written consent of the holders of at least a majority [of holders] in principal amount" of the outstanding senior debentures. Subsequent to the issuance of the senior debentures, Santa Fe decided to spin off its real estate subsidiary, SFP Realty. Pursuant to that spin-off, newly issued SFP Realty common stock, in an amount which constituted 19.9 percent of its total outstanding common stock, was sold to the Bay Area Real Estate Investment Associates Partnership (hereinafter "Bay Area"). The remaining 80.1 percent of SFP Realty stock was retained by Santa Fe, possibly to be distributed to holders of Santa Fe common stock. Also, as part of the spin-off, Bay Area acquired the right to a put option on the newly issued stock. Bay Area could exercise the put and require Santa Fe, or SFP Realty, to purchase the newly issued stock held by Bay Area, at a set price, if all phases of the spin-off were not completed by January 1, 1992. Such a put option, - 5 - however, violated the terms of the trust indenture which prohibited Santa Fe and SFP Realty from redeeming the stock while the senior debentures remained outstanding. In order to assure SFP Realty's ability to perform under the put if it came to be exercised by Bay Area, Santa Fe sought to invoke the amendment provision of the trust indenture to eliminate the prohibition against stock redemption. To this end, Santa Fe promulgated a proxy statement to solicit the consent of the majority, in principal amount, of holders of senior debentures to amend the trust indenture. The explanatory statement contained an offer by Santa Fe to make cash payments of $10 for each $1,000 principal amount of senior debentures to those holders who consented to the amendment up to and until the time that the requisite amount of consents were received to permit the amendment to the trust indenture. Those senior debentureholders who did not consent to the amendment, or who did not consent until after the needed majority had been reached, were bound by the amendment, and they did not receive the cash payments of $10 per $1,000 principal amount of senior debentures. The Drages, and other shareholders who did not receive the cash incentive, claim that they were "divested of important rights and protections under the [t]rust [i]ndenture" without receiving any consideration or compensation from Santa Fe. They assert that Santa Fe's offer of a cash payment to senior debentureholders who consented to the amendment constituted a breach of express and/or - 6 - implied provisions of the trust indenture. They also allege that the cash payments violated a fiduciary duty owed to Santa Fe senior debentureholders. In response to the complaint, Santa Fe filed a motion to dismiss under Civ.R. 12(B)(6). Santa Fe maintained that the offer of compensation to senior debentureholders in exchange for their vote to allow amendment of the trust indenture was entirely proper as a matter of law and that the amendment process was carried out consistent with the language of the trust indenture and thus violated no contractual or fiduciary duties of any kind. In addition, Santa Fe argued that the Drages' claims were barred because they failed to comply with the trust indenture's no-action clause. The no-action clause in the trust indenture provides as follows: SECTION 6.06. Limitation on Suits. A Securityholder may pursue a remedy with respect to this Indenture of the Securities only if: (a) the Holder gives to the Trustee notice of a continuing Event of Default; (b) the Holders of at least 40% in principal amount of the Securities make a request to the Trustee to pursue the remedy; (c) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and - 7 - (e) the Holders of a majority in principal amount of the Securities do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. It was this no-action clause which served as the basis for the trial court's dismissal order. In granting Santa Fe's motion to dismiss, the trial court wrote as follows: This Court does not reach the issues of breach of contract and fiduciary duty for the reason that plaintiffs have failed to plead compliance with the conditions precedent to bringing suit, as required by the Indenture on which plaintiffs' claims are based. The complaint therefore fails to state a claim upon which relief can be granted requiring dismissal of plaintiffs' complaint in its entirety. *** [T]he complaint contains no allegations showing compliance with [the no-action clause]. Plaintiffs assert that the no-action clause does not apply in a case involving coercive financial inducements in a voting context. According to plaintiffs, the no-action clause is unreasonable in light of this important factual circumstance. Plaintiffs have cited no authority for this proposition and this court has found none *** A mere reading of the Indenture in the case at bar reveals that the restrictions as set forth are clear and unambiguous. Plaintiffs have simply failed to comply with these restrictions. It is from this judgment that the Drages now appeal, assigning the following errors for this court's review: - 8 - I. THE COURT BELOW ERRED AS A MATTER OF LAW WHEN IT DISMISSED THE PLAINTIFFS' ACTION, HOLDING INCORRECTLY THAT PLAINTIFFS WERE REQUIRED TO PLEAD IN THEIR COMPLAINT THAT THEY HAD COMPLIED WITH A PRE-SUIT "NO ACTION" CLAUSE, WHEN THE FACTS AND CIRCUMSTANCES OF THE CASE CREATED A FACTUAL ISSUE FOR THE JURY WHETHER ENFORCEMENT OF THE NO ACTION CLAUSE WAS REASONABLE. II. THE COURT BELOW ERRED AS A MATTER OF LAW WHEN IT GRANTED DEFENDANT'S MOTION TO DISMISS UNDER RULE 12(B)(6) FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF MAY BE GRANTED, BECAUSE CASE LAW HOLDS THAT THE REASONABLENESS OF THE ENFORCEMENT OF A NO ACTION CLAUSE IN A TRUST INDENTURE IS A QUESTION OF FACT, OR A MIXED QUESTION OF FACT AND LAW, WHICH SHOULD HAVE BEEN A QUESTION SUBMITTED TO THE JURY. II. In reviewing a motion to dismiss under Civ.R. 12(B)(6), the court must accept as true all factual allegations in the complaint. Greeley v. Miami Valley Maintenance Contrs., Inc. (1990), 49 Ohio St.3d 338. The motion must be denied unless it appears beyond a doubt that the plaintiff can prove no set of facts, consistent with the complaint, which would entitle the plaintiff to relief. O'Brien v. University Community Tenants Union, Inc. (1975), 42 Ohio St.2d 242. At the outset, two points need to be made. The first is that the trust indenture contains a choice of law provision which requires the application of New York law in construing the operation of the trust indenture. Both sides agree on the - 9 - application of New York law to the dispute at issue. The other is that the Drages fully acknowledge they did not comply with the requirements of the no-action clause. With these points in mind, we turn now to address the Drages' assignments of error. New York courts recognize that no-action clauses have been included in indentures for years to limit the types of suits 1 arising from those agreements. McMahan & Co. v. Wherehouse Entertainment, Inc. (S.D.N.Y. 1994), 859 F. Supp. 743; Birn v. Childs Co. (N.Y. Sup. Ct. 1942) 37 N.Y.S.2d 689, 696 ("[n]o action clauses have been inserted in *** trust indentures for years."). The oft-stated purpose of such a clause is to protect the majority of debentureholders, and the issuing corporation, from non-meritorious lawsuits by individual debentureholders. Id., ("In so far as [no action clauses] prevent individual debentureholders from getting special advantages for themselves and protect the rights and security of all holders as a class, and also in so far as they afford the trustee notice and an opportunity for examination, they serve a highly useful purpose and have been uniformly sustained ***."); Watts v. Missouri-Kansas-Texas R.R. Co. (5th Cir. 1967), 383 F.2d 571. As the American Bar Foundation's 1 New York law characterizes the corporate trust indenture as a contract between the company that issued the debentures and the debentureholders. Lorenz v. CSX Corp. (3rd Cir. 1993), 1 F.3d 1406 (construing New York law); Metropolitan Life Ins. Co. v. R.J.R. Nabisco, Inc. (S.D.N.Y. 1989), 716 F.S. 1504. Thus, the rights of debentureholders must be found in the terms of the indenture itself or come from general principles of contract law. Broad v. Rockwell Int'l Corp. (5th Cir. Apr. (en banc), 642 F.2d 929, 946, 948, cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380, (1981). - 10 - Commentaries on Indentures, Section 5.7, at 232 (1971), explains, regarding the Foundation's proposed model no-action clause: The major purpose of this [s]ection is to deter individual debentureholders from bringing independent lawsuits for unworthy or unjustifiable reasons, causing expense to the Company and diminishing its assets. The theory is that if the suit is worthwhile, [a significant percent] of the debentureholders would be willing to join in sponsoring it *** An additional purpose is the expression of the principal of law that would otherwise be implied that all rights and remedies of the indenture are for the equal and ratable benefit of all holders. The Drages insist that under New York law, no-action clauses are not enforceable if they are unreasonable under the facts and circumstances of a particular case. The Drages contend that the trial court committed reversible error when it held that they were precluded from bringing this suit for failing to comply with the no-action clause in the trust indenture, as a matter of law, and without a factual determination of whether the enforcement of the no-action clause would be unreasonable under the specific facts and circumstances of this case, where Santa Fe solicited and made cash payments to those senior debentureholders who consented to the amendments to the trust indenture. They insist that as a result of this consent payment by Santa Fe, it would have been impossible for them to amass the required percentage of debentureholders necessary to bring this lawsuit in compliance with the no-action clause. Santa Fe disagrees with the Drages' assertion that the enforceability of the no-action clause in the indenture became a - 11 - question for the jury that the trial court could not resolve without undertaking a factual inquiry into the reasonableness of the clause. While this court has found no New York case directly addressing this issue, we have found several cases, which are also relied upon by Santa Fe, wherein the courts found the no-action clause enforceable as a matter of law, without inquiry into the reasonableness of the clause under the particular facts of the suit before it. Friedman v. Chesapeake and Ohio Railway Co. (S.D.N.Y. 1966), 261 F.Supp. 728, 730, aff'd, 395 F.2d 663 (2d Cir.1968), cert. denied, 393 U.S. 1016 (1969) ("[Plaintiffs] must *** plead and prove compliance with the requirements and performance of the conditions defined in the indenture as conditions precedent to the maintenance of this action. The complaint does not allege that the conditions precedent to suit, required by the trust indenture, have been met, and the fact that they have not been complied with is alleged in the challenged affirmative defense and is shown by undisputed affidavits ***. The complaint, therefore, fails to state a claim upon which relief can be granted."); Cruden v. Bank of New York (2d Cir.1992), 957 F.2d 961; Victor v. Riklis (S.D.N.Y. May 15, 1992), 91 Civ. 2897, 1992 WL 122911 ("[Plaintiff] has not complied with the conditions for suit set forth in the *** indentures. The `no action' clause of those indentures prohibits an individual debentureholder *** from pursuing `any remedy with respect to [the] Indenture of the Securities' unless certain - 12 - conditions have been met. Until [plaintiff] can demonstrate compliance with the no-action provision of the *** indentures he is precluded from pursuing his *** claims."); see, also, McMahan & Co. v. Wherehouse Entertainment, Inc., supra at 749 ("No action clause is broad and applies to `any remedy with respect to [the] indenture or the Securities' ***. Plaintiffs did not comply with the No Action Clause and thus are precluded from suing defendants on the state-law claims."). In addition to the force of this line of authority, there is a line of New York cases which makes clear that when a court is confronted with boilerplate provisions of detailed indentures used and relied upon throughout the securities market, such as a no- action clause, see Commentaries on Indentures, supra, the court is to construe such boilerplate provisions as a matter of law rather 2 than fact. As explained by the court in Sharon Steel Corporation v. Chase Manhattan Bank, N.A. (2d Cir. 1981), 691 F.2d 1039: *** uniformity in interpretation [of boilerplate provisions] is important to the efficiency of capital markets *** Whereas participants in the capital market can adjust their affairs according to a uniform interpretation, whether it be correct or not as 2 This principle appears to have its roots in the historical characterization of the corporate trust indenture as a contract between the issuing company and the holders and the New York rules of contract construction which provide that the interpretation of an unambiguous contract provision is a function for the court rather than for a jury, Teitlebaum Holdings, Ltd. v. Gold (1979), 48 N.Y.2d 51, and a court may not rewrite a contract to accord with its instinct for the dispensation of equity under the facts of a case. DeVanzo v. Newark Insurance Co. (1974), 353 N.Y.S.2D 29, 32. - 13 - an initial proposition, the creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets *** Just such uncertainties would be created if interpretation of boilerplate provisions were submitted to juries sitting in every judicial district in the nation. (Emphasis added). See, also, Morgan Stanley & Co. v. Archer Daniels Midland Co. (S.D.N.Y.1983), 570 F. Supp. 1529, 1535-1536 ("[Plaintiff concedes that the legality of [the transaction at issue] would depend on a factual inquiry *** This case-by-case approach is problematic ***. [Plaintiff's theory] appears to be keyed to the subjective expectations of the bondholders *** and reads a subjective element into what presumably should be an objective determination based on the language appearing in the bond agreement."); Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., supra at 1515-1516. The Drages rely heavily on Sass v. New Yorker Towers, Ltd. (1st Dep't 1965), 23 A.2d 105, 108, 258 N.Y.S.2d 765, 768, to support their position that New York law requires jury consideration of whether enforcement of a no-action clause would be reasonable under the facts of a particular suit. Sass, however, may be criticized in important ways that make it unsuited as persuasive authority here. Sass does not, as represented by the Drages, stand for the principle that efforts by issuers of debentures to limit the remedies of debenture holders should be - 14 - subjected to a scrutiny of the facts and circumstances of the case to determine whether such a limitation is reasonable. In Sass, the plaintiff argued that the no-action clause was unconscionable and, therefore, should be disregarded. In addressing this argument, the court, for reasons which are not clear, relied on the Restatement (First) of Contracts Section 58, as applicable authority. Section 58 provides as follows: A bargain to forego a privilege, that otherwise would exist, to litigate in a Federal Court rather than in a State Court, or in a State Court rather than in a Federal Court, or otherwise to limit unreasonably the tribunal to which resort may be had for the enforcement of a possible right of action or the time within which a possible future claim may be asserted, is illegal. (Emphasis added). As shown by the highlighted language, Section 58 clearly pertains to contractual attempts to limit the jurisdiction of courts. Section 58 does not indicate that all restrictions upon the right to bring a suit are subject to scrutiny to determine their reasonableness; rather, only those that limit the jurisdiction of the court or the applicable statute of limitations. A no-action clause, however, does not restrict the jurisdiction of the court or effect the applicable statute of limitations. Thus, it is less than apparent why the Sass court considered Section 58 to be worthy of note, especially when considering the fact that the issue before the court was whether the no-action clause was unconscionable, not whether it was unreasonable. Moreover, - 15 - regardless of the court's statement that it considered the facts and circumstances of the case to determine the reasonableness of the clause, the court held that the no-action clause was enforceable as a matter of law. It is also worthy to note that Section 58 is not included in the Restatement (Second) of Contracts. Similarly, we find the Drages' reliance upon Order of United Commercial Travelers v. Duncan (6th Cir. 1955), 221 F.2d 703, where the court was construing Ohio law, and not New York law, beside the point. Finally, even were we to accept the Drages' argument that New York law requires jury consideration of whether enforcement of a no-action clause would be reasonable under the facts of a particular suit, there is case authority, albeit not New York, explicitly holding that it is not a violation of a securityholder's rights for the issuer to compensate the securityholder for consenting to an amendment to the indenture. In Katz v. Oak Industries, Inc. (Del.Chan.Ct. 1986), 508 A.2d 873, the issuer of bonds made a tender offer to holders of the company's debt securities but conditioned the offer upon the tendering bondholders' consent to amendments to the underlying indenures. That tender offer, conditioned upon consent, is analogous to the cash payment offered by Santa Fe. The plaintiff in Katz claims, as do the Drages in this case, that the use of the tender offer constituted a coercive tactic breaching an implied - 16 - covenent of good faith to a company's debtholders. The court in Katz rejected that argument, stating: [T]here is nothing in the indenture provisions granting bondholders power to vote proposed modifications in the relevant indenture that implies that Oak may not offer an inducement to bondholders to consent to such amendments. Such an implication, at least where, as here, the inducement is offered on the same terms to each holder of an affected security, would be wholly inconsistent with the strictly commercial nature of the relationship. * * * In these circumstances, while it is clear that Oak has fashioned the exchange offer and consent solicitation in a way designed to encourage consents, I cannot conclude that the offer violates the intendment of any of the express contractual provisions considered, or applying the test set out above, that its structure and timing breaches an implied obligation of good faith and fair dealing. Id. at 881. Similarly, in Kass v. Eastern Air Lines, Inc. (Del.Chan.Ct. Nov. 14, 1986), 1986 WL 13008, the plaintiffs sought to enjoin defendants from offering a cash payment to debentureholders who consented to proposed amendments to the indenture. The court refused to enjoin the offer, stating: [H]ad Eastern not made its offer to all bondholders on the same terms, but had it privately paid money to sufficient holders to carry the election, one would, without more, feel some confidence in concluding, provisionally at least, that such conduct was so inconsistent with the concept of voting by the amendment provision that it constituted a violation of what must have been the reasonable expectation of the contracting parties. - 17 - I have no such confidence here, however. Each holder is offered the opportunity to accept or reject the consideration offered. Each will continue to own bonds and thus each has an economic incentive of the same kind to evaluate the question whether any threat to the value of his or her bonds posed by the amendment is more or less valuable than the consideration offered for his or her consent. Id. at 5. Inasmuch as the indenture did not prohibit the payments offered by Santa Fe and Santa Fe made its offer to all senior debentureholders on the same terms, it seems that this was an action Santa Fe was free to take. Since the greater weight of New York authorities supports the position of Santa Fe that the enforceability of the no-action clause in the indenture was a question of law that the trial court could resolve without undertaking a factual inquiry into the reasonableness of the clause, this court can but conclude that the trial court correctly applied the terms of the governing trust indenture in assessing whether the Drages failed to plead compliance with the conditions precedent to bringing suit, as required by the indenture. The Drages' complaint, therefore, fails to state a claim upon which relief can be granted. The Drages' first and second assignments of error are overruled, and the judgment of the trial court is affirmed. - 18 - It is ordered that appellee recover of appellants its costs herein taxed. The Court finds there were reasonable grounds for this appeal. It is ordered that a special mandate issue out of this Court directing the Cuyahoga County Court of Common Pleas to carry this judgment into execution. A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure. SARA J. HARPER, P.J. CONCURS IN JUDGMENT ONLY TERRENCE O'DONNELL, J. CONCURS IN JUDGMENT ONLY JUDGE DONALD C. NUGENT N.B. This entry is made pursuant to the third sentence of Rule 22(D), Ohio Rules of Appellate Procedure. This is an announce- ment of decision (see Rule 26). Ten (10) days from the date hereof, this document will be stamped to indicate journalization, .