Opinion
04 Civ. 10014 (PKL).
March 30, 2005
MEMORANDUM ORDER
Plaintiff, Aristocrat Leisure Limited ("Aristocrat"), seeks reformation of a bond indenture ("Indenture") to correct an allegedly mutual mistake, and a declaration of plaintiff's right to call for redemption under the Indenture. Defendant trustee, Deutsche Bank Trust Company Americas ("Trustee"), defends this action on behalf of all of the convertible bondholders and is an affiliate of one of the lead underwriters and managers of the bond offering at issue. In the instant motion, the above-named intervening defendants ("Intervenors" or "Bondholders") seek intervention as of right pursuant to Federal Rule Civil Procedure 24(a)(2), or, in the alternative, permission to intervene pursuant to Federal Rule Civil Procedure 24(b)(2).
BACKGROUND
On an unidentified date, plaintiff, an Australian corporation, offered US$130,000,000 of 5% convertible bonds due May 2006 to qualified institutional buyers. Unfortunately, the exchange rate on the Indenture was mistakenly transposed so that, instead of reading "US$0.514 = A$1.00," the Indenture read "A$0.514 = US$1.00." As alleged in the Complaint, the Indenture provides that Aristocrat has the right to redeem the bonds after May 21, 2004, provided that a share price trigger be met as determined by a formula based on the exchange rate specified in the Indenture. (Plaintiff's Complaint ¶¶ 9, 13.) Plaintiff asserts that its right to redeem was triggered under the Indenture, according to the correct exchange rate, on November 22, 2004. On December 20, 2004, plaintiff sought to correct the error by notice; however, defendant Trustee opposed plaintiff's correction of this error because it would allow plaintiff to call the bonds and immediately terminate the bondholders' rights to convert the bonds into Aristocrat equity shares.
"A$" stands for Australian Dollar Currency.
Plaintiff thus seeks a declaration from this Court that, (1) the exchange rate should be corrected to reflect the parties' intended agreement; (2) plaintiff's redemption rights became effective on November 22, 2004 pursuant to the corrected exchange rate; (3) the December 20, 2004 notice immediately terminated the bondholders' rights to convert their bonds into Aristocrat shares; and, (4) defendant Trustee must comply with the December 20, 2004 notice by redeeming all outstanding bonds. Plaintiff seeks declaratory judgment to avoid paying interest on the bonds through their expiration in May 2006.
Defendant denies substantially all of plaintiff's substantive claims, and asserts counter-claims for declaratory relief and indemnification.
The majority of the bondholders, on whose behalf defendant Trustee now acts, have moved this Court to allow them to intervene separately as of right as additional defendants. The Bondholders attached to their motion a proposed Answer including counter-claims for securities fraud and breach of the implied covenant of good faith and fair dealing against plaintiff. Plaintiff offered a conditional consent allowing the Bondholders to permissively intervene provided that the counter-claims, which are contingent on the disposition of plaintiff's claims, not delay the disposition of this case. Plaintiff initially requested that this Court sever and stay the Bondholders' counter-claims. However, by stipulation dated March 9, 2005, the parties agreed that plaintiff need not answer the Bondholders' contingent counter-claims and discovery is stayed on those claims until this Court renders its decision on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). Depending on that decision, the parties will then confer with each other and the Court to determine the best course of action regarding the contingent counter-claims
As is so often the case in civil litigation, however, nothing is as simple as it seems. The March 9, 2005 stipulation failed to expressly state that the Bondholders were allowed to intervene, though all parties agreed to intervention at the February 28, 2005 pre-trial conference before this Court. By letter on March 24, 2005, the Bondholders notified the Court of this discrepancy and indicated that the parties could not agree on the nature of the Bondholders' intervention. The Bondholders seek to intervene as of right, while plaintiff will only stipulate to permissive intervention. Relying on the parties' motion papers, the Court now addresses this discrete procedural issue in order to clarify the record and move the case ahead.
DISCUSSION
In order to intervene as of right pursuant to Federal Rule 24(a)(2), the Bondholders must: (1) file a timely application with the Court; (2) show an interest in the action; (3) show an impairment arising from an unfavorable disposition in the action; and, (4) have an interest not adequately protected by the parties. In re Bank of New York Derivative Litigation, 320 F.3d 291, 300 (2d Cir. 2003) (citing New York News, Inc. v. Kheel, 972 F.2d 482, 485 (2d Cir. 1992)). "`Failure to satisfy any one of these requirements is a sufficient ground to deny the application.'" Id. (quoting Catanzano by Catanzano v. Wing, 103 F.3d 223, 232 (2d Cir. 1996)).
The parties do not dispute that the application was timely made; the Bondholders petitioned this Court for the right to intervene just two weeks after plaintiff filed its complaint. Plaintiff only disputes that the Bondholders have demonstrated a sufficiently direct interest which is not adequately protected by defendant Trustee; therefore, the Court will only address this contested requirement for invention as of right.
The Bondholders claim they have an interest in this litigation that is not adequately protected by defendant Trustee because, (1) the Trustee is not required to follow the Bondholders' instructions if it believes they contradict the terms of the Indenture; (2) the Trustee is not in the chain of legal and beneficial ownership of the Convertible Bonds and thus, lacks standing to assert the Bondholders' two contingent counter-claims of securities fraud and breach of the implied covenant of good faith and fair dealing; and, (3) the Trustee might not advocate the Bondholders' affirmative defense that the Offering Memorandum failed to adequately disclose plaintiff's right to redeem the bonds without notice because the Trustee's affiliate acted as the lead manager of that Offering and the Trustee need not follow the Bondholders' instructions if they are prejudicial to that affiliate.
It is of note that defendant Trustee consents to the Bondholders' intervention. (Defendant Trustee's Answer at pp. 5 ¶ 5, 6 ¶ 7.)
Plaintiff contends that all of movants' interests are represented by the Trustee, except for their contingent counter-claims. As in Washington Electric, plaintiff argues that movants' interest in those counter-claims is only relevant once the substantive issues are adjudicated, and, is therefore, too remote to support intervention as of right. The Court agrees with plaintiff on all but one determinative point.
In order to demonstrate a sufficient interest in the action, the Bondholders must show that their interests are "direct, substantial, and legally protectable." Washington Elec. Coop., Inc. v. Massachusetts Mun. Wholesale Elec. Co., 922 F.2d 92, 97 (2d Cir. 1990). If the Bondholders' interests are too remote from the subject matter of the proceeding or if their interests are contingent on the occurrence of a sequence of events, their interests are not substantial enough to warrant intervention as of right. Id. The Second Circuit affirmed the denial of a motion for intervention as of right where the interest was deemed too remote because the proposed intervenor plaintiffs' interest depended on plaintiffs winning the suit and, after winning, plaintiffs' Board of Directors determining that the movants would be entitled to a percentage of the recovery in the suit. Id. Further, where a prospective intervenor argued he had a legally protectable interest to file a motion for sanctions, pursuant to Federal Rule of Civil Procedure 11, based on his personal and unique knowledge, the District Court found that movant had not asserted a sufficient interest because the Federal Rules of Civil Procedure do not create substantive rights. New York News, 972 F.2d at 486. Movant's claim of interest in "a streamlined, abuse-free judicial system" was insufficient to support intervention as of right. Id.
Movants' argument that Trustee cannot adequately represent the Bondholders' interests because it is not required to follow instructions it believes are contrary to the Indenture is unpersuasive in light of the relevant caselaw. The Second Circuit has determined that a proposed intervenor is adequately represented "[s]o long as the party has demonstrated sufficient motivation to litigate vigorously and to present all colorable contentions." Natural Res. Def. Council, Inc. v. New York State Dep't of Envtl. Conservation, 834 F.2d 60, 62 (2d Cir. 1987) (emphasis added). The representation is therefore adequate even where the defendant refuses to advance the intervenor's arguments that the defendant believes are unavailing. Id.; see also In re Bank of New York, 320 F.3d at 301 (finding representation was not inadequate where plaintiffs chose a "slightly different strategy and have raised slightly different claims" than movants proposed).
It is also apparent that movants' counter-claims for securities fraud and breach of the implied covenant of good faith and fair dealing are too remote to justify intervention as of right pursuant to Washington Electric, 922 F.2d at 97 (denying movants' assertion of interest where the interest would only be triggered if plaintiff won the case). Notably, there, the District Court based its denial of intervention as of right, in part, on the fact that movants' counter-claims would radically alter the scope of the complaint. Id. The same could be argued regarding the case currently before the Court as it involves only a declaration of rights pursuant to an Indenture and not any securities fraud or breach of contract claims. However, because the parties stipulated to staying plaintiff's requirement to answer or move with respect to those counter-claims, and because discovery is also stayed with respect to those counter-claims, the Court finds that no prejudice or undue delay will result if movants are allowed to intervene as of right based on other interests.
Movants' final argument, that the Trustee may not adequately represent movants' affirmative defense that the Offering Memorandum failed to adequately disclose plaintiff's right to redeem without notice, is convincing. At the outset, the Court notes that movants' burden of demonstrating inadequate representation is minimal. Washington Elec., 922 F.2d at 98 (citing Trbovich v. United Mine Workers, 404 U.S. 528, 538 n. 10 (1972) ("The requirement of the Rule is satisfied if the applicant shows that representation of his interest `may be' inadequate; and the burden of making that showing should be treated as minimal.") (citing 3B J. Moore, Federal Practice § 24.09 (1969)). Movants concede that the Offering Memorandum constitutes parole evidence as to the meaning of the Indenture which can only properly be considered by this Court if the Court finds the Indenture ambiguous. However, movants contend that the Trustee is not likely to advocate this alternative because its affiliate was the lead manager of the Offering Memorandum and underwriter for the offering. The Court finds that this generates a risk of "collusion" and "adversity of interest" between the Bondholders and the Trustee given the Trustee's association with a main underwriter of the offering. See Butler, Fitzgerald Potter v. Sequa Corp., 250 F.3d 171, 180 (2d Cir. 2001). Thus, the Bondholders' interest in asserting an affirmative defense based upon the Offering Memorandum may not be adequately represented by defendant Trustee.
In conclusion, the Court finds that movants have convincingly argued that they can intervene as of right pursuant to Federal Rule of Civil Procedure 24(a)(2) in the above-captioned matter. Thus, Intervenors are ORDERED to file their Answer with counter-claims within FIVE (5) DAYS of the filing of this Order. Pursuant to the parties' understanding as stated in their separate March 24, 2005 letters to the Court, the Intervenors' Answer and counter-claims will be treated as filed on March 18, 2005 for the purpose of making plaintiff Aristocrat's Answer to the Intervenors' counter-claim for declaratory relief due on April 7, 2005. Pursuant to the parties' March 9, 2005 stipulation, plaintiff Aristocrat need not answer or move with respect to the Intervenors' counter-claims for securities fraud and breach of the implied covenant of good faith and fair dealing at this time.