Friedman v. Chesapeake & Ohio Railway Co.

Baltimore & Ohio Railway Company (B&O) (defendant) was a common carrier that issued bonds with a maturity date of February 1, 2010. The indenture contained a no-action clause, providing that the indenture trustee had the right to bring actions under the indenture and prohibiting individual bondholders from bringing lawsuits under the indenture unless the trustee unreasonably failed to act. Chesapeake & Ohio Railway Company (C&O) (defendant) purchased 90 percent of B&O’s stock, gaining control over B&O. The Interstate Commerce Commission approved the acquisition and determined that the transaction was not a merger. A group of B&O bondholders (the plaintiff bondholders) (plaintiffs), believing that the transaction was a merger, argued that B&O had violated the indenture and accelerated the maturity date of the bonds, which would make the principal and interest due immediately. The indenture trustee refused to sue B&O, so the plaintiff bondholders filed a lawsuit against B&O and C&O in federal district court. The plaintiff bondholders argued that the no-action clause in the indenture did not prohibit them from bringing the lawsuit, because the lawsuit was authorized by the Trust Indenture Act of 1939. Section 316(b) of the Trust Indenture Act prohibited any limitation on the right of a bondholder to sue a bond issuer for the bonds’ principal or interest without the bondholder’s consent. B&O and C&O filed motions for summary judgment. B&O and C&O argued that the no-action clause was an affirmative defense to the plaintiff bondholders’ claims and asserted that the Trust Indenture Act did not apply to the case, because the bonds, which were issued by a common carrier, were exempt from the Trust Indenture Act.