Elliott Assoc. v. J. Henry Schroder Bank & Trust

• Decision Date: 17 March 1987
• Docket Number: No. 86 Civ. 3725 (LBS).,86 Civ. 3725 (LBS).
• Citation: 655 F. Supp. 1281
• Parties: ELLIOTT ASSOCIATES, on behalf of itself and all other holders of the 10% Convertible Subordinated Debentures of Centronics Data Computer Corp. similarly situated, Plaintiff, v. J. HENRY SCHRODER BANK & TRUST COMPANY and Centronics Data Computer Corp., Defendants.
• Court: U.S. District Court — Southern District of New York

655 F. Supp. 1281

ELLIOTT ASSOCIATES, on behalf of itself and all other holders of the 10% Convertible Subordinated Debentures of Centronics Data Computer Corp. similarly situated, Plaintiff, v. J. HENRY SCHRODER BANK & TRUST COMPANY and Centronics Data Computer Corp., Defendants.

No. 86 Civ. 3725 (LBS).

United States District Court, S.D. New York.

March 17, 1987.

Kleinberg, Kaplan, Wolff & Cohen, P.C., New York City, for plaintiff; Norris D. Wolff, of counsel.

Hawkins, Delafield & Wood, New York City, for defendant Schroder; W. Cullen MacDonald, Katherine A. Gabbay, of counsel.

Spengler, Carlson, Gubar, Brodsky & Frischling, New York City, for defendant Centronics; Richard P. Swanson, Laura A. Proske, of counsel.

OPINION

SAND, District Judge.

This case presents an important question that touches on the obligations of indenture trustees in performing duties assigned to them in a trust indenture. Plaintiff, a holder of certain convertible debentures, sues on a number of theories both the trustee and the company that issued the debentures. In essence, plaintiff claims that the trustee, in conspiracy with the company, acted to enrich the company at the expense of the debenture holders by saving the company from an impending obligation to make a substantial semi-annual interest payment to holders of record as of a certain date.

The conspiracy was carried out, plaintiff claims, by the trustee's decision, allegedly made in bad faith at the company's urging, to accept less than the full period of redemption notice to which the trustee was entitled under the indenture. Defendants deny liability and assert that their actions were authorized by the relevant contractual provisions and permissible under the governing legal principles.

By consent of all parties, this case has been decided by the Court based on the facts, affidavits and documents set forth in a stipulated record submitted by the parties for judicial resolution of the underlying controversy on the merits. Although in a strict sense, a bench trial was not held, the parties agreed, inter alia, that "the Court shall be free to resolve any disputed factual matters and to draw any inferences from the exhibits and/or affidavits submitted to the Court with the same force and effect as if this action were tried in open court...." See Stipulation and Order, attached to this Opinion as Exhibit A.

As this Opinion indicates, the parties have stipulated to most of the relevant facts but sharply dispute their legal significance. The following constitutes our findings of fact and conclusions of law pursuant to F.R.Civ.P. 52(a).

Findings of Fact

At all times relevant hereto, plaintiff Elliott Associates ("Elliott"), a New Jersey limited partnership, was the holder of $525,000 principal amount of certain 10% Convertible Subordinated Debentures due June 1, 1990 ("Debentures"), which were issued by defendant Centronics Data Computer Corp. ("Centronics"), pursuant to a trust indenture ("Indenture"), between Centronics and defendant J. Henry Schroder Bank and Trust Company ("Schroder"), as trustee ("Trustee"). Centronics is a Delaware corporation with its principal offices in New Hampshire. Defendant Schroder is a New York corporation with its principal offices in New York.

On March 12, 1986, George Sievers, the Senior Vice President in charge of Schroder's corporate trust department, received a telephone call from Neil R. Gordon, the manager of treasury services for Centronics. Gordon told Sievers that Centronics "was contemplating redemption of its outstanding" Debentures subject to certain conditions, including the receipt of applicable clearances from the Securities and Exchange Commission and stability in the market for Centronics common stock. See affidavit of Neil R. Gordon, ¶ 2. During the conversation, Gordon asked Sievers how much time Schroder would need to perform its services in connection with the contemplated redemption. This inquiry was presumably occasioned by the requirement in Section 3.01 of the Indenture that Centronics provide notice to the Trustee of the date of redemption and the principal amount of Debentures to be redeemed "at least 50 days (unless a shorter notice shall be satisfactory to the Trustee)" before the redemption date. Specifically, it appears that in planning the redemption Centronics wanted to know whether Schroder would need the full 50 days or would be satisfied with "shorter notice."

Schroder, through Sievers, responded to the effect that in the case of a total redemption, Schroder "would need only a week to prepare the notices for a redemption, since there were less than two dozen holders to be notified." See affidavit of George Sievers at ¶ 2. Gordon's affidavit and his diary entries from March 12, 1986 tend to corroborate that the telephone conversation of that date occurred substantially as we have described it.

Approximately a week later, on March 20, 1986, the Board of Directors of Centronics met and approved redemption of all outstanding Debentures. See Stipulation at Exhibit 8. By letter dated April 4, 1986, subsequent to the Sievers-Gordon conversation and board approval of the redemption, Robert Stein, the president of Centronics, informed Schroder that "pursuant to the terms of the Indenture, notice is hereby given that the Company will redeem all of its outstanding 10% Convertible Subordinated Debentures due June 15, 1990, on May 16, 1986." See Stipulation at Exhibit 5.

Work on the securities law aspects of the redemption proceeded thereafter, and on or about April 8, 1986, Centronics submitted draft S-3 registration materials to the SEC in connection with the redemption. The S-3 was cleared on May 1, 1986.

That same day, a notice of redemption and a letter of transmittal, both dated May 1, 1986, were mailed to holders of the outstanding Debentures. Then, by letter dated May 2, 1986, Stein confirmed to Schroder that the notice to the Trustee "was given as of April 4, 1986." Subsequently, Centronics provided Schroder with an officer's certificate in which the signatory officers certified to Schroder that in their opinion "all conditions precedent provided for in the Indenture relating to the proposed redemption had been complied with." See Stipulation at Exhibit 8.

Schroder apparently was satisfied with the notice it had received. In Schroder's view, the "shorter notice" which Centronics had furnished was adequate because it left Schroder with sufficient time to perform its pre-redemption administrative tasks. See affidavit of George R. Sievers at ¶ 7.

The letter of transmittal that accompanied the May 1, 1986 notice of redemption issued to Debenture holders urged the holders to consider the alternatives to redemption which were available prior to the close of business on May 15, 1986. Specifically, Centronics informed the holders that the company believed that "it is to your advantage to convert your Debentures into common stock so long as the market price of the Common Stock is greater than $3¾ per share (without taking into consideration sales expense) through May 15, 1986, since you will receive upon conversion of your Debentures common stock having a greater quoted market value than the amount of cash which would otherwise be received by you if you had sold the Debentures to the purchaser or surrendered the Debentures for redemption." The notice of redemption pointed out that those Debentures which were not converted into common stock by the close of business on May 15, 1986, the conversion termination date, would be automatically redeemed as of May 16, 1986, on which date the redemption price would become due and payable and all interest would cease to accrue. Conversion rights, of course, would no longer apply.

Elliott elected to convert. As of May 15, 1986, the last day for conversion, conversion from creditor to shareholder status was indeed the economically most profitable alternative. Since the market price of Centronics common stock had risen to $6 5/8 per share on that day, each $1,000 Debenture was convertible into approximately $2,038 worth of common stock. See Stipulated Facts at Paragraph 8. By contrast, a $1,000 Debenture surrendered for redemption the next day, the redemption date, would have yielded approximately $1,146.11, representing a redemption price of $1,100 plus accrued interest of $46.11 from December 1, 1985, to May 16, 1986.

The foregoing findings of fact, with the possible exception of our characterization of what transpired in the March 12, 1986 telephone discussion between Sievers and Gordon, are essentially undisputed. The propriety of the actions of Schroder and Centronics in connection with the redemption, however, is not, and we therefore turn to the disputed legal issues.

Conclusions of law

I. Jurisdiction

Jurisdiction is predicated on the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa-77bbbb (the "Trust Indenture Act"), diversity of citizenship, 28 U.S.C., Section 1332(a) (1), and principles of pendent jurisdiction.

II. Class Certification is Denied

Elliott filed this action "on behalf of itself and all other holders of the 10% Convertible Subordinated Debentures of Centronics Data Computer Corp. similarly situated." Pending at the time of the submission of the stipulated record was Elliott's motion for class certification, a motion which defendants oppose on a number of grounds. We resolve this threshold application at the outset based on the special circumstances of this case before setting forth our conclusions of law with respect to Elliott's primary claims.

It is settled that the party seeking class certification bears the burden of proving that it has satisfied the requirements of F.R.Civ.P. Rule 23.7A Wright, Miller & Kane, Federal Practice and Procedure, Civil 2d., § 1759 (1986). The first pre-requisite to a class action set forth in Rule 23(a) provides that a member of a putative class may sue as a representative party "on behalf of all only...