Opinion
C.A. No.: 99C-07-143-FSS.
Submitted: November 22, 1999.
Decided: February 29, 2000.
Upon Defendant's Motion to Dismiss and Plaintiff's Motion for Partial Summary Judgment — DENIED, part. DEFERRED, in part .
ORDER
This is a class-action, breach of contract case. It is fall-out from a large securities transaction involving highly sophisticated business people. Specifically, Plaintiff is a beneficial owner of STRYPES(SM), which are securities sold by Defendant, redeemable for cash or other property under certain conditions and at specified redemption rates. Plaintiff claims that when Defendant redeemed its STRYPES, Defendant did not pay what it promised in its indenture.
Both sides have filed dispositive motions. The Court first will consider whether Plaintiff, as beneficial owner rather than registered holder, is a proper party to bring suit. Second, the Court will consider whether Plaintiff must meet the indenture's pre-suit requirements. Finally, the Court will defer deciding which of the indenture's redemption clauses applies. That issue merits full briefing.
I.
The challenged redemption happened on June 15, 1999. Plaintiff filed suit on July 14, 1999. Defendant moved to dismiss on September 29, 1999. Plaintiff moved for partial summary judgment on October 29, 1999 and responded to Defendant's motion on November 17. Defendant filed its opposition to summary judgment on November 18. The Court heard oral argument on November 22, 1999.
II.
Defendant's motion is based on alternatives. According to Defendant, because Plaintiff failed to allege registered holder status, which the indenture requires as a prerequisite to suit, Plaintiff lacks standing to challenge the redemption.
Also, Defendant contends that Plaintiff failed to meet the indenture's pre-suit requirements of:
notice of default to the trustee, request by 25% of the registered holders that the trustee begin suit, indemnification of the trustee and the trustee's failure to begin suit within sixty days after notice, request, and offer of indemnity.
For good measure, Defendant concludes that even accepting Plaintiff's allegations, the redemption patently was consistent with the indenture's provisions. Defendant indisputably redeemed the securities using the right conversion ratio to arrive at the proper redemption price.
A.
The Ninth Supplemental Indenture, which provides the applicable redemption terms for the STRYPES, declares that only parties to the indenture and "Holders" have "any benefit or any legal or equitable right, remedy or claim under this Supplemental Indenture." The indenture defines "Holder" as "the Person in whose name [STRYPES] are registered. . . ." In short, only registered holders have contract rights enforceable against Defendant.
Plaintiff, and the class it represents, merely are beneficial owners. They are not registered holders of the STRYPES. Before oral argument, however, Plaintiff obtained the registered holder's "authorization for [Plaintiff], as the beneficial holder, to take any action a holder is entitled to take under the indenture with respect to the STRYPES."
The procedure used by Plaintiff and the registered holder's delegation of authority is suggested in Defendant's prospectus. While Defendant generally minimizes the legal significance of its own prospectus, Defendant confirmed there that it "understands" that a beneficial owner, such as Plaintiff, would take steps like Plaintiff took in order to fill the holder's shoes. For this litigation's purposes, Plaintiff is standing in now for the registered holder, with the holder's permission. There no longer is any basis for dismissal due to what Defendant characterizes as Plaintiff's lack of standing.
B.
The indenture includes pre-suit requirements that amount to a no-action clause. Under Section 507, "[n]o Holder . . . shall have any right to institute any proceeding, judicial or otherwise, . . ." unless the Holder fulfills four specific conditions. First, the Holder must notify the trustee "of a continuing Event of Default." Second, the Holders of at least 25% of the STRYPES must ask the trustee to act. Third, the Holder must offer to indemnify the trustee. Fourth, sixty days must pass without action by the trustee.
Even if the holder, or its stand-in, satisfies the indenture's pre-suit requirements, the holder still might not be free to bring suit. If during the sixty days after a request for action the holders of a majority of the STRYPES instruct the trustee not to act, the trustee may not act and the holder originally asking for action may not bring suit independently. No-action clauses like Section 507 are enforceable. If this action were to turn solely on Section 507, Plaintiff hardly would have a chance.
There is, however, a way to bypass the indenture's pre-suit requirements. Under the supplemental indenture's Section 601(f), which replaces the indenture's Section 508, a holder has the "absolute and unconditional right to receive . . . payment of the Maturity Consideration or the Applicable Redemption Price. . . ." on the Redemption date. And that right "shall not be impaired without the consent of such Holder."
Plaintiff concedes that it has not met any of Section 507's pre-suit requirements. Instead Plaintiff relies on the bypass clause. Plaintiff's argument is: "This suit is . . . a means of securing the Applicable Redemption Price." In its complaint, Plaintiff consistently confuses the prospectus with the indenture and supplemental indenture. Nevertheless, in effect Plaintiff alleges that in various ways, Defendant miscalculated the amount owed to the holders. While the complaint incidentally accuses Defendant with improperly manipulating the AIG common stock's market value, at bottom Plaintiff's claim is that Defendant failed to pay the Applicable Redemption Price.
In its motion to dismiss, Defendant does not refer to the bypass clause. Defendant presents case law supporting the proposition that no-action clauses are enforceable. Generally, Defendant is correct that "in consenting to no-action clauses . . . plaintiffs waive their right to bring claims that are common to all . . . and thus can be prosecuted by the trustee, unless they first comply with the [pre-suit] procedures. . . ." The only case offered by Defendant that arguably involves a bypass clause, however, is Feder v. Union Carbide. The bypass in Feder and the debenture holder's claims were different than the bypass clause and JAS's claims here.
Feldbaum v. McCrory Corp., Del. Ch., C.A. Nos. 11866, 11920, 12006 slip op. at 16-17, Allen, C. (June 1, 1992).
Feder v. Union Carbide, N.Y. App. Div., 530 N.Y.S.2d 165 (1988).
The Court further observes that the bypass clause might be read only to concern a failure by Defendant to pay on time, as opposed to its allowing Plaintiff to challenge a timely but low redemption price. Defendant, however, is not advocating such a narrow reading of the bypass clause and the Court agrees that the bypass clause protects a holder's independent right to challenge the redemption's price.
The bypass clause contemplates direct claims by holders that allege failure to pay the Applicable Redemption Price. While Plaintiff did not couch its complaint in those precise words, that is the essence of the claim against Defendant, so far. In its motion to dismiss, Defendant itself characterizes Plaintiff's claim as: "Having received exactly what was bargained for, the plaintiff may not seek more through an irrational reading of the Indenture." The Court eventually will consider whether Plaintiff's claim is sound. Meanwhile, thanks to the bypass clause, Plaintiff does not have to involve the trustee before it sues Defendant for a higher redemption price.
C.
Defendant's final ground for dismissal and Plaintiff's motion for partial summary judgment go to the case's heart. Defendant claims that it always had the right to redeem each STRYPES for $76.106 to be paid in cash or Sun America Common Stock. Plaintiff claims that Sun America's merger with AIG triggered an upward adjustment to the amount that holders were entitled to receive.
Everyone seems to agree that the case's outcome will turn on how the Court reads the controlling documents. Plaintiff has submitted additional material by affidavit and the Court has heard oral argument. Nevertheless, at this point, the Court has the benefit of only a few descriptive paragraphs and even fewer paragraphs of legal argument from each side. While I doubt that the Court will turn to extrinsic aids, I am not satisfied that the pivotal issues have been presented adequately.
The total claim here for Plaintiff and the class is roughly $70 million. The controlling documents are complicated and convoluted. Furthermore, the redemption ultimately did not involve cash or Sun America Common Stock; rather Defendant chose to redeem each STRYPES for $76.106 in AIG stock, on a given date. In order to be certain that I understand the undisputed facts and the parties' positions, I need full briefing on the dispositive issues.
III.
If Plaintiff is serious about this litigation, within thirty days it will file an amended complaint. Plaintiff will incorporate in the complaint Plaintiff's right to act for the registered holder. Plaintiff also will invoke the bypass clause clearly. Plaintiff will limit its claims to those covered by the bypass. The amended complaint also will reference precisely the contractual provisions on which Plaintiff relies. If, for example, Plaintiff truly is relying on the prospectus and not the indentures, then Plaintiff must establish the primacy of the prospectus.
Superior Court Civil Rule 15(b) gives the Court discretion to allow the pleading to be amended as necessary to cause them to conform to the evidence presented.
After the amended complaint is filed, counsel shall confer and agree to a schedule that provides for new or renewed dispositive motions and full briefing. The Court does not anticipate calling for further oral argument, although that remains a possibility. Meanwhile, the Court's rulings here on Plaintiff's standing and the no-action clause's bypass are the rule of the case. The parties are free to proceed as they see fit, under the Court's rules, but the Court expects that its next decision will focus on the merits and resolve this case.
IV.
For the foregoing reasons, Defendant's Motion to Dismiss is DENIED with respect to Plaintiff's authority to proceed and Plaintiff's authority to bypass the pre-suit requirements. The Court is deferring further consideration of Defendant's Motion to Dismiss and Plaintiff's Motion for Partial Summary Judgment pending submission of an amended complaint and full briefing on the issues. The Court anticipates that its next action will be its signing-off on a stipulated briefing schedule.
IT IS SO ORDERED.
Judge