Case Title: Racepoint Partners, LLC v. JPMorgan Chase Bank, N.A.

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2010-04-01T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 6  
Racepoint Partners, LLC et al.,
            Appellants,
        v.
JPMorgan Chase Bank, N.A.,
            Respondent.
James B. Heaton, III, for appellants.
Thomas C. Rice, for respondent.
American Bankers Association, amicus curiae.
PIGOTT, J.:
On February 7, 2001, the energy company Enron executed
an indenture agreement with Chase Manhattan Bank ("Chase"),
naming Chase as the indenture trustee for the holders of certain
Enron notes.  The agreement contained, in section 4.02, a
standard provision setting forth a covenant by Enron
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"to file with the Trustee [i.e. Chase],
within 15 days after it files the same with
the [Securities and Exchange Commission],
copies of its annual reports and of the
information, documents and other reports . .
. which the Company [i.e. Enron] is required
to file with the SEC pursuant to Section 13
or 15 (d) of the [Securities] Exchange Act. 
Delivery of such reports, information and
documents to the Trustee is for informational
purposes only and the Trustee's receipt of
such information shall not constitute
constructive notice of any information
contained therein or determinable from
information contained therein, including the
Issuer's compliance with any of its covenants
hereunder (as to which the Trustee is
entitled to rely exclusively on Officers'
Certificates).  The Issuer also shall comply
with any other provisions of Trust Indenture
Act Section 314 (a)."
The agreement also set forth various circumstances or
events that would constitute default by either party, including
failure by Enron to comply with this provision, if not corrected
within 60 days of notification by Chase.
In December 2001, in the wake of the major accounting
fraud scandal with which it has become synonymous, Enron filed
for bankruptcy.  Thereafter, plaintiffs Racepoint Partners, LLC,
and Willow Capital-II, L.L.C., bought approximately $1 billion of
the notes from their holders.  Plaintiffs, which, as secondary
holders of the notes, are vested with the claims and demands of
the sellers, then brought this common law action against Chase
alleging, among other things, breach of contract.  Plaintiffs
claim, first, that Enron defaulted under the indenture agreement
and, second, that Chase had actual knowledge of this default and
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1 On a similar theory, plaintiffs also allege that Chase
breached its fiduciary duty to the noteholders.  Plaintiffs
concede that the dismissal of their breach of contract cause of
action is fatal to the breach of fiduciary duty cause of action.
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that its failure to notify Enron and the noteholders of the
default constituted breach of the agreement.1  The issue in this
appeal is the allegation of contractual default by Enron in
filing reports that were false.  
Plaintiffs point to the fact that Enron agreed in
section 4.02 to file with Chase copies of all reports that it was
"required to file with the SEC pursuant to Section 13 or 15 (d)
of the [Securities] Exchange Act."  Section 13 of the Act
requires publicly traded companies to keep records accurately
reflecting their transactions and assets, and to file annual and
quarterly reports with the Securities and Exchange Commission
(see 15 USC § 78m).  Plaintiffs argue that because the financial
reports filed by Enron with Chase were inaccurate and did not
comply with federal securities law, they were not the reports
Enron was "required to file with the SEC."  Plaintiffs posit
that, by filing these same fraudulent reports with Chase, Enron
failed to satisfy its section 4.02 covenant, and thus defaulted.
Chase moved to dismiss the complaint under CPLR 3211. 
Supreme Court denied Chase's motion.  The Appellate Division
reversed, granting the motion (57 AD3d 378).  We granted leave to
appeal, and now affirm.
Section 4.02 of the indenture agreement is a mandated
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provision based on the requirements of § 314 (a) of the Trust
Indenture Act of 1939:
Each person who, as set forth in the
registration statement or application, is or
is to be an obligor upon the indenture
securities covered thereby shall . . . file
with the indenture trustee copies of the
annual reports and of the information,
documents, and other reports (or copies of
such portions of any of the foregoing as the
[Securities and Exchange] Commission may by
rules and regulations prescribe) which such
obligor is required to file with the
Commission pursuant to section 13 or section
15(d) of the Securities Exchange Act of 1934
[15 USCS §§ 78m or 78o(d)]; or, if the
obligor is not required to file information,
documents, or reports pursuant to either of
such sections, then to file with the
indenture trustee and the [Securities and
Exchange] Commission, in accordance with
rules and regulations prescribed by the
Commission, such of the supplementary and
periodic information, documents, and reports
which may be required pursuant to section 13
of the Securities Exchange Act of 1934 [15
USCS § 78m], in respect of a security listed
and registered on a national securities
exchange as may be prescribed in such rules
and regulations (15 USCS § 77nnn [a] [1]).
Plaintiffs concede that the parties' intent in section
4.02 may be equated with Congressional intent with respect to §
314 (a) of the Trust Indenture Act of 1939.  In drafting the
Trust Indenture Act, Congress intended simply to ensure that an
indenture trustee was provided with up-to-date reports on a
company's financial status, by requiring the company to send the
trustee a copy of filed financial reports.  In the 1930s, when §
314 (a) was drafted, computer-based technologies, whereby copies
of SEC reports can now be obtained, did not exist.
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The legislative history of § 314 (a) suggests that
Congress intended to create a delivery requirement and no more. 
The 1939 House Report highlighted the legislators' concern that
trustees and bondholders at the time did not receive periodic
reports from companies issuing bonds.  "In a substantial portion
of indentures . . . the issuer was under no obligation to file an
annual report with the indenture trustee.  None of the indentures
. . . required the transmission to the bondholders of periodic
reports, such as stockholders customarily receive.  None of them
established machinery for the transmission of such reports . . ." 
(H. R. Rep. No. 1016, 35 [1939]).  It is apparent that § 314 (a)
was designed to mandate such a mechanism of delivery of reports
to indenture trustees.  The same House Report, observing that in
many cases a company "will already be required to file periodic
reports with the [Securities and Exchange] Commission under
Section 13 or Section 15 (d)," stated that the bill under
consideration "merely requires that copies of such reports . . .
be filed with the indenture trustee" (H. R. Rep. No. 1016, 35).
As federal courts have observed, when considering
Indenture Agreement provisions very similar to the one at issue
here, "the provision merely requires the company to transmit to
the trustee copies of whatever reports it actually files with the
SEC . . . any duty actually to file the reports is imposed
'pursuant to Section 13 or 15 (d) of the Exchange Act' and not
pursuant to the indenture itself.  The provision does not
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incorporate the Exchange Act; it merely refers to it in order to
establish which reports must be forwarded. . . .  [It] impose[s]
nothing more than the ministerial duty to forward copies of
certain reports, identified by reference to the Exchange Act,
within fifteen days of actually filing the reports with the SEC" 
(UnitedHealth Group Inc. v Wilmington Trust Co., 548 F3d 1124,
1128, 1129, 1130 [8th Cir 2008]; see also e.g. Affiliated
Computer Servs. Inc. v Wilmington Trust Co., 565 F3d 924, 930-931
[5th Cir 2009]); Am. Stock Transfer & Trust Co. v Par Pharm.
Cos., 2009 US Dist LEXIS 52602, at *10-13 [SDNY 2009]).
It is clear therefore that indenture agreements
containing the required delivery provisions pursuant to § 314 (a)
refer to the Exchange Act only to identify the types of report
that should be forwarded to indenture trustees.  They do not
create contractual duties on the part of the trustee to assure
that the information contained in any report filed is true and
accurate.  That is simply not the mission or purpose of the
trustee or the contract under which it undertakes its duties.
Of course, companies have a duty to file accurate
reports with the SEC.  That obligation, however, derives from the
Securities Exchange Act, not from indenture agreements.
Our holding that section 4.02 of the indenture
agreement simply embodies a delivery requirement, and does not
imply a duty on the part of the trustee to assure the filing of
accurate reports or risk default, is consistent with the limited,
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"ministerial" functions of indenture trustees (AG Capital Funding
Partners, L.P. v State St. Bank & Trust Co., 11 NY3d 146, 157
[2008]), and with the plain language of section 4.02, which
states that "[d]elivery of such reports, information and
documents [filed with the SEC] to the Trustee is for
informational purposes only."  Plaintiffs' proposed
interpretation, on the other hand, would require indenture
trustees to review the substance of SEC filings, so as to reduce
the risk of liability, greatly expanding indenture trustees'
recognized administrative duties far beyond anything found in the
contract.
Accordingly, the order of the Appellate Division should
be affirmed, with costs.
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Order affirmed, with costs.  Opinion by Judge Pigott.  Chief
Judge Lippman and Judges Ciparick, Graffeo, Read and Jones
concur.  Judge Smith took no part.
Decided April 1, 2010