Harris Trust and Sav. Bank v. E-II Holdings, Inc., E-II

• Decision Date: 03 May 1991
• Docket Number: No. 90-1095,E-II,90-1095
• Parties: Fed. Sec. L. Rep. P 95,803 HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation, not individually but as Trustee, and LaSalle National Bank, a national banking association, not individually but as Trustee, Plaintiffs-Appellants, v.HOLDINGS, INCORPORATED, a Delaware corporation, and American Brands, Incorporated, a Delaware corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 636

926 F.2d 636

Fed. Sec. L. Rep. P 95,803

HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation, not individually but as Trustee, and LaSalle National Bank, a national banking association, not individually but as Trustee, Plaintiffs-Appellants, v. E-II HOLDINGS, INCORPORATED, a Delaware corporation, and American Brands, Incorporated, a Delaware corporation, Defendants-Appellees.

No. 90-1095.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 30, 1990.

Decided Feb. 21, 1991.

Rehearing and Rehearing In Banc

Denied May 3, 1991.

James E. Spiotto, Ann E. Acker, William P. Smith, Wendy Grossman, Kathryn M. Gleason, Chapman & Cutler, Chicago, Ill., for plaintiffs-appellants.

Terry M. Grimm, Timothy J. Rivelli, Gregory J. Bueche, Winston & Strawn, Chicago, Ill., Stephen A. Marshall, Abraham H. Levin, Gerald Harris, Rubin, Baum, Levin, Constant & Friedman, New York City, William Bruce Hoff, Jr., Mayer, Brown & Platt, Thomas M. Dethlefs, Jay Erens, Hopkins & Sutter, Chicago, Ill., Robert B. Mazur, Eric M. Roth, Wachtell, Lipton, Rosen & Katz, Daniel J. O'Neill, Chadbourne & Parke, New York City, for defendants-appellees.

Before WOOD, Jr., COFFEY, and KANNE, Circuit Judges.

HARRINGTON WOOD, Jr., Circuit Judge.

Technically, they are high yield debt securities, but in common parlance we call them junk bonds. It is an unflattering and unwelcome appellation, due in no small part to the fact that oftentimes the securities are, quite literally, junk. See Kuhn, Junk: The Weak and the Strong, FORTUNE, Oct. 23, 1989, at 17. The appellants, trustees of high yield debt securities with a face value of $1.5 billion, are before this court in an attempt to assuage their fears that the worst has occurred. We cannot provide the reassurance they seek, however; we lack subject matter jurisdiction over most of the complaint and the remainder fails to state a claim.

The facts are straightforward and, for purposes of this decision, undisputed. ¹ In 1987, BCI Holdings Corp. ("BCI") engineered a $6.2 billion leveraged acquisition of Beatrice Companies, Inc ("Beatrice"). During the reshuffling that ensued, BCI created E-II Holdings, Inc. ("E-II"), and capitalized it with an initial portfolio of fifteen business concerns that were once part of Beatrice. Soon thereafter, E-II made a registered public offering of $1.5 billion in high yield debt securities: $750,000,000 of 12.85% senior subordinated notes and $750,000,000 of 13.05% subordinated debentures. The trustee under the note indenture was Harris Trust and Savings Bank ("Harris"). The trustee under the debenture indenture ² was LaSalle National Bank ("LaSalle") (collectively, the "Trustees").

E-II was not immune to the takeover mania that victimized the 1980s, and in December 1987 it launched a hostile takeover bid for American Brands, Inc. ("American Brands"). American Brands countered with a bid for E-II--the so-called "pac man" defense. And when the dust settled, it was American Brands, and not E-II, that prevailed.

Following its unsuccessful takeover attempt, E-II was involved in a number of business transactions that gave rise to uneasiness on the part of the Trustees. For example, on February 29, 1988, E-II became a wholly owned direct subsidiary of American Brands. On July 1, 1988, American Brands sold E-II to McGregor Acquisition Corp. ("McGregor"). ³ And one day after that sale, McGregor made a "capital contribution" to E-II of all of the issued and outstanding stock of its subsidiary, Faberge, Inc. ("Faberge"), in exchange for 840 shares of E-II and a "dividend" of $925,000,000. In all, the Trustees have concerns about some fourteen different transactions (the parties refer to them as "Extraordinary Transactions") occurring between February and December of 1988.

The Trustees were not alone in their concern. A significant number, though not a majority, of investors filed notices of default with the Trustees during the summer and fall of 1988. These notices alleged that a default had occurred because the transaction involving Faberge was in violation of the Indentures. ⁴

The Trustees sought to quell their own concerns, as well as those of the investors, by going directly to the source. In addition to the officers' certificates and opinions of counsel required under the Indentures, the Trustees demanded that E-II provide additional information about the Extraordinary Transactions. In particular, the Trustees asked E-II to disclose the factual information on which the certificates and opinions were based. E-II was not accommodating, however; it provided the certificates and opinions required under the Indentures but did not disclose the factual bases of those certificates and opinions. E-II refused to provide the additional information on the ground that the Indentures did not provide such a right. ⁵

In the Trustees' view, E-II's failure to cooperate placed them in a quandary the likes of Scylla and Charybdis. If they acted immediately and declared E-II in default, then the declaration could trigger cross-default provisions in other loan agreements and thereby catapult E-II into involuntary bankruptcy. And if it was later discovered that the Trustees were wrong and that E-II had not been in default, then the disgruntled investors would likely sue the Trustees. On the other hand, the Trustees were also amenable to suit if they failed to act and the investors later discovered that, in fact, E-II's actions had breached the Indentures' covenants. Neither course of action seemed prudent in view of what the Trustees perceived as the insufficient nature of the information in their possession.

Paralyzed by indecision, the Trustees searched for someone to make their decision for them. On January 10, 1989, the Trustees filed a declaratory judgment action against E-II and asserted that the following issues were "matter[s] in dispute": ⁶

a. Whether the acquisition of E-II by American Brands was in compliance with the terms of the Indentures and principles of applicable law and equity, including the implied covenants of good faith and fair dealing;

b. Whether the post-acquisition Extraordinary Transactions ... were in compliance with the terms of the Indentures and principles of applicable law and equity, including the implied covenants of good faith and fair dealing;

c. Whether E-II has complied with the provisions of the [Trust Indenture Act ("Act"), 15 U.S.C. Secs. 77aaa-bbbb,] including but not limited to Section 314, [id. Sec. 77nnn,] which requires evidence of compliance with indenture provisions;

d. Whether an Event of Default has occurred on the Notes or the Debentures within the meaning of Section 315 of the [Act, 15 U.S.C. Sec. 77ooo];

e. What action the Trustees should take with respect to the Notices of Default ... received ...;

f. Whether or not the assets remaining in E-II are sufficient to generate sufficient revenues to ensure payment of principal, interest, and sinking fund obligations of the Notes and Debentures;

g. Whether any future asset sales by E-II can be permitted and, if so, under what circumstances; and

h. To what information are the Trustees entitled in order to determine if unusual occurrences, such as the Extraordinary Transactions, violate the terms of the Indentures.

The Trustees closed their complaint with a request for a judicial declaration concerning each of these "matter[s] in dispute." ⁷

E-II, ⁸ however, and subsequently the district court, were hard pressed to determine the Trustees' positions with respect to the alleged "matter[s] in dispute." And in fact, the Trustees had failed to take a position with respect to virtually every one of the issues for which they sought a judicial declaration. The Trustees did argue that they were entitled to more information than E-II was giving them (the eighth "matter in dispute"), but otherwise peppered their submissions with qualifiers--"may," "could," and other verbalisms that failed to indicate a stance.

On E-II's motion to dismiss under rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, the district court held that it had no subject matter jurisdiction to decide those issues for which the Trustees failed to take a position. That failure, the district court concluded, precluded jurisdiction because it evidenced the lack of a case or controversy. As to the dispute over the Trustees' entitlement to additional information, the district court concluded that a case or controversy existed because the parties disputed the quantity and quality of disclosure required of E-II. The district court then found no legal basis to support the Trustees' claim that they were entitled to more information than E-II was willing to disclose. As such, it dismissed the request for information on the ground that it failed to state a cause of action. The district court also denied a subsequent motion by the Trustees to alter or amend the judgment.

On appeal, the Trustees continue to assert that it is neither necessary nor appropriate for them to commit to a position. Indeed, they assert that their request for "judicial guidance" and "judicial instruction" is the paradigm on which all declaratory judgment cases are built. And in so doing, they seal their fate: "Frequently, an issue of this sort will come before [this court] clad, so to speak, in sheep's clothing: the potential of the asserted principle to effect important change ... is not immediately evident, and must be discerned by a careful and perceptive analysis. But this wolf comes as a wolf." ⁹

As a predicate to relief, the Declaratory Judgment Act requires that the case be one of "actual controversy." 28 U.S.C. Sec. 2201(a). That predicate, which tracks the "cases" or "controversies" requirement of article III, saves the statute from unconstitutionally expanding the federal courts' jurisdiction. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 57 S.Ct. 461, 81 L.Ed. 617 (1937) (upholding Act); U.S. CONST. art....