Opinion
600169/06.
Decided September 18, 2006.
Kleinberg, Kaplan, Wolff Cohen, P.C., New York, New York, (David Parker, Edward P. Grosz, Esqs.) Anthony, Ostlund Baer, P.A. Minneapolis, MN, (Jeffrey I. Ross, Esq.) for Plaintiff.
Fried, Frank, Harris, Shriver Jacobson LLP, New York, New York, (Matthew Gluck, Es for Defendant.
Plaintiff The Bank of New York, not in its individual capacity but solely in its capacity as Indenture Trustee on behalf of all Holders of 2.75% Series B Convertible Subordinated Debentures Due December 15, 2024 of BearingPoint, Inc., moves, pursuant to CPLR 3212, for an order granting summary judgment as to the first cause of action asserted in the complaint.
Defendant BearingPoint, Inc. cross-moves, pursuant to CPLR 3212, for summary judgment, dismissing the complaint.
Plaintiff The Bank of New York is a New York banking corporation with its principal place of business in New York, New York. The Bank of New York is the Indenture Trustee (Indenture Trustee) under an indenture, dated as of December 22, 2004 (Indenture), between BearingPoint, Inc. (Bearingpoint) and itself as Trustee. Pursuant to the terms of the Indenture, BearingPoint issued $225 million principal amount of its 2.50% Series A Convertible Subordinated Debentures and $175 million principal amount of its 2.75% Series B Convertible Subordinate Debentures due December 15, 2024. The registered Holder of the Notes is Cede Co., the nominee of the Depository Trust Company (DTC). Defendant BearingPoint is a publicly held global management and technology consulting firm that trades on the New York Stock Exchange. BearingPoint is incorporated under the laws of the State of Delaware, with its corporate headquarters in McLean, Virginia.
BearingPoint failed to file its required Annual Report on form 10-K for the December 31, 2004 year end, either with the SEC, with which it was due on or about March 16, 2005, or with the Indenture Trustee, with which it was due on or about April 1, 2005. BearingPoint also failed to file its required form 10-Q for the quarter ending March 31, 2005, either with the SEC, with which it was due on or about May 15, 2005, or with the Indenture Trustee, with which it was due on or about May 30, 2005. Furthermore, BearingPoint failed to file its required form 10-Q for the quarter ending June 30, 2005 either with the SEC, with which it was due on or about August 14, 2005, or with the Indenture Trustee, with which it was due on or about August 29, 2005.
The complaint alleges that BearingPoint's failure to file with the Trustee copies of its annual and quarterly reports breached § 5.02 of the Indenture. In addition, plaintiff alleges that by failing to make the required filings with the SEC, BearingPoint was responsible for the failure of a condition precedent to filing such annual and quarterly reports with the Indenture Trustee, as required by § 5.02 of the Indenture.
The complaint alleges that on or about September 8, 2005, BearingPoint was provided with a Notice of Default by Holders of the Series B Debentures, notifying BearingPoint of its failure to comply with § 5.02 of the Indenture, and that an Event of Default would occur if this failure continued for 60 days. More specifically, the letter stated:
As set forth in our letter dated August 26, 2006 (copy attached), we represent entities, which in the aggregate, own in excess of 25% of the Debentures issued by the Company pursuant to that certain Indenture dated, December 22, 2004 (the "Indenture"), by and between the Company and The Bank Of New York, as trustee. Insofar as BearingPoint, Inc. has failed to file with the SEC its form 10-K or Form 10-Q for the most recent reporting periods and has failed to provide the Trustee for this issue of securities with substantially the same information required to be contained in such filing, by this letter you are notified of a default under Sections 5.02 and 7.01 (g) of the Indenture. Pursuant to Section 7.01 of the Indenture, we hereby demand that the Company cure such default within sixty (60) days from the receipt of this Notice of Default.
This letter shall serve as a "Notice of Default" pursuant to Section 7.01 of the Indenture (Notice of Cross Motion, exhibit 6).
On or about November 17, 2005, in accordance with § 7.02 of the Indenture, BearingPoint was notified by holders of the Series B debentures that an Event of Default had occurred and was continuing and that, as a result, the principal amount of the Series B Debentures, the accrued and unpaid Interest, and any accrued and unpaid Liquidated Damages were due and payable immediately (the Notice of Acceleration). BearingPoint made no such payment to the holder of the Series B Debentures. Plaintiff alleges that as of the date of the filing of this complaint, BearingPoint still had not filed its 2004 10-K, or its first quarter and second quarter 2005 10-Qs with the SEC or with the Indenture Trustee and had not complied with the Notice of Acceleration.
In its first cause of action, plaintiff sues for breach of contract, alleging that, as the Indenture Trustee, it is entitled to relief since BearingPoint breached the Indenture. Plaintiff alleges that Holders of the Series B Debenture are entitled to the remedy of acceleration or, in the alternative, damages pursuant to § 7.03 of the Indenture, as well as all other appropriate relief, including an award of attorneys' fees to the Indenture Trustee in accordance with the terms of the Indenture. In its second cause of action, plaintiff alleges that, to the extent that BearingPoint did not breach an express obligation set forth under § 5.02 of the Indenture, it breached an implied obligation, i.e., the covenant of good faith and fair dealing in the Indenture, and that Holders of the Series B Debentures are entitled to the remedy of acceleration or, in the alternative, damages pursuant to § 7.03 of the Indenture, as well as all other appropriate relief, including an award of attorneys' fees to the Indenture Trustee in accordance with the terms of the Indenture.
BearingPoint cross-moves for summary judgment, pursuant to CPLR 3212, to dismiss the complaint. BearingPoint alleges that the notice of default sent by plaintiff's law firm was deficient to provide notice of default to BearingPoint, pursuant to the notification procedures enunciated in the Indenture. BearingPoint further alleges that it did not violate any duties or obligations imposed by the Indenture and that, consequently, there was no defaulting event.
Section 5.02 of the Indenture, denominated "SEC and Other Reports," provides, in pertinent part:
[T]he Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15 (d) of the Exchange Act. The Company shall comply with the other provisions of TIA Section 314(a) (Complaint, exhibit 3, at 46-47).
Thus, by reference, § 5.02 incorporates Section 13 of the Securities Exchange Act of 1934, which expressly provides that publicly held companies must file annual and quarterly reports with the SEC "as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security" ( 15 USC § 78m [a]). Furthermore, the requirement to provide the annual and quarterly reports to the Trustee is mandated by Section 314 (a) of the Trust Indenture Act of 1939 (the TIA) (15 USC Ch 2A Subch III) which is expressly referenced in the above-quoted language. Indeed, § 5.02 of the Indenture essentially adopts the exact language of Section 314 (a) (1) of the TIA, which obligates an issuer of bonds or notes to provide the Indenture Trustee with its quarterly and annual SEC reports ( 15 USC § 77nnn).
The Indenture defines a default as follows:
Section 7.01. Events and Defaults. So long as any Securities are outstanding, each of the following shall be, with respect to each series of Securities, an "Event of Default"
* * *
(g) The Company fails to comply with any of the terms, agreements or covenants of the Company in the Securities or this Indenture [. . .] and such failure continues for 60 days after receipt by the Company of a Notice of Default (Complaint, exhibit 3, at 49-50).
The Indenture's acceleration clause states:
Section 7.02. Acceleration. If an Event of Default with respect to a series of Securities [. . .] occurs and is continuing (the default not having been cured or waived), the Trustee by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities of such series at the time outstanding by notice to the Company and the Trustee, may declare the principal amount of such series of Securities and any accrued and unpaid Interest and accrued and unpaid Liquidated Damages, if any, on all the Securities through the date of acceleration of such series to be immediately due and payable. Upon such a declaration such accelerated amount shall be due and payable immediately (Complaint, exhibit 13, at 52).
It is axiomatic that the movant for summary judgment must tender sufficient evidence to eliminate any material issue of fact from the case ( see JMD Holding Corp. v. Congress Fin. Corp., 4 NY3d 373; Alvarez v. Prospect Hosp., 68 NY2d 320). The failure to make such a showing requires denial of the motion, regardless of the sufficiency of the opposing papers ( Winegrad v. New York Univ. Med. Ctr., 64 NY2d 851). Once this showing has been made, however, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action. Mere conclusions, expressions of hope, or unsubstantiated allegations or assertions are insufficient for this purpose ( Zuckerman v. City of New York, 49 NY2d 557).
In support of its motion for summary judgment, plaintiff argues that § 5.02 required BearingPoint to provide the Indenture Trustee with SEC filings, which BearingPoint failed to do, thereby breaching that section of the Indenture. BearingPoint, on the other hand, contends that its obligation to furnish the Indenture Trustee with annual and quarterly reports was dependent upon its filing those reports with the SEC. BearingPoint urges that since it did not file with the SEC, it had no obligation to provide copies of the filings with the Indenture Trustee.
In support of its cross motion, BearingPoint argues that as a threshold matter, the September 9, 2005 Notice of Default sent by the Holders' attorney was deficient for failing to comply with the Notice of Default provisions of the Indenture. In support of this contention, defendant relies upon the terms of the Indenture, which, according to BearingPoint, would designate Cede, as DTC's nominee, as the sole Holder of the Notes, since the Notes were issued as a single global security registered in Cede's name (Indenture § 2.01, at 14). Plaintiff argues that Cede's role, as registered Holder, is purely ministerial since Cede has no beneficial interest in the Notes and has no authority to act except on behalf its participants (see Offering Memorandum, at 62, affidavit of Marc R. Rosen, exhibit A). Plaintiff also contends that BearingPoint's argument that, notwithstanding Cede's purely administrative role, only Cede, rather than the beneficial Holders, was capable of proffering the Notice of Default, is contradicted by the provisions of the Offering Memorandum of the Indenture.
The Offering Memorandum describes the Indenture and Notes. It uses the term "Holder" to refer to the beneficial Holder, as distinct from the registered Holder, as follows:
A holder may own its interest in the global Debentures directly through DTC if such holder is a participant in DTC, or indirectly through organizations which are direct DTC participants if such holder is not a participant in DTC. . . . Holders may also beneficially own interests in the global Debentures held by DTC through certain brokers, dealers, trust companies and other parties that clear through or maintain a custodial relationship with a direct DTC participant, either directly or indirectly (Offering Memorandum, at 61, Affidavit of Marc R. Rosen, exhibit A).
In describing the various rights of the beneficial Holders, the Offering Memorandum states that "A holder that would like to convert Debenture into share . . . should contact its broker" (Offering Memorandum, at 48, Affidavit of Marc R. Rosen, exhibit A). Read in this context, beneficial Holders are then described as entitled to give the requisite Notice of Default.
The Notice of Default provisions of the Indenture reside in Section 7.01, which provides that a Notice of Default may be sent by the Trustee or by "the Holders of at least 25% in aggregate of the principal amount of the [Notes]" (Complaint, exhibit 3, at 51; affirmation of Matthew Gluck). The Indenture provides that notice can be given by an agent of a Holder in lieu of the Holder itself:
Any request, demand, authorization, direction, notice, consent, waiver or other action provided for by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and [. . .] such action shall become effective when such instrument or instruments are delivered to the Trustee and [. . .], to the Company, as described in Section 13.02. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the company, if made in the manner provided in this Section (Indenture § 1.04 [a]).
Thus, an agent "duly appointed" by a Holder may provide notice under § 7.01 of the Indenture. Moreover, the above-quoted language states that the notice "becomes effective at the time of delivery" to the Trustee and to BearingPoint in accordance with § 13.02, i.e., the Indenture's general "Notice" section.
On September 9, 2005, the law firm of Andrews Kurth LLP delivered a Notice of Default to BearingPoint on behalf of "entities which in the aggregate, own[ed] in excess of 25% of the [Notes]" (Affidavit of Richard Baumfield [Baumfield affidavit], exhibit 2; Complaint, exhibit 4). On that day, three groups of funds, Fore Research and Management LP, Linden Advisor LP and Whitebox Advisors LLC, had provided written authorization to Andrews Karth to send the Notice of Default (Baumfield affidavit, exhibits 3, 4-5; affidavit of Robert G. Lennon, exhibit 1; affidavit of Hareesh Paranjape, exhibit 1; affidavit of Dale Willenbring, exhibit 2). The three funds advised Andrews Kurth of their individual holdings, which totaled $90,764 million, to wit: more than 25% of the Notes.
A few days later, on September 14, 2005, Andrews Kurth communicated directly with BearingPoint by phone, offering to identify the Holders pursuant to a confidentiality agreement (Baumfield affidavit, ¶ 4). BearingPoint stated that it would get back to Andrew Kurth regarding the issues discussed, but never did (Baumfield affidavit, ¶ 4).
Two months later, on November 17, 2005, the three Holders who authorized Andrews Kurth to send the Notice of Default on their behalf, authorized different counsel to send a Notice of Acceleration (affirmation of Edward Grosz, exhibit 6). BearingPoint does not challenge the sufficiency of the acceleration notice.
After reviewing the documents produced by defendant, I find that as a threshold matter, the September 9, 2005 Notice of Default sent by Andrews Kurth was sufficient as a matter of law. BearingPoint's argument that only the registered Holder of the Notes has authority to send a notice of default finds no support either in the Offering Memorandum, which provides that Beneficial Holders are themselves authorized to send the Notice of Default, or in the provisions in the Indenture itself. Consistent with these provisions, after receiving the Notice of Default, BearingPoint's counsel sought to ascertain the identities of the Beneficial Holders in whose behalf the Notice of Default was sent.
Section 7.01 of the Indenture, requiring Notice by 25% of the Holders, must be read in conjunction with § 1.04 (a) of the Indenture, which provides for notice to be given by "an agent duly appointed in writing." Such notice became effective as of the date it was delivered to BearingPoint and to the Trustee (Section 1.04 [a]). The Holders appointed Andrew Kurth as their agent in writing on September 9, and also informed Andrews Kurth of their holdings (Baumfield affidavit ¶¶ 3-5, exhibits 3, 4, 5, 6, 7, 8). In opposition to BearingPoint's cross motion, plaintiff submits the affidavit of Richard Baumfield, who states that prior to sending the September 9, 2005 letter, his firm "requested and received from each Holder written communications confirming and representing to us their ownership of the Notes and authorizing Andrews Kurth LLP to send (the September 9, 2005 letter) on their behalf" (Baumfield Affidavit, exhibits 3-8). In consideration of the documents submitted by plaintiffs, I find that there was full compliance with the Notice provisions in the Indenture.
Having communicated with Andrews Kurth seeking identification of the beneficial Holders before discussing a possible settlement, BearingPoint should not be heard at this juncture to argue that the law firm was without authority to represent the Holders. Equitable estoppel arises when one party makes statements or engages in conduct which induces another to act to its detriment ( Bender v. New York City Health and Hosps. Corp., 38 NY2d 662 [party equitably estopped from asserting improper notice defense when its counsel had been aware of allegedly defective notice before litigation but acted inconsistently with that knowledge]). Defendant never questioned whether the "entities" mentioned in the September 9, 2004 letter were the beneficial Holders of the Bonds. Neither did defendant ask to confirm the status of the Holders on whose behalf notice was given as registered Holders, which it knew could have been only DTC or its nominee, Cede Co. On the contrary, defendant sought to confirm the identity and requisite percentage ownership of the beneficial Holders. BearingPoint is, therefore, estopped from now arguing that only Cede Co. could give notice ( see Friedman v. Airlift Intl., Inc., 44 AD2d 459, 461 [1st Dept 1974] [if beneficial ownership is indisputable, failure to proceed in name of nominee "is of no significance"). Notably, the filing by the beneficial Holders has now been retroactively ratified by the registered Holder (ratification letters by Cede Co.; see Applestein v. The Province of Buenos Aires, 415 F3d 242 [2d Cir 2005]; Fontana v. Republic of Argentina, 415 F3d 238 [2d Cir 2005], where the Second Circuit held that an owner of a beneficial interest must receive authorization from the registered holder of the bond before it may sue, but that such authorization may be granted subsequent to the filing of a lawsuit]).
BearingPoint also contends that it did not breach the Indenture when it failed to provide the Indenture Trustee with timely SEC filings, alleging that it had no independent obligation under the Indenture to make any SEC filing, at all. This argument ignores the clear import of § 5.02 of the Indenture and the TIA. Under BearingPoint's interpretation of the relevant Indenture provision, BearingPoint's obligation to provide information to the Trustee was contingent on whether or not it chose to file with the SEC. Section 5.02, however, unambiguously obligates BearingPoint to make the required SEC filings and to provide copies of them to the Trustee. The provision, which is denominated "SEC and other Reports", provides: "[T]he Company shall file with the Trustee . . . copies of its annual report and of the information, documents and other reports . . . which the Company is required to file with the SEC pursuant to Section 13 or 15 (d) of the Exchange Act" (emphasis provided). BearingPoint's tortured parsing of this provision to read the section as making SEC filings optional under the terms of the Indenture, vitiates the clear purpose of the Indenture to provide information to the investors so that they may protect their investment. This proposed construction would defy the clear intentions of the parties and does not comport with the straightforward and unambiguous intent of the provision.
BearingPoint's obligation to provide the Trustee with timely annual and quarterly reports is also expressly provided for by the second sentence of § 5.02 of the Indenture, which states: "The Company shall comply with the other provisions of TIA Section 314 (a)." Section 314 (a) of the TIA specifically obligates an issuer of bonds or notes, such as BearingPoint, to provide the Indenture Trustee with current SEC filings. Section 302 (a) (4) of the TIA expressly provides that:
[T]he national public interest and the interest of investors in notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein, which are offered to the public, are adversely affected . . . (4) when the obligor is not obligated to furnish to the trustee under the indenture and to such investors adequate current information as to its financial condition, and as to the performance of its obligations with respect to the securities outstanding under such indenture . . . ( 15 USC § 77bbb [b]).
To implement Section 302, TIA § 314 (a) expressly mandates that:
Each person who . . . is or is to be an obligor upon the indenture securities covered thereby shall —
(1) file with the indenture trustee copies of the annual reports and of the information, documents and other reports . . . which such obligor is required to file with the Commission pursuant to section 78m or 780 (d) of this title . . . ( 15 USC § 77nnn [a]).
Thus, § 5.02 requires BearingPoint to provide the Indenture Trustee with copies of required SEC filings, which BearingPoint failed to do. It is apparent that the underlying purpose of § 5.02 of the Indenture was to make BearingPoint's financial information available to the Series B Debenture Holders by providing such information to the Trustee. As a memorialization of apparent commercial realities, this section expressed that which is known to the investment community, i.e. that only by guarding against incomplete information, can investors make informed decisions about their investment and guard against the risks attendant to incomplete information.
Although BearingPoint cites the Offering Memorandum in support of its position that it had no obligation to file SEC reports pursuant to the terms of the Indenture, the referenced provisions of the Offering Memorandum, which, in any event would only be considered upon finding of ambiguity in the Indenture ( Matter of Wallace v. 600 Partners Co., 86 NY2d 543, 548) merely refer to the timing of the SEC filings and in no way obviate BearngPoint's obligation to file with the SEC. On the contrary, the offering plan provides that:
[I]f we do not have audited financial statement available by March 31, 2005, we will be in default under our 2004 Credit Facility (unless the delay is solely as a result of continuing work by us and/or our independent registered public accounting firm to prepare opinions or statements required or permitted by Section 404 of Sarbanes-Oxley, in which case the requirement will be extended by 30 days) and possible other agreement. A default would permit the lender under the 2004 Credit Facility to terminate the 2004 Credit Facility, accelerate any outstanding loans and proceed against their collateral (Cross-Motion, exhibit 4, at 12-13).
Thus, the clear and unambiguous import of the Indenture is merely underscored by the language in the Offering Memorandum.
In the absence of ambiguity which obscures the intentions of the parties to a contract, the interpretation of a contract and the obligations of the parties thereto are questions of law and not of fact ( R/S Assoc. v. New York Job Dev. Auth., 98 NY2d 29, 32; Bethlehem Steel Co. v. Turner Constr. Co., 2 NY2d 456). "[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms" ( W.W.W. Assoc. v. Giancontieri, 77 NY2d 157, 162). It is well settled that "extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face" ( Intercontinental Planning Ltd. v. Daystrom, Inc., 24 NY2d 372, 379. Having found that the terms of § 5.02 are unambiguous, Bearingpoint's attempts to modify the terms of the provisions of the Indenture by referring to the Offering Memorandum are unavailing.
Since BearingPoint argues that there was no obligation to file reports with the SEC under the Indenture, they argue that the inexorable conclusion is that there was no Default Event. On the contrary, by not filing required SEC reports, BearingPoint repudiated its obligations under the Indenture, thereby frustrating the Trustee's rights under the Indenture. A party's repudiation of its future obligations under a contract may take the form of "a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach'" ( Norcon Power Partners v. Niagara Mohawk Power Corp., 92 NY2d 458, 463). BearingPoint cannot take advantage of its failure to fulfill its obligation to file timely reports with the SEC by arguing that it has consequently not breached its obligation to provide the Trustee with copies of such reports ( see In re Bankers Trust Co., 450 F3d 121 [2d Cir NY 2006]).
Consequently, the Notice of Default sent in the September letter was sufficient, and BearingPoint's cross-motion for summary judgment is unfounded in evidentiary proof sufficient to dismiss the complaint. Furthermore, plaintiff has established as a matter of law that BearingPoint defaulted under the provisions of § 5.02. Since the default mechanisms of the Indenture were fully satisfied by the September 9, 2005 Default letter and the November 17, 2005 Acceleration letter, BearingPoint was obligated to accelerate immediately all principal and accrued interest. Having failed to do so, BearingPoint breached § 7.02 of the Indenture (Complaint, exhibit 1, first cause of action, ¶ 21).
Accordingly, it is hereby
ORDERED that defendant's cross motion for summary judgment to dismiss the complaint is denied; and it is further
ORDERED that plaintiff's motion for summary judgment on its first cause of action is granted, and defendants found liable for breach of contract with the amount of damages to be determined at trial; and it is further
ORDERED that the remainder of the action shall continue.