Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 85 L. Ed. 826, 61 S. Ct. 510 (1941). With these principles in mind it is necessary to analyze the facts of this case and what Trustees are actually requesting.
The basic complaint of the Trustees is that after E-II was acquired by American Brands it began a series of transactions, described earlier in this opinion, which have been characterized by some but not a majority of the Holders of the securities as a stripping of subsidiaries for less than their fair market value, which was followed by a sale of a "stripped-down" E-II to a highly leveraged company, RFC, which caused the price of the securities to drop precipitously in the market. Subsequent to this a further transaction involving subsidiaries of RFC was carried out which in effect caused E-II to purchase the outstanding shares of Faberge, a company owned by a subsidiary of RFC, at a value greatly in excess of Faberge's book value. However E-II has furnished Trustees with all of the certificates and opinions specifically required of it by the Indentures, each attesting to the fact that these transactions were carried out in accordance with the Indentures. There is no contention that any of these certificates and opinions failed to comply with the formal requirements of Section 11.05 of the Indentures. Trustees however complain that E-II has resolutely refused to provide them with any detailed financial information to permit verification of the matters contained in the certificates which they contend violate certain implied requirements of the Indentures. As a result Trustees contend that they are powerless to verify whether any of the transactions and acquisitions constituted an "Event of Default" as the same is defined in the Indentures. They contend that although paragraph 7.02(b) permits them to rely on these certificates, the Indentures do not say that they must rely on them nor do the Indentures prohibit further investigation by the Trustees in order to verify the accuracy of the certificates. They further contend that Section 7.02(b) requires that they determine that the certificates conform with the requirements of Section 11.05 and that this requires access to financial details. Essentially they argue that E-II ought not to be permitted to conceal a violation of the Indentures if it has in fact committed a violation.
On the other hand, E-II argues that the Indentures do not give Trustees the power to require E-II to turn over information not specifically provided for and therefore it has no duty to do so. Instead, Trustees are to rely on the statements and certificates for which the Indentures specifically provide. E-II further argues that under New York law (which both parties agree apply) where there is an instrument that contains a specific covenant regarding a subject there are no covenants to be implied concerning that subject. Broad v. Rockwell Intern. Corp., 642 F.2d 929, 957 (5th Cir. 1981). Since the Indentures contain specific covenants covering what E-II must disclose to the Trustees, no additional covenants to provide information not specifically provided for can be implied.
E-II also argues that there is no actual controversy between the parties because the Trustees have been unwilling or unable to declare a default. Therefore the real purpose of their lawsuit is to get an advisory opinion from this court whether they have the power to do so. In support E-II cites People v. Archer-Daniels-Midland, 704 F.2d 935 (7th Cir. 1983).
In Archer-Daniels-Midland the State's Attorney of Peoria County filed a suit that was eventually removed to federal court. This suit sought a declaration whether an Illinois statute prohibiting the employment of professional strikebreakers was preempted by the National Labor Relations Act. The appeals court concluded that there was no subject matter jurisdiction to make such a declaration because the disagreement with regard to the validity and scope of the Illinois Strikebreaker's Act had not ripened into an actual controversy between the state and the defendant. In so finding the court pointed out that the State's Attorney had not yet decided whether to bring criminal charges against Archer-Daniels-Midland nor did the complaint allege that he intended to do so in the event of a declaration or no preemption and, apparently, "before making up his mind he wanted to know whether he might become a cropper on preemption." Rather than to ask experts on labor law for advice on this issue, he decided to seek advice from what he thought was a more authoritative quarter, the courts.
"Evidently he will not make a final decision whether to prosecute Archer-Daniels-Midland until he gets authoritative judicial advice. There is thus no actual controversy between him and the company but only a potential controversy that will become actual if and when he prosecutes. Regardless of the advice the court gave, there is nothing compelling the State's Attorney to act on it."
Comparing the facts here as alleged by Trustees in their complaint and the facts in Archer-Daniels-Midland appears to foreclose the relief sought by the Trustees with respect to whether E-II violated the Indentures creating an "Event of Default." For a variety of reasons, including lack of information and lack of sufficient Holder participation, Trustees have declined to declare an event of default under the terms of the Indentures. Even if this court should conduct the lengthy evidentiary hearings necessary for it to make an independent determination that an event of default had in fact occurred with regard to one or more of the transactions, so as to empower the Trustees to act, the Indentures do not require them to act. Under Section 7.05, in the event of a default other than payment of principal, Trustees may withhold the notice if the Trustees determine withholding is in the interest of the security Holders. Even if the Trustees did act, under Sections 6.04 of the Indentures, the security Holders holding a majority of the principal amount of indebtedness have the power to overrule the Trustees. Therefore any opinion that the court might issue could be nothing more than an advisory opinion, advising Trustees of their rights but not resolving any actual case or controversy. Archer-Daniels-Midland, at 941. The Trustees, in effect, at all times have the power to create a controversy but they have not yet done so nor do they have to do so.
Trustees do not even try to distinguish Archer-Daniels-Midland. They instead argue their right to standing in behalf of the security Holders citing cases such as GMC v. Calif. Bd. of Equalization, 815 F.2d 1305, 1307-08 (9th Cir. 1987), which gave standing to fiduciaries of employee benefit plans. See also Central Montana Electric Power Corp. v. Administrator, 840 F.2d 1472, 1474-75 (9th Cir. 1988) (giving standing to cooperatives), and Adams v. Morton, 581 F.2d 1314, 1319 (9th Cir. 1978), cert. denied, 440 U.S. 958, 59 L. Ed. 2d 771, 99 S. Ct. 1498 (1979) (giving standing to representatives of Indian tribes). In each of these cases however the group represented had suffered a "distinct and palpable" injury and the plaintiff was allowed to proceed in its representative capacity. On the other hand, in this case neither the Trustees nor the Note Holders have as yet alleged any injury and instead are proceeding in the realm of conjecture and hypothesis. A party may proceed in a representative capacity only if it alleges facts sufficient to make out a case or controversy had those it represents themselves brought suit. Warth v. Seldin, 422 U.S. 490, 95 S. Ct. 2197, 2214, 45 L. Ed. 2d 343 (1975). Consequently none of these cases help the Trustees with the case or controversy issue.
Trustees also in support of their position point to a suit brought by E-II in New York as tacit recognition that a case and controversy exists between the parties. However that action was precipitated by a notice of default issued by an alleged majority of Note Holders and sought a declaration that a notice of default was invalid (Grim affdvt., ex. D). E-II denied that a default existed, that a default had been properly declared, and that a majority of Note Holders had joined in the notice of default. Thus an actual controversy existed. Once it was admitted that a majority of Note Holders had not joined, thus invalidating the default, E-II dismissed the New York suit (Grim affdvt., ex. F).
Finally, Trustees could precipitate an actual controversy by declaring a default or by convincing the Holders of a majority of the principal amount of notes to join them in doing so under Clause (3) of Section 6.01 for failure to abide by the terms of the Indentures. This they have been unwilling or unable to do.
Accordingly, based on Archer-Daniels-Midland, there is no subject matter jurisdiction to advise Trustees whether the various acquisitions and transactions were in compliance with the terms of the Note Indentures.
In accord with this is Gardner & Florence Call Cowles Foundation v. Empire, Inc., 589 F. Supp. 669 (S.D.N.Y. 1984). Here debenture holders brought suit against the obligor claiming that the merger with another corporation violated contractual rights set out in the indenture under which the debentures were issued. Inter alia, plaintiffs sought a declaration that defendant was in default. The court noted that plaintiffs had neither declared a default themselves nor obtained the requisite participation of the security holders of 25 percent and therefore dismissed the claims as improperly brought, id. at p.675.
Reading Trustees' brief indicates however that their real complaint is with the lack of information supplied to it by E-II concerning these acquisitions and transactions. They point out that the Extraordinary Transactions described in their complaint have drastically changed the character of E-II, including the nature of the risk. They charge that if E-II is permitted to conceal the details of these transactions they will be powerless to make an independent determination as to whether a default has occurred. They are faced with a Hobson's choice to declare a default in a vacuum and run the risk of triggering cross-default provisions in other E-II loan agreements, possibly precipitating the commencement of bankruptcy proceedings, or to fail to declare a default and perhaps endanger the repayment rights of the security Holders.
Arguably an actual dispute may exist over Trustees' rights to additional information.
Trustees claim that under the Indenture agreements they are entitled to detailed information to make an informed decision that the certificates of compliance it received from E-II are accurate, i.e., that the transactions certified do comply. E-II strenuously denies that Trustees are entitled to any information whatsoever. A declaration of the court could actually resolve this dispute. Consequently this claim has the elements of controversy that is lacking in Trustees' other claims. In fact E-II seems to recognize there is a judicial controversy here. E-II argues instead that Trustees' complaint, rather than failing for want of jurisdiction insofar as it seeks a declaration of their right to information, fails to state a claim upon which relief may be granted.
The gist of E-II's argument is that the right to the information demanded is not expressly provided for in the Indentures and therefore the rule against implied covenants in New York (see Hazzard v. Chase Natl. Bank of NY, 159 Misc. 57, 287 N.Y.S. 541, 567 (1936), aff'd, 257 App.Div. 950, 14 N.Y.S.2d 147 (1939), aff'd, 282 N.Y. 652, 26 N.E.2d 801 (1940), cert. denied, 311 U.S. 708, 85 L. Ed. 460, 61 S. Ct. 319 (1940)), controls. Although Trustees admit that there is no specific provision in the Indentures entitling them to the information they request, they insist that the Indentures must be construed to effectuate their purpose -- to protect the security Holders. They argue that since nothing in the Indentures precludes the right of the Trustees to investigate further in the event they have doubts regarding the reliability of the certificates and opinions, they are entitled to receive this information. Trustees also refer to the Trust Indenture Act of 1939 ("TIA") and its philosophy of protecting security holders as providing a basis for an expansive view of the Trustees' rights to information.
However neither the Indentures nor the TIA appears to require the obligor to furnish information not specifically provided for in the Indentures themselves and Trustees, as we have seen, do not refer the court to any specific provision in the Indentures, nor do they refer us to any provision of the TIA requiring the furnishing of such information.
The only provision in the TIA that appears to cover the subject of the obligor providing information to the trustee is Section 314 (15 U.S.C. § 77nnn). Subparagraph (a)(2) requires the obligor to file with the indenture trustee under rules and regulations prescribed by the SEC:
"such additional information with respect to compliance by such obligor with the conditions and covenants provided for in the indenture, as may be required by such rules and regulations . . . ."
However the court has been unable to find any such rules and regulations prescribed by the SEC pursuant to this section (see 17 C.F.R. 260.0-1 et seq.) and neither party has referred to any such rule or regulation. Further, subparagraph (f) of Section 77nnn provides:
"Nothing in this section shall be construed either as requiring the inclusion in the indenture . . . of provisions that the obligor upon the indenture securities shall furnish to the indenture trustee any other evidence of compliance with the conditions and covenants provided for in the indenture than the evidence specified in this section, or as preventing the inclusion of such provisions in such indenture, if the parties so agree."
The philosophy appears to be that an obligor ought to be protected from having to disclose what could constitute sensitive information other than what the security laws and the rules and regulations issued pursuant to these laws require unless the obligor specifically agrees to do so.
Therefore absent any specific requirement in the Indentures, E-II is under no obligation under New York law, the TIA, or rules and regulations issued under authority of the TIA to furnish information on its acquisitions or transactions other than the certificates and opinions expressly provided for.
Accordingly, to the extent that the court has jurisdiction to entertain Trustees' complaint, it appears that the complaint fails to state a claim upon which relief can be granted.
For the reasons herein stated, E-II's motion is granted and the complaint is dismissed.
Since this action disposes of the case it is unnecessary to rule on E-II's motion to transfer pursuant to 28 U.S.C. § 1404(a).
IT IS SO ORDERED.