Harris v. Union Elec. Co.

• Decision Date: 16 June 1981
• Docket Number: Nos. 42583,42615,s. 42583
• Citation: 622 S.W.2d 239
• Parties: Harold HARRIS, Continental Casualty Company and National Fire Insurance Company of Hartsford, etc., Plaintiffs-Respondents, v. UNION ELECTRIC COMPANY, Defendant-Appellant, St. Louis Union Trust, et al., Defendant-Cross-Appellant.
• Court: Missouri Court of Appeals

Page 239

622 S.W.2d 239

Harold HARRIS, Continental Casualty Company and National Fire Insurance Company of Hartsford, etc Plaintiffs-Respondents, v. UNION ELECTRIC COMPANY, Defendant-Appellant St. Louis Union Trust, et al., Defendant-Cross-Appellant.

Nos. 42583, 42615.

Missouri Court of Appeals, Eastern District, Division Two.

June 16, 1981.

Motion for Rehearing and/or Transfer to Supreme Court Denied

Sept. 21, 1981.

Application to Transfer Denied Nov. 10, 1981.

Francis X. Duda, St. Louis, for defendant-appellant.

Thomas S. McPheeters, Jr., David S. Slavkin, St. Louis, for defendant-cross-appellant.

David L. Campbell, St. Louis, for plaintiffs.

John J. Cole, St. Louis, for Underwriters.

GUNN, Judge.

Defendant Union Electric (UE) appeals, and defendant St. Louis Union Trust cross-appeals, from a trial court order ¹ granting plaintiff's summary judgment motion for declaratory and injunctive relief. Plaintiffs, suing individually and on behalf of all holders of Union Electric's First Mortgage Bonds, 101/2 Series due March 1, 2005 (Series 2005 Bonds) sought a declaration of the redemption features of their bonds. We are compelled to reverse and remand for further proceedings consistent with this opinion.

At the outset, we comment that the trial court was faced with an enormously complex and massive case. The transcript on appeal alone contains 38 volumes. And we are required to treat a multitude of issues.

On March 26, 1975, UE issued $70,000,000 of Series 2005 Bonds under a Supplemental Indenture between it as grantor and St. Louis Union Trust Company, its mortgage trustee. The 1975 Indenture incorporated and referred to various portions of an Indenture of Mortgage and Deed of Trust dated June 15, 1937 (the Original Indenture) as well as other indentures from 1937 to 1975 that also supplemented the Original Indenture.

The present controversy began in April 1978 when UE publicly announced that it intended to redeem about $50,000,000 of Series 2005 Bonds at the "special redemption" price of 100% of the par value of the bonds. To implement this redemption plan, UE had made short-term borrowings of cash at an interest rate of less than 10.6% and deposited with the trustee $700,000 for the Improvement Fund for Series 2005 Bonds and $49,187,000 for a Maintenance Fund that applied to all bonds outstanding under the Original Indenture. UE's plan was to replace these short-term borrowings with a long-term bond issue at 9.35%.

Plaintiffs objected to the redemption plan contending that the 1975 Indenture expressly precluded a redemption from funds obtained at an interest cost less than 10.6% for the first ten years, until March 1, 1985. This lawsuit was filed on May 9, 1978. Within a month UE announced that it had abandoned its redemption scheme for the time being, had withdrawn the cash from the Maintenance Fund and replaced it with property additions.

The plaintiffs' amended petition is in eleven counts; the first four counts name UE as the sole defendant and seek declaratory and injunctive relief, while the remaining seven counts also name certain underwriters as defendants and seek an award of monetary damages. Counts I, II and IV ² are the only counts presently before this Court, having been consolidated and severed for separate trial by the trial court. Counts I and II seek declaratory and injunctive relief, alleging that if UE's redemption plan is permitted under the indentures, UE has violated the Trust Indenture Act of 1939, § 323(a) (15 U.S.C. § 77www) (Count I), and the Securities Act of 1933, § 17(a) (15 U.S.C. § 77q) (Count II), by not adequately disclosing the redemption rights in the prospectus. Count IV is headed "Declaratory Judgment" (presumably an action under the Missouri statutes dealing with declaratory judgments, §§ 527.0l0-. 130, RSMo 1978). It basically reiterates the allegations of the first three counts and again seeks a declaration of plaintiffs' rights under the indentures and an injunction prohibiting the redemption plan contemplated by UE.

The bond mortgage and trust indentures are contained in a document several hundred pages in length. We set forth only those sections vitally important to resolution of the redemption dispute. Section 1, Article III, of the 1975 Supplemental Indenture is entitled "Redemptions" and states:

The Bonds of 2005 Series shall, subject to the provisions of Article V of the Original Indenture, be redeemable (otherwise than by operation of the Improvement Fund or the Maintenance Fund provided in Article IV hereof or pursuant to Section 8 of Article VIII of the Original Indenture), at any time or from time to time prior to maturity, at the option of the Board of Directors of the Company, either as a whole or in part by lot, at the then applicable regular redemption price set forth in the form of Bonds of 2005 Series in Section 3 of Article I of this Supplemental Indenture, together in each case, with accrued interest to the redemption date.

In case of the redemption of less than all the outstanding bonds of 2005 Series, the particular Bonds or portions (equal to $1000 or a multiple thereof) of Bonds of a denomination larger than $1000 to be redeemed shall be determined by lot in such manner as the Trustee in its discretion shall deem proper, as in the Original Indenture provided.

Irrespective of the provisions of this Section 1, Bonds of 2005 Series shall not be redeemable at the option of the Company at any time prior to March 1, 1985 (other than by the operation of the Improvement Fund or the Maintenance Fund provided in Article IV of this Supplemental Indenture or pursuant to Section 8 of Article VIII of the Original Indenture) if moneys for such redemption are obtained by the Company directly or indirectly from or in anticipation of borrowings by or for the account of the Company at an effective interest cost (computed in accordance with generally accepted financial practice) of 10.60% or less per annum. (emphasis added).

The third paragraph above provides the initial controversy. It limits redemption for the first ten years if the funds for redemption come from borrowings at less than 10.6%. Plaintiffs maintain that this restriction on lower interest cost refunding also applies to redemptions "by the operation of the Improvement Fund or the Maintenance Fund provided in Article IV of this Supplemental Indenture or pursuant to Section 8 of Article VIII of the Original Indenture." UE insists, however, that the quoted parenthetical language provides exceptions to the ten-year restriction on lower interest cost refunding; that the restriction only applies to "regular" redemptions and does not apply to "special" redemptions.

"Special" redemptions are mentioned in Section 3, Article IV of the 1975 Supplemental Indenture:

All cash paid to the Trustee for the Improvement Fund for Bonds of 2005 Series provided for in Section I of this Article IV shall be held in trust, but not as part of the trust estate, for the benefit of the holders of Bonds of 2005 Series and, if in excess of Fifty Thousands Dollars ($50,000), shall be applied to the redemption, on the earliest practical date (but not earlier than the next succeeding May 1) next succeeding the date of payment of such cash, at the special redemption price set forth in the form of Bonds of 2005 Series in Section 3 of Article I of this Supplemental Indenture applicable on the date fixed for such redemption, together with accrued interest to the redemption date, of a principal amount of Bonds of 2005 Series equal, as near as may be, to the amount of such cash....

Bonds of 2005 Series shall be redeemable, at any time and from time to time on and after May 1, 1977, for the Improvement Fund for Bonds of 2005 Series provided in Section 1 of this Article IV, and at any time and from time to time on and after March 1, 1975, pursuant to Section 8 of Article VIII of the Original Indenture, at the then applicable special redemption price set forth in the form of Bonds of 2005 Series in Section 3 of Article I of this Supplemental Indenture, together, in each case, with accrued interest to the redemption date.

The "special" redemption price is set at 100% of the par value of the bond, whereas the "regular" price list provides a descending premium upon redemption, starting at 106.88% of par if redeemed during the 12 month period beginning March 1, 1985 and decreasing incrementally to 100% of par if redeemed during the 12 month period beginning March 1, 2004.

The Improvement Fund is established in Section 1, Article IV of the 1975 Supplemental Indenture (the indentures of prior series of bonds establish separate Improvement Funds for each bond series) which calls for UE to pay to the Trustee each year, beginning in 1977, "a sum in cash equal to one percent" of the principal amount of outstanding Series 2005 Bonds. The section further provides that UE may satisfy the 1% Improvement Fund deposit "the Company may credit against such Improvement Fund" with certain property additions in lieu of cash. Until the deposit of $700,000 cash for the Series 2005 Improvement Fund in 1978, UE had never deposited cash to satisfy the Fund for any series of its bonds but had always utilized property credits instead.

There is only one Maintenance Fund for the benefit of all outstanding series of bonds. The 1941 Supplemental Indenture created it, but the 1958 Supplemental Indenture made some changes in the Maintenance Fund provisions. The 1975 Supplemental Indenture states that satisfaction of the 1958 Maintenance Fund requirements shall be deemed full compliance with the 1941 Indenture terms. UE is required each year to deposit with the Trustee for the Maintenance Fund an amount of cash, referred to as the "basic replacement requirement," equal to fifteen percent (15%) of the gross operating revenues of the company for the preceding year, less the total amount spent by the company for maintenance and repairs and the...