Commercial Litigation and Arbitration

Issuer Owes No Contractual Duty to Noteholders to File Timely Reports with SEC — Caselaw Split

In the midst of an options-backdating investigation, UnitedHealth Group (UHG) — the issuer of $850 million of notes — failed to timely file certain reports with the SEC. The Indenture Trustee contended that the failure to file the SEC reports breached a duty under the indenture to the noteholders, and hedge funds owning more than 25% of the notes issued a notice of default. District Judge James Rosenbaum held that there was no default, and the Eighth Circuit affirmed in UnitedHealth Group Inc. v. Wilmington Trust Co., 2008 U.S. App. LEXIS 24301 (8th Cir. Dec. 1, 2008):

The [default] notice claimed that UHG's failure to file a timely 2Q 10-Q violated § 504(i) of the trust indenture. That section reads as follows:

So long as any of the Securities remain Outstanding, the Company shall cause copies of all current, quarterly and annual financial reports on Forms 8-K, 10-Q and 10-K, respectively, and all proxy statements, which the Company is then required to file with the [Securities and Exchange] Commission pursuant to Section 13 or 15(d) of the Exchange Act to be filed with the Trustee and mailed to the Holders of such series of Securities at their addresses appearing in the Security Register maintained by the Security Registrar, in each case, within 15 days of filing with the Commission. The Company shall also comply with the provisions of TIA [Trust Indenture Act] ss. 314(a).

(emphasis added). At the very least, § 504(i) requires that UHG forward to the indenture trustee copies of the company's required financial reports within fifteen days of actually filing such reports with the SEC. The notice of default claimed that § 504(i) also imposed an affirmative duty to file timely reports with the SEC and that UHG's failure in that regard constituted a default under the indenture. ***

Section 504(i), reduced to its essence, reads as follows: "the Company shall cause copies of . . . financial reports . . . which the Company is then required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act to be filed with the Trustee . . . within fifteen days of filing with the Commission." Wilmington Trust argues that the plain meaning of the phrase "then required to file" imposes an independent obligation to file timely reports. Wilmington Trust correctly notes that the word "then" means "at that time." But for our purposes the word's placement and function within the sentence are just as important as its definition.

In § 504(i) the phrase "then required to file" is part of a longer clause introduced by the relative pronoun "which." The antecedent of "which" is clearly and unambiguously the word "reports." Thus, as a simple matter of syntax, the phrase "then required to file" modifies the word "reports" and indicates which reports are subject to § 504(i)'s terms. Just as clearly and just as unambiguously, the phrase "within fifteen days of filing with the Commission" modifies "shall cause . . . to be filed" and indicates when § 504(i)'s command must be fulfilled. The plain meaning of § 504(i) thus imposes only a relative time constraint: copies of the indicated reports must be forwarded to the trustee within fifteen days of actually filing them with the SEC. The clause imposes no absolute timetable or independent obligation to comply with the Exchange Act or SEC regulations. In fact, the plain language of § 504(i) makes clear that 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 incorporate the Exchange Act; it merely refers to it in order to establish which reports must be forwarded.

The precise issue in this case is a matter of first impression in the Eighth Circuit. It has recently been presented to three federal district courts and to a New York State trial court. Although none of the decisions of these courts is binding on us, we note that the three federal courts all concluded, on nearly identical facts, that similar indenture provisions did not impose independent obligations to file timely SEC reports. See Finisar Corp. v. U.S. Bank Trust Nat'l Ass'n, No. C 07-4052, 2008 U.S. Dist. LEXIS 65329, 2008 WL 3916050 (N.D. Cal. Aug. 25, 2008); Affiliated Computer Servs., Inc. v. Wilmington Trust Co., No. 3:06-CV-1770-D, 2008 U.S. Dist. LEXIS 10190, 2008 WL 373162 (N.D. Tex. Feb. 12, 2008); Cyberonics, Inc. v. Wells Fargo Bank Nat'l Ass'n, No. H-07-121, 2007 U.S. Dist. LEXIS 42779, 2007 WL 1729977 (S.D. Tex. June 13, 2007).

In an unpublished opinion, the commercial division of the New York trial court reached the opposite conclusion. Bank of N.Y. v. BearingPoint, Inc., 13 Misc. 3d 1209A, 824 N.Y.S.2d 752, 2006 WL 2670143 (N.Y. Sup. Ct. 2006). *** The court's analysis focused on the mandatory language of the indenture but did not distinguish between two distinct duties: one to file reports with the SEC in the first instance and another to forward copies of the reports to the trustee. More importantly, the court did not consider any timing issues and simply eliminated the phrase "within 15 days after it files such . . . reports . . . with the SEC," replacing it with a set of ellipses.

The Finisar, Affiliated Computer Services, and Cyberonics courts all considered and rejected BearingPoint, as did the district court in this case. They did so after coming to the same conclusion: the indenture provisions at issue imposed 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. As previously discussed, the clear and unambiguous language of the indenture in this case leads to the same conclusion. We therefore decline to follow BearingPoint.

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