716 F. Supp. 1504 (S.D.N.Y. 1989)
Metropolitan Life Insurance Co. is a New York life insurance company that provides pension benefits for 42 million individuals and holds assets exceeding $88 billion.1
Jefferson-Pilot Life Insurance Co. is a North Carolina company with more than $3 billion in total assets.2 MetLife owned $340,542,000 in principal amount of six separate RJR Nabisco debt issues purchased between July 1975 and July 1988.3
Jefferson-Pilot owned $9.34 million in principal amount of three separate RJR Nabisco debt issues purchased between June 1978 and June 1988.4 RJR Nabisco is a Delaware consumer products holding company whose brands include Oreo cookies and Winston cigarettes.5
F. Ross Johnson served as RJR Nabisco CEO from January 1987 until February 1989.6 On October 20, 1988, Johnson proposed a $17 billion leveraged buy-out of RJR Nabisco at $75 per share.7
A bidding war developed among Johnson's group, Kohlberg Kravis Roberts & Co., and others.8 On December 1, 1988, a special committee of RJR Nabisco directors recommended acceptance of the KKR $24 billion proposal at roughly $109 per share.9
The merger was completed during the week of April 24, 1989, at which time RJR Nabisco assumed roughly $19 billion of new debt.10 The bonds were governed by detailed indentures under New York law that contained no restrictions on additional unsecured debt or on mergers beyond requiring assumption of the debt by a United States corporation.11
In 1983 and 1985 MetLife agreed to delete restrictive covenants from two bond issues in exchange for guarantees and other benefits.12 Prospectuses explicitly stated there were no restrictions on unsecured short-term debt or funded debt by non-restricted subsidiaries.13
Internal MetLife memoranda from 1982 and 1985 documented awareness of LBO effects on bond values and the absence of protective covenants in public indentures.14 The company had considered but not implemented change-of-ownership covenants.15 Multiple lawsuits were filed after the LBO announcement.16
This Court heard the action on an expedited basis and denied plaintiffs' request for a preliminary injunction on February 16, 1989, for lack of irreparable harm.17
Whether RJR Nabisco breached an implied covenant of good faith and fair dealing contained in the bond indentures by completing the leveraged buy-out?18
Under New York law an implied covenant of good faith and fair dealing is breached only when one party seeks to prevent the contract's performance or to withhold its benefits.19 The covenant will only aid and further the explicit terms of the agreement.20 It will never impose an obligation inconsistent with other terms of the contractual relationship.21
No. The bond indentures explicitly permitted RJR Nabisco to consolidate with or merge into any other corporation under Article Ten.22 The indentures also permitted the company to incur additional debt.23 Prospectuses stated there were no restrictions on the creation of unsecured short-term debt.24 Metropolitan Life and Jefferson-Pilot are sophisticated investors.25
In 1983 and 1985 MetLife agreed to delete restrictive covenants from two bond issues in exchange for guarantees and other benefits. The leveraged buy-out did not breach any express payment obligation.26 The implied covenant cannot create a new substantive restriction on debt incurrence that was not bargained for in these contracts.27 Internal MetLife memoranda confirm the company's awareness of LBO risks and its decision not to implement protective covenants in public indentures.28
The fruits of the indentures are limited to periodic interest payments and repayment of principal, none of which were violated.29
RJR Nabisco did not breach an implied covenant of good faith and fair dealing, and defendants are entitled to summary judgment on Count I.30
Whether the leveraged buy-out frustrated the commercial purpose of the indentures or was unconscionable in equity?31
A claim of frustration of purpose requires that the purpose frustrated must have been a principal purpose of the contract.32 The frustration must be substantial.33 The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.34 Unconscionability claims by sophisticated parties who entered a liquid trading market with eyes open fail absent a showing of inequitable bargaining positions.35
No. The purpose of the indentures was the periodic payment of interest and eventual repayment of principal.36 None of those obligations was frustrated by the LBO.37 The transaction was foreseeable to sophisticated investors such as Metropolitan Life and Jefferson-Pilot.38 Their own internal memoranda discussed LBO risks and the absence of protective covenants in public bonds.39
No fiduciary duty exists between a corporation and its bondholders under New York or Delaware law.40 The plaintiffs' equity claims restate the same arguments rejected under the implied covenant analysis.41 The parties' respective bargaining positions were not inequitable.42 Plaintiffs remained free to sell their bonds at any time prior to the announcement.43
The leveraged buy-out did not frustrate the commercial purpose of the indentures and was not unconscionable, and defendants are entitled to summary judgment on Count V.44
Whether the plaintiffs' common-law fraud claims satisfy the particularity requirements of Rule 9(b)?45
No. The amended complaint does not specify the time, place, or content of any alleged misrepresentations by RJR Nabisco executives regarding the LBO plans.48 The pleading lacks the particularity required by Second Circuit precedent for fraud claims.49 The current pleading cannot survive scrutiny under Rule 9(b).50
The plaintiffs' common-law fraud claims do not satisfy the particularity requirements of Rule 9(b) and are dismissed with leave to replead.51
Whether the plaintiffs' claims under Section 10(b) and Rule 10b-5 may proceed with respect to bonds purchased before September 1987?52
No. The first, second, third, fifth, seventh, and eighth securities listed in the amended complaint were purchased before September 1987.55 That is when plaintiffs allege defendants first began to develop an LBO plan.56 Rule 10b-5 claims on those issues therefore fail as a matter of law.57 The rule does not protect mere holders.58
The plaintiffs' claims under Section 10(b) and Rule 10b-5 may not proceed with respect to bonds purchased before September 1987, and defendants' motion is granted as to those issues.59
Whether the plaintiffs' claims under applicable fraudulent conveyance laws satisfy the particularity requirements of Rule 9(b)?60
Rule 9(b) requires that allegations of fraud, including claims under fraudulent conveyance laws, be stated with particularity.61 The pleading must include the circumstances constituting fraud such as the time, place, and content of any misrepresentations.
The plaintiffs' claims under applicable fraudulent conveyance laws do not satisfy the particularity requirements of Rule 9(b) and are dismissed with leave to replead.64