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

decided: February 1, 1988.


Appeals from judgment entered on orders of the United States District Court for the Southern District of New York (Leonard B. Sand, Judge) which dismissed a debenture holder's class action against a trustee, denied a motion for class certification, and dismissed defendant's counterclaims for costs and attorneys' fees.

Feinberg, Chief Judge, Pierce and Altimari, Circuit Judges.

Author: Altimari

ALTIMARI, Circuit Judge:

This appeal involves an examination of the obligations and duties of a trustee during the performance of its pre-default duties under a trust indenture, qualified under the Trust Indenture Act of 1939, 15 U.S.C. ยง 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.


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 trustee." Section 3.03 of the indenture required Centronics to provide the debenture holders with "at 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

the 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 "notwithstanding 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 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.

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 ...

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