Elliott Associates v. J. Henry Schroder Bank & Trust Co.

• Decision Date: 01 February 1988
• Docket Number: 67 and 68,D,Nos. 7,s. 7
• Citation: 838 F.2d 66
• Parties: , Fed. Sec. L. Rep. P 93,614 ELLIOTT ASSOCIATES, on behalf of itself and all other holders of the 10% Convertible Subordinated Debentures of Centronics Data Computer Corp. similarly situated, Plaintiff-Appellant, Cross-Appellee, v. J. HENRY SCHRODER BANK & TRUST CO. and Centronics Data Computer Corp., Defendants-Appellees, Cross-Appellants. ockets 87-7258, 87-7364 and 87-7366.
• Court: U.S. Court of Appeals — Second Circuit

Page 66

838 F.2d 66

56 USLW 2496, Fed. Sec. L. Rep. P 93,614

ELLIOTT ASSOCIATES, on behalf of itself and all other

holders of the 10% Convertible Subordinated

Debentures of Centronics Data Computer

Corp. similarly situated, Plaintiff-Appellant, Cross-Appellee, v. J. HENRY SCHRODER BANK & TRUST CO. and Centronics Data

Computer Corp., Defendants-Appellees, Cross-Appellants.

Nos. 7, 67 and 68, Dockets 87-7258, 87-7364 and 87-7366.

United States Court of Appeals, Second Circuit.

Argued Sept. 3, 1987.

Decided Feb. 1, 1988.

Norris D. Wolff, New York City (Ronald D. Hariri, Kleinberg, Kaplan, Wolff & Cohen, P.C., New York City, of counsel), for plaintiff-appellant, cross-appellee Elliott Associates.

Richard P. Swanson, New York City (Laura A. Proske, Spengler Carlson Gubar Brodsky & Frischling, New York City, of counsel), for defendant-appellee, cross-appellant Centronics Data Computer Corp.

W. Cullen MacDonald, New York City (Katherine A. Gabbay, Hawkins, Delafield & Wood, New York City, of counsel), for defendant-appellee, cross-appellant, J. Henry Schroder Bank & Trust Co.

Robert B. Fiske, Jr., New York City (James L. Kerr, Thomas F. Godfrey, Davis Polk & Wardwell, New York City, of counsel), for amicus curiae Corporate Trust Committee of the Corporate Fiduciaries Ass'n of New York City.

Before FEINBERG, Chief Judge, and PIERCE and ALTIMARI, Circuit Judges.

ALTIMARI, Circuit Judge:

This appeal involves an examination of the obligations and duties of a trustee during the performance of its predefault duties under a trust indenture, qualified under the Trust Indenture Act of 1939, 15 U.S.C. Sec. 77aaa et seq. (the "Act"). The instant action was brought by a debenture holder who sought to represent a class of all debenture holders under the trust indenture. The debenture holder alleged in its complaint that the trustee waived a 50-day notice period prior to the redemption of the debentures and did not consider the impact of the waiver on the financial interests of the debenture holders. The debenture holder alleged further that, had the trustee not waived the full 50-day notice period, the debenture holders would have been entitled to receive an additional $1.2 million in interest from the issuer of the debentures. The debenture holder therefore concludes that the trustee's waiver was improper and constituted a breach of the trustee's duties owed to the debenture holders under the indenture, the Act and state law.

The district court dismissed the debenture holder's action after conducting a bench trial and entered judgment in favor

of the defendants. The district court held that the trustee's waiver did not constitute a breach of any duty owed to the debenture holders--under the indenture or otherwise--because, as the court found, a trustee's pre-default duties are limited to those duties expressly provided in the indenture. See 655 F.Supp. 1281, 1288-89 (S.D.N.Y.1987). We agree with the district court that no breach of duty was stated here. Accordingly, we affirm the district court's decision dismissing the action.

FACTS and BACKGROUND

Appellant Elliott Associates ("Elliott") was the holder of $525,000 principal amount of 10% Convertible Subordinated Debentures due June 1, 1990 (the "debentures") which were issued by Centronics Data Computer Corporation ("Centronics") pursuant to an indenture between Centronics and J. Henry Schroder Bank and Trust Company ("Schroder"), as trustee. Elliott's debentures were part of an aggregate debenture offering by Centronics of $40,000,000 under the indenture which was qualified by the Securities Exchange Commission ("SEC") pursuant to the Act.

The indenture and debentures provided, inter alia, that Centronics had the right to redeem the debentures "at any time" at a specified price, plus accrued interest, but the indenture also provided that, during the first two years following the issuance of the debentures, Centronics' right to redeem was subject to certain conditions involving the market price of Centronics' common stock. To facilitate its right to redeem the debentures, Centronics was required to provide written notice of a proposed redemption to the trustee and to the debenture holders. Section 3.01 of the indenture required that Centronics give the trustee 50-day notice of its intention to call its debentures for redemption, "unless a shorter notice shall be satisfactory to the [t]rustee." Section 3.03 of the indenture required Centronics to provide the debenture holders with "[a]t least 15 days but not more than 60 days" notice of a proposed redemption.

At the option of the debenture holders, the debentures were convertible into shares of Centronics' common stock. In the event Centronics called the debentures for redemption, debenture holders could convert their debentures "at any time before the close of business on the last Business Day prior to the redemption date." Subject to certain adjustments, the conversion price was $3.25 per share. The number of shares issuable upon conversion could be determined by dividing the principal amount converted by the conversion price. Upon conversion, however, the debentures provided that "no adjustment for interest or dividends [would] be made."

Debenture holders were to receive interest payments from Centronics semi-annually on June 1 and December 1 of each year. Describing the method of interest payment, each debenture provided that

[t]he Company will pay interest on the Debentures (except defaulted interest) to the persons who are registered Holders of Debentures at the close of business on the November 15 or May 15 next preceding the interest payment date. Holders must surrender Debentures to a Paying Agent to collect principal payments.

To insure the primacy of the debenture holders' right to receive interest, the indenture provided that "[n]otwithstanding any other provision of this Indenture, the right of the Holder of a Security to receive payment of ... interest on the Security ... shall not be impaired."

In early 1986, Centronics was considering whether to call its outstanding debentures for redemption. On March 12, 1986, Centronics' Treasury Services Manager, Neil R. Gordon, telephoned Schroder's Senior Vice President in charge of the Corporate Trust Department, George R. Sievers, and informed him of Centronics' interest in redeeming the debentures. Gordon told Sievers that Centronics "was contemplating redemption" of all of its outstanding debentures, subject to SEC approval and fluctuations in the market for Centronics' common stock. Specifically addressing the 50-day notice to the trustee requirement in section 3.01 of the indenture, Gordon asked Shortly thereafter, on March 20, 1986, Centronics' Board of Directors met and approved a complete redemption of all of its outstanding debentures and designated May 16, 1986 as the redemption date. On April 4, 1986--42 days prior to the redemption--Centronics' President, Robert Stein, wrote Schroder and informed the trustee 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 1, 1990, on May 16, 1986." Centronics then proceeded to file registration materials with the SEC in order to receive clearance for the redemption. Schroder was furnished with copies of all the materials Centronics had filed with the SEC.

                Sievers how much time "Schroder would need once the SEC had Centronics' registration materials and an actual redemption date could therefore be set."    Sievers responded that "Schroder would only need [one] week" notice of the redemption.  Sievers explained that this shorter notice would satisfy section 3.01 because Centronics was proposing a complete rather than a partial redemption, and because there were relatively few debenture holders.  Sievers explained that the shorter notice therefore would provide it with sufficient time to perform its various administrative tasks in connection with the proposed redemption
                

On May 1, 1986, the SEC cleared the proposed redemption. On that same day, pursuant to section 3.03 of the indenture, Centronics gave formal notice of the May 16, 1986 redemption to the debenture holders. In a letter accompanying the Notice of Redemption, Centronics' President explained that, as long as the price of Centronics' common stock exceeded $3.75 per share, debenture holders would receive more value in conversion than in redemption. In the Notice of Redemption, debenture holders were advised, inter alia, that the conversion price of $3.25 per share, when divided into each $1,000 principal amount being converted, would yield 307.69 shares of Centronics common stock. Based upon the April 30, 1986 New York Stock Exchange closing price of $5 3/8 per share of Centronics' common stock, each $1,000 principal amount of debenture was convertible into Centronics common stock having an approximate value of $1,653.83. Debenture holders were advised further that failure to elect conversion by May 15, 1986 would result in each $1,000 principal amount debenture being redeemed on May 16 for $1,146.11, which consisted of $1,000 in principal, $100 for the 10% redemption premium, and $46.11 in interest accrued from December 1, 1985 (the last interest payment date) to May 16, 1986 (the redemption date). Finally, the notice of redemption explained that accrued interest was not payable upon conversion:

No adjustments for Interest or Dividends upon Conversion. No payment or adjustment will be made by or on behalf of the Company (i) on account of any interest accrued on any Debentures surrendered for conversion or (ii) on account of dividends, if any, on shares of Common Stock issued upon such conversion. Holders converting Debentures will not be entitled to receive the interest thereon from December 1, 1985 to May 16, 1986, the date of redemption. (emphasis in original).

On May 15, 1986, the last day available for conversion prior...