Opinion ID: 2149916
Heading Depth: 1
Heading Rank: 4

Heading: Analysis of Indenture Provisions

Text: The parties have conflicting views of the meaning of the Indenture and so we construe its meaning. The primary purpose in the construction of contracts is to ascertain and give effect to the mutual intention of the parties. Western & Southern Life Ins. Co. v. Vale (1938), 213 Ind. 601, 610, 12 N.E.2d 350, 354. In the Indenture, the Authority made the following undertakings  the pledge of security and affirmative covenants referred to by the Court of Appeals  relevant to this dispute: 1. The Authority pledged all amounts paid to the Bond and Interest Sinking Fund and all rent and other income from the Authority's buildings to the Trustee to secure the payment of the principal and redemption price of and interest on the bonds. Indenture § 4.06. 2. The Authority promised that, except for changes expressly permitted by the Indenture, it would not agree to any modification of the terms of the Lease which would substantially impair or reduce the security of the holders of the bonds, or agree to the termination thereof, or agree to a reduction of the lease rental provided for therein until all indebtedness secured by this Indenture is fully paid, except upon compliance with the provisions of Section 12.02 Indenture § 7.01. Section 12.02 of the Indenture specified the Bondholder approval requirements for amendments to the Indenture. 3. The Authority agreed that it would not incur any indebtedness other than the Bonds payable from rents collected under the Lease other than short-term debt incurred in connection with the operation and maintenance of the Authority's buildings. Indenture § 7.07. 4. The Authority agreed that until the bonds and the interest thereon shall have been paid, or provision for such payment shall have been made, and except as in this Indenture otherwise permitted, it will not sell, or otherwise dispose of or encumber, the [Authority's buildings], and will not create or permit to be created any charge or lien on the rentals or other income derived therefrom. Indenture § 7.09. In addition to these undertakings, the Indenture permitted the Authority, at its option and upon payment of a premium, to redeem certain outstanding Bonds according to procedures set forth in the Indenture. Indenture art. V. The Indenture contains no provisions giving the Bondholders the option to tender Bonds for redemption prior to maturity. Finally, the Indenture contains the following defeasance provisions which we believe are far more central to this dispute than did the Court of Appeals: Section 13.01. If the Authority shall pay or cause to be paid, or there shall otherwise be paid, to the holders of the bonds and coupons the principal and interest and redemption price, if any, to become due thereon, at the times and in the manner stipulated therein and in this Indenture, then the pledge of rentals and other income, moneys and securities hereby pledged, the right, title and interest of the Trustee, and all other rights granted hereby, shall thereupon cease, terminate and become void and be discharged and satisfied... . Section 13.02. Bonds or coupons for the payment or redemption of which money shall then be held by the Trustee or the Paying Agents (through the deposit by the Authority of funds for such payment or redemption, or otherwise), whether at or prior to the maturity or redemption date of such Bonds, shall be deemed to have been paid, within the meaning of Section 13.01; provided, however, that if any such Bonds are to be redeemed prior to the maturity thereof, the Authority shall have taken all action necessary to redeem such Bonds, and notice of such redemption shall have been duly given or provision satisfactory to the Trustee shall have been made for the giving of such notice; and provided further, that if the maturity or redemption date of any such bond shall not then have arrived, provision shall have been made by the Authority, by deposit with the Trustee or other method satisfactory to it, for the payment to the holders of any such Bonds and coupons, upon surrender thereof, whether or not prior to the maturity or redemption date thereof, of the full amount to which they would be entitled by way of principal, redemption price or interest to the date of such maturity or redemption; and provision shall have been made by the Authority, satisfactory to the Trustee, for the publication at least twice in an interval of not less than seven (7) days between publications in newspapers of general circulation or financial journals published in the Cities of Indianapolis, Indiana, and New York, New York, respectively, which notice shall advise the holder of the bonds and coupons that such moneys are so available for such payment. Section 13.01 provides that if the Authority shall pay, directly or indirectly, to the Bondholders all of the principal and interest due them, then the pledge of payments and rents and other undertakings made in the Indenture and the rights of the Trustee cease. Section 13.02 defines the term pay as used in § 13.01. It specifies that the Authority will be deemed to have paid Bonds not yet matured if (i) the Authority deposits with the Trustee the full amount to which the Bondholders, upon surrender of their Bonds, would be entitled to the date of maturity, and (ii) the Authority arranges for the publication of notice in Indianapolis and New York of notice to the Bondholders that such moneys are so available for such payment. Section 13.01, by its terms, eliminates the problem that the Court of Appeals found when it held that the covenants and amendment provisions of the Indenture prohibited defeasance without immediate redemption. Section 13.01 provides that if the defeasance provisions are complied with, then the pledge of rentals and other income, moneys and securities hereby pledged, the right, title and interest of the Trustee, and all other rights granted hereby, shall thereupon cease, terminate and become void and discharged and satisfied. Thus, by its terms, § 13.01 overrides the pledge of security and other affirmative covenants described above. Concluding that the pledge of security and other affirmative covenants are subject to the defeasance provisions of § 13.01 does not adversely affect the Bondholders. Under the terms of the Indenture, the Indenture and all of the issuer's undertakings  pledge of payments and rents, covenants against further indebtedness and encumbrances  remain in effect so long as any Bonds or coupons remained outstanding unless and until payment is on deposit with the Trustee. Then, and only then, are the pledge of security and other affirmative covenants in the Indenture terminated. We conclude that there is nothing about the pledge of security or affirmative covenants that prevents defeasance so long as the provisions of § 13.01 are scrupulously complied with. In reaching the contrary conclusion, that is, in determining that defeasance violated the pledge of security and affirmative covenants, the Court of Appeals went on to hold that the Bonds became immediately due and payable. [1] While we hold no violation of the pledge of security or affirmative covenants is triggered by the defeasance plan, the question of whether the Bondholders are entitled to pre-payment remains. The answer turns on the way § 13.02 is interpreted. Interpretation of § 13.02 Favorable to Bondholders. Section 13.02 defines when Bonds are deemed to have been paid, within the meaning of Section 13.01. That is, unless the provisions of § 13.02 are complied with, the defeasance provided for under § 13.01 cannot occur because the Bonds will not have been paid. One of the conditions of Section 13.02 is that the Authority must make provision ... by deposit with the Trustee or other method satisfactory to it, for the payment to the holders of any such bonds and coupons, upon surrender thereof, whether or not prior to the maturity ... date thereof, of the full amount to which they would be entitled by way of principal . .. or interest to the date of such maturity. (Emphasis added). Further, in the notice provision, § 13.02 requires that the notice advise Bondholders and coupon holders that such moneys are so available for such payment. The Bondholders argue that this language requires that Bondholders and coupon holders are to be paid the principal and interest to which they are entitled upon surrender of their securities, even if prior to maturity. This construction does no particular violence to Indiana bond law. It merely says that indentures will be interpreted in accordance with their terms and this particular Indenture provides for pre-payment in the event of defeasance. Interpretation of § 13.02 Favorable to Authority. Traditional defeasance clauses existed for the purpose of permitting the issuer's and Trustee's obligations to be discharged even if all Bonds and coupons had not been tendered for payment. Bondholders were not entitled to receive payment for their securities prior to maturity. The Authority argues that while the Bondholders might tender their Bonds for payment prior to maturity, the language here does not create any entitlement to pre-payment. The proper construction of the provision for payment clause, according to the Authority, is that in order for defeasance to occur, the trustee must have an adequate amount on deposit to pay the Bonds and coupons at maturity, regardless of when the Bonds are surrendered for payment. We agree with the Authority's interpretation. We note in particular that the language of § 13.02 provides that for the defeasance provisions to be effective, the Authority must make provision ... for the payment to the holders ... of the full amount to which they would be entitled by way of principal ... or interest to the date of such maturity,  (emphasis added), not to the date the Bonds are tendered for payment. If Bondholders and coupon holders could be paid upon surrender, then they would not be paid to the date of maturity. In other words, for the language of § 13.02 to support the Bondholders interpretation, the language would have to require that the Authority make provision for the payment to the holders of the full amount to which they would be entitled by way of principal or interest to the date of such surrender,  not to the date of such maturity. While we think it likely that the defeasance provision of this Indenture was not drafted with the expectation that defeasance could take place fifteen years prior to final maturity, the Indenture also contains no restrictions that we can discern on such a result. The Indenture could have been drafted to require mandatory early redemption or early redemption at the option of the Bondholder. However, the fact that the Authority has been able to take advantage of a provision that was probably originally intended to serve a different purpose provides no basis for this court to re-write the contract and provide for early redemption. See First Fed. Sav. Bank of Indiana v. Key Markets, Inc. (1990), Ind., 559 N.E.2d 600, 604. The Bondholders will, under this arrangement, receive payment of principal and interest when due in accordance with the terms of their Bonds. And because provision has been made by the Authority, by deposit with the Trustee or other method satisfactory to it, of the full amount to which the Bondholders will be entitled by way of principal and interest to the date of maturity, further protection under the Indenture is not necessary and, by the terms of §§ 13.01 and 13.02, is terminated.