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Creditors

We begin with creditors because (1) creditors are the only constituency that still has some remnants of protections in corporate law, and (2) most other claims ultimately resolve into damages or other financial claims, transforming all constituencies into creditors at the end of the day.

Gheewalla sets forth the principle that creditors cannot invoke the protections of fiduciary duties against corporate directors (although they may occasionally have standing to enforce a derivative claim on behalf of the corporation). MetLife v. RJR Nabisco declines to protect the plaintiff-creditor under a contractual implied duty of good faith and fair dealing. The bottom line is that creditors have to rely on contractual protections. The MetLife decision reviews many customary protective clauses.

Do you find the courts' reasonings convincing?

  • 1 NACEPF v. Gheewalla (Del. 2007)

    The decision addresses, and you should look out for, two related but separate questions:

    1. Who has standing to assert a fiduciary duty claim?
    2. Whom is the fiduciary duty owed to, i.e., whose interests does it protect?


    How might the answer to the second question have made a difference in this case? Whose interests were conflicting, and how, if at all, could the courts have adjudicated this conflict?

    1
    930 A.2d 92 (2007)
    2
    NORTH AMERICAN CATHOLIC EDUCATIONAL PROGRAMMING FOUNDATION, INC., Plaintiff Below, Appellant
    v.
    Rob GHEEWALLA, Gerry Cardinale and Jack Daly, Defendants Below, Appellees.
    3
    No. 521,2006.
    4

    Supreme Court of Delaware.

    5
    Submitted: February 12, 2007.
    6
    Decided: May 18, 2007.
    7

    Edward M. McNally (argued) and Raj Srivatsan, Morris, James, Hitchens & Williams, Wilmington, DE, for appellant.

    8

    Samuel A. Nolen, Richards, Layton & Finger, Wilmington, DE, for appellees.

    9

    Before STEELE, Chief Justice, HOLLAND, BERGER, Justices, and ABLEMAN, Judge.[1]

    10
    HOLLAND, Justice:
    11

    This is the appeal of the plaintiff-appellant, North American Catholic Educational Programming Foundation, Inc. ("NACEPF") from a final judgment of the Court of Chancery that dismissed NACEPF's Complaint for failure to state a claim.[2] NACEPF holds certain radio wave spectrum licenses regulated by the Federal Communications Commission ("FCC"). In March 2001, NACEPF, together with other similar spectrum license-holders, entered into the Master Use and Royalty Agreement (the "Master Agreement") with Clearwire Holdings, Inc. ("Clearwire"), a Delaware corporation. Under the Master Agreement, Clearwire could obtain rights to those licenses as then-existing leases expired and the then-current lessees failed to exercise rights of first refusal.

    12

    The defendant-appellees are Rob Gheewalla, Gerry Cardinale, and Jack Daly (collectively, the "Defendants"), who served as directors of Clearwire at the behest of Goldman Sachs & Co. ("Goldman Sachs"). NACEPF's Complaint alleges that the Defendants, even though they comprised less than a majority of the board, were able to control Clearwire because its only source of funding was Goldman Sachs. According to NACEPF, they used that power to favor Goldman Sachs' agenda in derogation of their fiduciary duties as directors of Clearwire. In addition to bringing fiduciary duty claims, NACEPF's Complaint also asserts that the Defendants fraudulently induced it to enter into the Master Agreement with Clearwire and that the Defendants tortiously interfered with NACEPF's business opportunities.[3]

    13

    NACEPF is not a shareholder of Clearwire. Instead, NACEPF filed its Complaint in the Court of Chancery as a putative [94] creditor of Clearwire. The Complaint alleges direct, not derivative, fiduciary duty claims against the Defendants, who served as directors of Clearwire while it was either insolvent or in the "zone of insolvency."

    14

    Personal jurisdiction over the Defendants was premised exclusively upon 10 Del. C. § 3114, which subjects directors of Delaware corporations to personal jurisdiction in the Court of Chancery over claims "for violation of a duty in [their] capacity [as directors of the corporation]." No other basis for personal jurisdiction over the Defendants was asserted. Accordingly, NACEPF's efforts to bring its other claims in the Court of Chancery fail on jurisdictional grounds unless those other claims are adequately alleged to be "sufficiently related" to a viable fiduciary duty claim against the Defendants.

    15

    For the reasons set forth in its Opinion, the Court of Chancery concluded: (1) that creditors of a Delaware corporation in the "zone of insolvency" may not assert direct claims for breach of fiduciary duty against the corporation's directors; (2) that the Complaint failed to state a claim for the narrow, if extant, cause of action for direct claims involving breach of fiduciary duty brought by creditors against directors of insolvent Delaware corporations; and (3) that, with dismissal of its fiduciary duty claims, NACEPF had not provided any basis for exercising personal jurisdiction over the Defendants with respect to NACEPF's other claims. Therefore, the Defendants' Motion to Dismiss the Complaint was granted.

    16

    In this opinion, we hold that the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation's directors. Accordingly, we have concluded that the judgments of the Court of Chancery must be affirmed.

    17
    Facts[4]
    18

    NACEPF is an independent lay organization incorporated under the laws of Rhode Island. In 2000, NACEPF joined with Hispanic Information and Telecommunications Network, Inc. ("HITN"), Instructional Telecommunications Foundation, Inc. ("ITF"), and various affiliates of ITF to form the ITFS Spectrum Development Alliance, Inc. (the "Alliance"). Collectively, the Alliance owned a significant percentage of FCC-approved licenses for microwave signal transmissions ("spectrum") used for educational programs that were known as "Instruction Television Fixed Service" spectrum ("ITFS") licenses.

    19

    The Defendants were directors of Clearwire. The Defendants were also all employed by Goldman Sachs and served on the Clearwire Board of Directors at the behest of Goldman Sachs. NACEPF alleges that the Defendants effectively controlled Clearwire through the financial and other influence that Goldman Sachs had over Clearwire.

    20

    According to the Complaint, the Defendants represented to NACEPF and the other Alliance members that Clearwire's stated business purpose was to create a national system of wireless connections to the internet. Between 2000 and March 2001, Clearwire negotiated a Master Agreement with the Alliance, which Clearwire and the Alliance members entered into in March 2001. NACEPF asserts [95] that it negotiated the terms of the Master Agreement with several individuals, including the Defendants. NACEPF submits that all of the Defendants purported to be acting on the behalf of Goldman Sachs and the entity that became Clearwire.

    21

    Under the terms of the Master Agreement, Clearwire was to acquire the Alliance members' ITFS spectrum licenses when those licenses became available. To do so, Clearwire was obligated to pay NACEPF and other Alliance members more than $24.3 million. The Complaint alleges that the Defendants knew but did not tell NACEPF that Goldman Sachs did not intend to carry out the business plan that was the stated rationale for asking NACEPF to enter into the Master Agreement, i.e., by funding Clearwire.

    22

    In June 2002, the market for wireless spectrum collapsed when WorldCom announced its accounting problems. It appeared that there was or soon would be a surplus of spectrum available from World-Com. Thereafter, Clearwire began negotiations with the members of the Alliance to end Clearwire's obligations to the members. Eventually, Clearwire paid over $2 million to HITN and ITF to settle their claims and; according to NACEPF, was only able to limit its payments to that amount by otherwise threatening to file for bankruptcy protection. These settlements left the NACEPF as the sole remaining member of the Alliance. The Complaint alleges that, by October 2003, Clearwire "had been unable to obtain any further financing and effectively went out of business."[5]

    23
    NACEPF's Complaint
    24

    In its Complaint, NACEPF asserts three claims against the Defendants. In Count I of the Complaint, NACEPF alleges that the Defendants fraudulently induced it to enter into the Master Agreement and, thereafter, to continue with the Master Agreement to "preserv[e] its spectrum licenses for acquisition by Clearwire."[6] In Count II, NACEPF alleges that because, at all relevant times, Clearwire was either insolvent or in the "zone of insolvency," the Defendants owed fiduciary duties to NACEPF "as a substantial creditor of Clearwire," and that the Defendants breached those duties by:

    25
    (1) not preserving the assets of Clearwire for its benefit and that of its creditors when it became apparent that Clearwire would not be able to continue as a going concern and would need to be liquidated and (2) holding on to NACEPF's ITFS license rights when Clearwire would not use them, solely to keep Goldman Sachs's investment "in play."[7]
    26

    In Count III, NACEPF claims that the Defendants tortiously interfered with a prospective business opportunity belonging to NACEPF in that they caused Clearwire wrongfully "to assert the right to acquire NACEPF wireless spectrum," which resulted in NACEPF losing "the opportunity to convey its licenses for spectrum to other buyers."[8]

    27
    Motions to Dismiss
    28

    The Defendants moved to dismiss the Complaint on two grounds: first, for lack of personal jurisdiction under Court of Chancery Rule 12(b)(2); and, second, for [96] NACEPF's failure to state a claim upon which relief can be granted under Court of Chancery Rule 12(b)(6). With respect to their first basis for dismissal, the Defendants noted that NACEPF's sole ground for asserting personal jurisdiction over them is 10 Del. C. § 3114. The Defendants argued that personal jurisdiction under § 3114 requires, at least, sufficient allegations of a breach of fiduciary duty owed by director-defendants. With respect to their second basis for dismissal, the Defendants contended that, even assuming that personal jurisdiction was sufficiently alleged, NACEPF's Complaint failed to set forth allegations which adequately supported any of its claims for relief, as a matter of law.

    29
    Court of Chancery Rule 12(b)(2)
    30

    The Court of Chancery initially addressed the Defendants' motion under Rule 12(b)(2).[9] It began by examining the exercise of personal jurisdiction over nonresident directors of Delaware corporations under 10 Del. C. § 3114:[10]

    31
    "[T]he Delaware courts have consistently held that Section 3114 is applicable only in connection with suits brought against a nonresident for acts performed in his . . . capacity as a director . . . of a Delaware corporation." Further narrowing the scope of Section 3114, "Delaware cases have consistently interpreted [early cases construing the section] as establishing that [it] . . . appl[ies] only in connection with suits involving the statutory and nonstatutory fiduciary duties of nonresident directors."[11]
    32

    The Court of Chancery limited its Rule 12(b)(2) analysis to whether personal jurisdiction existed over the Defendants with respect to Count II of the Complaint.

    33

    Count II alleged that the Defendants breached their fiduciary duties while they served as directors of Clearwire and while Clearwire was either insolvent or in the zone of insolvency. The Court of Chancery concluded that the facts alleged in the Complaint, as supported by the affidavit submitted by NACEPF, constituted a prima facia showing of a breach of fiduciary duty by the Defendants in their capacity [97] as directors of a Delaware corporation. Accordingly, the Court of Chancery held that a statutory basis for the exercise of personal jurisdiction had been established by NACEPF for purposes of litigating Count II of the Complaint.

    34

    NACEPF expressly premised its Rule 12(b)(2) arguments for personal jurisdiction over the Defendants regarding Counts I and III (i.e., the non-fiduciary duty claims) on the Court of Chancery's first determining that Count II (i.e., the fiduciary duty claim) survives the Defendants' Rule 12(b)(6) motion to dismiss. Accordingly, the Court of Chancery proceeded on the basis that if it found that Count II must be dismissed under Rule 12(b)(6), then it would be without personal jurisdiction over the Defendants for purposes of moving forward with the merits of Counts I and III. Therefore, to resolve the issue of personal jurisdiction, the Court of Chancery was required to decide whether, as a matter of law, Count II of the NACEPF Complaint properly stated a breach of fiduciary duty claim upon which relief could be granted.

    35
    Court of Chancery Rule 12(b)(6)
    36

    The standards governing motions to dismiss under Court of Chancery Rule 12(b)(6) are well settled:

    37
    (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[12]
    38

    In the Court of Chancery and in this appeal, NACEPF waived any basis it may have had for pursuit of its claim derivatively. Instead, NACEPF seeks to assert only a direct claim for breach of fiduciary duties. It contends that such direct claims by creditors should be recognized in the context of both insolvency and the zone of insolvency. Accordingly, in ruling on the 12(b)(6) motion to dismiss Count II of the Complaint, the Court of Chancery was confronted with two legal questions: whether, as a matter of law, a corporation's creditors may assert direct claims against directors for breach of fiduciary duties when the corporation is either: first, insolvent or second, in the zone of insolvency.

    39
    Allegations of Insolvency and Zone of Insolvency
    40

    In support of its claim that Clearwire was either insolvent or in the zone of insolvency during the relevant periods, NACEPF alleged that Clearwire needed "substantially more financial support than it had obtained in March 2001."[13] The Complaint alleges Goldman Sachs had invested $47 million in Clearwire, which "represent[ed] 84% of the total sums invested in Clearwire in March 2001, when Clearwire was otherwise virtually out of funds."[14]

    41
    After March 2001, Clearwire had financial obligations related to its agreement with NACEPF and others that potentially exceeded $134 million, did not have the ability to raise sufficient cash from operations to pay its debts as they became due and was dependent on Goldman [98] Sachs to make additional investments to fund Clearwire's operations for the foreseeable future.[15]
    42

    The Complaint also alleges:

    43
    For example, upon the closing of the Master Agreement, Clearwire had approximately $29.2 million in cash and of that $24.3 million would be needed for future payments for spectrum to the Alliance members. Clearwire's "burn" rate was $2.1 million per month and it had then no significant revenues. The process of acquiring spectrum upon expiration of existing licenses was both time consuming and expensive, particularly if existing licenseholders contested the validity of any Clearwire offer that those license holders were required to match under their rights of first refusal.[16]
    44

    Additionally, in the Complaint, NACEPF alleges that, "[b]y October 2003, Clearwire had been unable to obtain any further financing and effectively went out of business. Except for money advanced to it as a stopgap measure by Goldman Sachs in late 2001, Clearwire was never able to raise any significant money."[17]

    45

    The Court of Chancery opined that insolvency may be demonstrated by either showing (1) "a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof,"[18] or (2) "an inability to meet maturing obligations as they fall due in the ordinary course of business."[19] Applying the standards applicable to review under Rule 12(b)(6), the Court of Chancery concluded that NACEPF had satisfactorily alleged facts which permitted a reasonable inference that Clearwire operated in the zone of insolvency[20] during at least a substantial portion of the relevant periods for purposes of this motion to dismiss. The Court of Chancery also concluded that insolvency had been adequately alleged in the Complaint, for Rule 12(b)(6) purposes, for at least a portion of the relevant periods following execution of the Master Agreement.

    46

    Corporations in the Zone of Insolvency Direct Claims for Breach of Fiduciary Duty May Not Be Asserted by Creditors

    47

    In order to withstand the Defendant's Rule 12(b)(6) motion to dismiss, the Plaintiff [99] was required to demonstrate that the breach of fiduciary duty claims set forth in Count II are cognizable under Delaware law.[21] This procedural requirement requires us to address a substantive question of first impression that is raised by the present appeal: as a matter of Delaware law, can the creditor of a corporation that is operating within the zone of insolvency bring a direct action against its directors for an alleged breach of fiduciary duty?

    48

    It is well established that the directors owe their fiduciary obligations to the corporation and its shareholders.[22] While shareholders rely on directors acting as fiduciaries to protect their interests, creditors are afforded protection through contractual agreements, fraud and fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy law, general commercial law and other sources of creditor rights.[23] Delaware courts have traditionally been reluctant to expand existing fiduciary duties.[24] Accordingly, "the general rule is that directors do not owe creditors duties beyond the relevant contractual terms."[25]

    49

    In this case, NACEPF argues that when a corporation is in the zone of insolvency, this Court should recognize a new direct right for creditors to challenge directors' exercise of business judgments as breaches of the fiduciary duties owed to them. This Court has never directly addressed the zone of insolvency issue involving directors' purported fiduciary duties to creditors that is presented by NACEPF in this appeal.[26] That subject has been discussed, however, in several judicial opinions[27] and many scholarly articles.[28]

    50

    [100] In Production Resources, the Court of Chancery remarked that recognition of fiduciary duties to creditors in the "zone of insolvency" context may involve:

    51
    "using the law of fiduciary duty to fill gaps that do not exist. Creditors are often protected by strong covenants, liens on assets, and other negotiated contractual protections. The implied covenant of good faith and fair dealing also protects creditors. So does the law of fraudulent conveyance. With these protections, when creditors are unable to prove that a corporation or its directors breached any of the specific legal duties owed to them, one would think that the conceptual room for concluding that the creditors were somehow, nevertheless, injured by inequitable conduct would be extremely small, if extant. Having complied with all legal obligations owed to the firm's creditors, the board would, in that scenario, ordinarily be free to take economic risk for the benefit of the firm's equity owners, so long as the directors comply with their fiduciary duties to the firm by selecting and pursuing with fidelity and prudence a plausible strategy to maximize the firm's value."[29]
    52

    In this case, the Court of Chancery noted that creditors' existing protections — among which are the protections afforded by their negotiated agreements, their security instruments, the implied covenant of good faith and fair dealing, fraudulent conveyance law, and bankruptcy law — render the imposition of an additional, unique layer of protection through direct claims for breach of fiduciary duty unnecessary.[30] It also noted that "any benefit to be derived by the recognition of such additional direct claims appears minimal, at best, and significantly outweighed by the costs to economic efficiency."[31] The Court of Chancery reasoned that "an otherwise solvent corporation operating in the zone of insolvency is one in most need of effective and proactive leadership — as well as the ability to negotiate in good faith with its creditors — [101] goals which would likely be significantly undermined by the prospect of individual liability arising from the pursuit of direct claims by creditors."[32] We agree.

    53

    Delaware corporate law provides for a separation of control and ownership.[33] The directors of Delaware corporations have "the legal responsibility to manage the business of a corporation for the benefit of its shareholders owners."[34] Accordingly, fiduciary duties are imposed upon the directors to regulate their conduct when they perform that function. Although the fiduciary duties of the directors of a Delaware corporation are unremitting:

    54
    the exact cause of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders. This Court has endeavored to provide the directors with clear signal beacons and brightly lined channel markers as they navigate with due care, good faith, a loyalty on behalf of a Delaware corporation and its shareholders. This Court has also endeavored to mark the safe harbors clearly.[35]
    55

    In this case, the need for providing directors with definitive guidance compels us to hold that no direct claim for breach of fiduciary duties may be asserted by the creditors of a solvent corporation that is operating in the zone of insolvency. When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. Therefore, we hold the Court of Chancery properly concluded that Count II of the NACEPF Complaint fails to state a claim, as a matter of Delaware law, to the extent that it attempts to assert a direct claim for breach of fiduciary duty to a creditor while Clearwire was operating in the zone of insolvency.

    56
    Insolvent Corporations Direct Claims For Breach of Fiduciary Duty May Not Be Asserted by Creditors
    57

    It is well settled that directors owe fiduciary duties to the corporation.[36] When a corporation is solvent, those duties may be enforced by its shareholders, who have standing to bring derivative actions on behalf of the corporation because they are the ultimate beneficiaries of the corporation's growth and increased value.[37] When a corporation is insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value.

    58

    Consequently, the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.[38] The corporation's [102] insolvency "makes the creditors the principal constituency injured by any fiduciary breaches that diminish the firm's value."[39] Therefore, equitable considerations give creditors standing to pursue derivative claims against the directors of an insolvent corporation. Individual creditors of an insolvent corporation have the same incentive to pursue valid derivative claims on its behalf that shareholders have when the corporation is solvent.

    59

    In Production Resources, the Court of Chancery recognized that — in most, if not all instances — creditors of insolvent corporations could bring derivative claims against directors of an insolvent corporation for breach of fiduciary duty. In that case, in response to the creditor plaintiff's contention that derivative claims for breach of fiduciary duty were transformed into direct claims upon insolvency, the Court of Chancery stated:

    60
    The fact that the corporation has become insolvent does not turn [derivative] claims into direct creditor claims, it simply provides creditors with standing to assert those claims. At all times, claims of this kind belong to the corporation itself because even if the improper acts occur when the firm is insolvent, they operate to injure the firm in the first instance by reducing its value, injuring creditors only indirectly by diminishing the value of the firm and therefore the assets from which the creditors may satisfy their claims.[40]
    61

    Nevertheless, in Production Resources, the Court of Chancery stated that it was "not prepared to rule out" the possibility that the creditor plaintiff had alleged conduct that "might support" a limited direct claim.[41] Since the complaint in Production Resources sufficiently alleged a derivative claim, however, it was unnecessary to decide if creditors had a legal right to bring direct fiduciary claims against directors in the insolvency context.[42]

    62

    In this case, NACEPF did not attempt to allege a derivative claim in Count II of its Complaint. It only asserted a direct claim against the director Defendants for alleged breaches of fiduciary duty when Clearwire was insolvent. The Court of Chancery did not decide that issue. Instead, the Court of Chancery assumed arguendo that a direct claim for a breach of fiduciary duty to a creditor is legally cognizable in the context of actual insolvency. It then held that Count II of NACEPF's Complaint failed to state such a direct creditor claim because it did not satisfy the pleading requirements described by the decisions in Production Resources[43] and [103] Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC.[44]

    63

    To date, the Court of Chancery has never recognized that a creditor has the right to assert a direct claim for breach of fiduciary duty against the directors of an insolvent corporation. However, prior to this opinion, that possibility remained an open question because of the "arguendo assumption" in this case and the dicta in Production Resources and Big Lots Stores. In this opinion, we recognize "the pragmatic conduct-regulating legal realms . . . calls for more precise conceptual line drawing."[45]

    64

    Recognizing that directors of an insolvent corporation owe direct fiduciary duties to creditors, would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interest of the insolvent corporation. To recognize a new right for creditors to bring direct fiduciary claims against those directors would create a conflict between those directors' duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors. Directors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation.[46] Accordingly, we hold that individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors. Creditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation or any other direct nonfiduciary claim, as discussed earlier in this opinion, that may be available for individual creditors.

    65
    Conclusion
    66

    The creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against its directors. Therefore, Count II of NACEPF's Complaint failed to state a claim upon which relief could be granted. Consequently, the final judgment of the Court of Chancery is affirmed.

    67

    [1] Sitting by designation pursuant to Del. Const. art. IV, § 12 and Supr. Ct. R. 2 and 4.

    68

    [2] North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 2006 WL 2588971 (Del.Ch. Sept. 1, 2006) ("Opinion").

    69

    [3] This action was initially filed in the Superior Court; it was dismissed without prejudice for lack of subject matter jurisdiction. Transfer to the Court of Chancery was permitted under 10 Del. C. § 1902.

    70

    [4] The relevant facts are primarily selected excerpts from the opening brief filed by NACEPF in this appeal.

    71

    [5] Complaint at ¶ 36 ("Except for money advanced to it as a stopgap measure by Goldman Sachs in late 2001, Clearwire was never able to raise any significant money.").

    72

    [6] Id. at ¶ 40.

    73

    [7] Id. at ¶ 45.

    74

    [8] Id. at ¶ 50.

    75

    [9] See Branson v. Exide Elecs. Corp., 625 A.2d 267 (Del.1993).

    76

    [10] The basis for personal jurisdiction relied upon by NACEPF, provides:

    77

    Every nonresident of this State who after September 1, 1977, accepts election or appointment as a director, trustee or member of the governing body of a corporation organized under the laws of this State or who after June 30, 1978, serves in such capacity, and every resident of this State who so accepts election or appointment or serves in such capacity and thereafter removes residence from this State shall, by such acceptance or by such service, be deemed thereby to have consented to the appointment of the registered agent of such corporation (or, if there is none, the Secretary of State) as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State, by or on behalf of, or against such corporation, in which such director, trustee or member is a necessary or proper party, or in any action or proceeding against such director, trustee or member for violation of a duty in such capacity, whether or not the person continues to serve as such director, trustee or member at the time suit is commenced. Such acceptance or service as such director, trustee or member shall be a signification of the consent of such director, trustee or member that any process when so served shall be of the same legal force and validity as if served upon such director, trustee or member within this State and such appointment of the registered agent (or, if there is none, the Secretary of State) shall be irrevocable.

    78

    10 Del. C. § 3114(a) (emphasis added).

    79

    [11] Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 3-5[a] (2005).

    80

    [12] In re General Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del.2006) (quoting Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del.2002)).

    81

    [13] Complaint at ¶ 30.

    82

    [14] Id. at ¶ 7(a).

    83

    [15] Id. at ¶ 7(b) (emphasis added). NACEPF also asserts that "Clearwire was unable to borrow money or obtain any other significant financing after March 2001, except from Goldman Sachs." Id. at ¶ 7(c).

    84

    [16] Id. at ¶ 30.

    85

    [17] Id. at ¶ 36.

    86

    [18] For that proposition, the Court of Chancery relied upon Production Res. Group v. NCT Group, Inc., 863 A.2d 772, 782 (Del.Ch. 2004) (quoting Siple v. S & K Plumbing & Heating, Inc., 1982 WL 8789, at *2 (Del.Ch. Apr. 13, 1982)); Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 789 (Del.Ch.1992) (explaining that corporation is insolvent if "it has liabilities in excess of a reasonable market value of assets held"); and McDonald v. Williams, 174 U.S. 397, 403, 19 S.Ct. 743, 43 L.Ed. 1022 (1899) (defining insolvent corporation as an entity with assets valued at less than its debts).

    87

    [19] For that proposition, the Court of Chancery also relied upon Production Res. Group v. NCT Group, Inc., 863 A.2d at 782 (quoting Siple v. S & K Plumbing & Heating, Inc., 1982 WL 8789, at *2).

    88

    [20] In light of its ultimate ruling, the Court of Chancery did not attempt to set forth a precise definition of what constitutes the "zone of insolvency." See Credit Lyonnais Bank Nederland N.V. v. Pathe Commc'ns Corp., 1991 WL 277613, at *34; see also Production Res. Group v. NCT Group, Inc., 863 A.2d at 789 n. 56 (describing the difficulties presented in identifying "zone of insolvency"). Our holding in this opinion also makes it unnecessary to precisely define a "zone of insolvency."

    89

    [21] See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del.2004) ("In this case it cannot be concluded that the complaint alleges a derivative claim. . . . But, it does not necessarily follow that the complaint states a direct, individual claim. While the complaint purports to set forth a direct claim, in reality, it states no claim at all.")

    90

    [22] See Guth v. Loft, 5 A.2d 503, 510 (Del. 1939) (while not technically trustees, directors stand in a fiduciary relationship to the corporation and its shareholders); Malone v. Brincat, 722 A.2d 5, 10 (Del.1998).

    91

    [23] See Production Res. Group v. NCT Group, Inc., 863 A.2d at 790.

    92

    [24] See, e.g., Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 625 (Del.Ch.2005), aff'd in part and rev'd in part on other grounds, 901 A.2d 106 (Del.2006).

    93

    [25] See, e.g., Simons v. Cogan, 549 A.2d 300, 304 (Del.1988); Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del.Ch.1986); Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 787 (Del.Ch. 1992); Production Res. Group v. NCT Group, Inc., 863 A.2d 772, 787 (Del.Ch.2004).

    94

    [26] E. Norman Veasey & Christine T. Di Guglelmo, What Happened in Delaware Corporate Law and Governance From 1992-2004? A Retrospective on Some Key Developments, 153 U. Pa. L.Rev. 1399, 1432 (May 2005).

    95

    [27] Credit Lyonnais Bank Nederland N.V. v. Pathe Commc'ns Corp., 1991 WL 277613 (Del. Ch.); Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del.Ch.2004); Trenwick America Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del.Ch.2006); Big Lots Stores, Inc. v. Bain Capital Fund VI, LLC, 922 A.2d 1169 (Del.Ch.2006).

    96

    [28] Rutheford B. Campbell, Jr. & Christopher W. Frost, Managers' Fiduciary Duties in Financially Distressed Corporations: Chaos in Delaware (and Elsewhere), 32 J. Corp. L. 491 (2007); Richard M. Cieri & Michael J. Riela, Protecting Directors and Officers of Corporations That Are Insolvent or In the Zone or Vicinity of Insolvency: Important Considerations, Practical Solutions, 2 DePaul Bus. & Com. L.J. 295, 301-02 (2004); Patrick M. Jones & Katherine Heid Harris, Chicken Little Was Wrong (Again): Perceived Trends in the Delaware Corporate Law of Fiduciary Duties and Standing in the Zone of Insolvency, 16 J. Bankr. L. & Prac. 2 (2007); Laura Lin, Shift of Fiduciary Duty Upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors, 46 Vand. L.Rev. 1485, 1487 (1993); Jonathan C. Lipson, Directors' Duties to Creditors: Powe-Imbalance and the Financially Distressed Corporation, 50 UCLA L.Rev. 1189 (2003); Ramesh K.S. Rao, et al., Fiduciary Duty A La Lyonnais: An Economic Perspective on Corporate Governance in a Financially-Distressed Firm, 22 J. Corp. L. 53 (1996); Myron M. Sheinfeld & Harris Pippitt, Fiduciary Duties of Directors of a Corporation in the vicinity of Insolvency and After Initiation of a Bankruptcy Case, 60 Bus. Law. 79 (2004); Robert K. Sahyan, Note, The Myth of the Zone of Insolvency: Production Resources Group v. NCG Group, 3 Hastings Bus. L.J. 181 (2006). Vladimir Jelisavcic, Corporate Law — A Safe Harbor Proposal to Define the Limits of Directors' Fiduciary Duty to Creditors in the "Vicinity of Insolvency:" Credit Lyonnais Bank Nederland N.V. v. Pathe Commc'ns Corp., 18 J. Corp. L. 145 (Fall 1993). See also Selected Papers from the University of Maryland's "Twilight in the Zone of Insolvency" Conference: Stephen M. Bainbridge, Much Ado About Little? Insolvency, 1 J.Bus.&Tech.L.; 335 (2007); J. Directors' Fiduciary Duties in the Vicinity of William Callison, Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities Is Incorrect as a Matter of Theory and Practice, 1 J.Bus.&Tech.L.; 431 (2007); Larry E. Ribstein & Kelli A. Alces, Directors' Duties in Failing Firms, 1 J.Bus.&Tech.L.; 529 (2007); Frederick Tung, Gap Filling in the Zone of Insolvency, 1 J.Bus.&Tech.L.; 607 (2007).

    97

    [29] Production Resources Group L.L. v. NCT Group, Inc., 863 A.2d at 790 (emphasis, added).

    98

    [30] See, e.g., Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 922 A.2d at 1181 (citing Stephen M. Bainbridge, Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency, 1 J.Bus.&Tech.L.; 335 (2007).

    99

    [31] Opinion at *13.

    100

    [32] Id.

    101

    [33] Malone v. Brincat, 722 A.2d 5 (1998).

    102

    [34] Id. at 9.

    103

    [35] Id. at 10.

    104

    [36] See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del.1939).

    105

    [37] See, e.g., Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984) partially overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000).

    106

    [38] Agostino v. Hicks, 845 A.2d 1110, 1117 (Del.Ch.2004); see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d at 1036 ("The derivative suit has been generally described as `one of the most interesting and ingenious of accountability mechanisms for large formal organizations.'") (quoting Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 351 (Del.1988)); Guttman v. Huang, 823 A.2d 492, 500 (Del.Ch.2003) (noting the "deterrence effects of meritorious derivative suits on faithless conduct.").

    107

    [39] Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 794 n. 67.

    108

    [40] Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 776; see also Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 195 n. 75 (Del.Ch.2006).

    109

    [41] Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 800. The court reserved "the opportunity . . . to revisit some of these questions with better input from the parties." Id. at 801.

    110

    [42] Id.

    111

    [43] In Production Resources, the Court of Chancery expressed in dicta a "conservative assumption that there might, possibly exist circumstances in which the directors [of an actually insolvent corporation] display such a marked degree of animus towards a particular creditor with a proven entitlement to payment that they expose themselves to a direct fiduciary duty claim by that creditor." Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 798. We think not. While there may well be a basis for a direct claim arising out of contract or tort, our holding today precludes a direct claim arising out of a purported breach of a fiduciary duty owed to that creditor by the directors of an insolvent corporation.

    112

    [44] Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 922 A.2d 1169 (Del.Ch.2006). In Big Lots, the Court of Chancery reiterated, also in dicta, that any potentially cognizable direct claims asserted by creditors in actual insolvency should be confined to the limited circumstances in Production Resources, namely, instances in which invidious conduct toward a particular "creditor" with a "proven entitlement to payment" has been alleged. Id. The suggestion in that dicta is also inconsistent with and precluded by our holding in this opinion.

    113

    [45] In Re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 65 (Del.2006).

    114

    [46] Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 797.

  • 2 Metropolitan Life Ins. Co. v. RJR Nabisco Inc. (SDNY 1989)

    MetLife, a very sophisticated creditor of RJR, claimed that the leveraged buyout of RJR by KKR was an entirely unanticipated event that violated RJR's implied duty of good faith and fair dealing towards its creditors. The court doesn't buy it. Do you?

    Regardless, notice the striking contrast between the treatment of creditors and shareholders in this and other 1980s takeover cases. In MetLife, the court blesses a takeover that clearly reduced creditor value by billions of dollars without the deal-specific approval of creditors. At about the same time, Delaware cases empowered and even required boards to defeat takeovers in the name of “inadequate value” to shareholders even when the latter would have approved the deal. Does this make sense?

    NB: The book Barbarians at the Gate tells the tale of the “bidding war” referred to in Judge Walker's introduction — it is a fun read.

    1
    716 F.Supp. 1504 (1989)
    2
    METROPOLITAN LIFE INSURANCE COMPANY and Jefferson-Pilot Life Insurance Company, Plaintiffs,
    v.
    RJR NABISCO, INC. and F. Ross Johnson, Defendants.
    3
    No. 88 Civ. 8266 (JMW).
    4

    United States District Court, S.D. New York.

    5
    June 1, 1989.
    6

    [1505] Philip Howard, Jack P. Levin, C. William Phillips, Howard, Darby & Levin, New York City, for plaintiffs.

    7

    Michael Bradley, Scott Tross, Brown & Wood, New York City, for defendant RJR Nabisco.

    8

    D. Scott Wise, Davis, Polk & Wardwell, New York City, for defendant F. Ross Johnson.

    9

    Kenneth Logan, Michael Lamb, Simpson Thacher & Bartlett, New York City, for KKR.

    10
    OPINION AND ORDER
    11
    WALKER, District Judge:
    12
    I. INTRODUCTION
    13

    The corporate parties to this action are among the country's most sophisticated financial institutions, as familiar with the Wall Street investment community and the securities market as American consumers are with the Oreo cookies and Winston cigarettes made by defendant RJR Nabisco, Inc. (sometimes "the company" or "RJR Nabisco"). The present action traces its origins to October 20, 1988, when F. Ross Johnson, then the Chief Executive Officer of RJR Nabisco, proposed a $17 billion leveraged buy-out ("LBO") of the company's shareholders, at $75 per share.[1] Within a few days, a bidding war developed among the investment group led by Johnson and the investment firm of Kohlberg Kravis Roberts & Co. ("KKR"), and others. On December 1, 1988, a special committee of RJR Nabisco directors, established by the company specifically to consider the competing proposals, recommended that the company accept the KKR proposal, a $24 billion LBO that called for the purchase of the company's outstanding stock at roughly $109 per share.

    14

    The flurry of activity late last year that accompanied the bidding war for RJR Nabisco spawned at least eight lawsuits, filed before this Court, charging the company and its former CEO with a variety of securities and common law violations.[2] The [1506] Court agreed to hear the present action — filed even before the company accepted the KKR proposal — on an expedited basis, with an eye toward March 1, 1989, when RJR Nabisco was expected to merge with the KKR holding entities created to facilitate the LBO. On that date, RJR Nabisco was also scheduled to assume roughly $19 billion of new debt.[3] After a delay unrelated to the present action, the merger was ultimately completed during the week of April 24, 1989.

    15

    Plaintiffs now allege, in short, that RJR Nabisco's actions have drastically impaired the value of bonds previously issued to plaintiffs by, in effect, misappropriating the value of those bonds to help finance the LBO and to distribute an enormous windfall to the company's shareholders. As a result, plaintiffs argue, they have unfairly suffered a multimillion dollar loss in the value of their bonds.[4]

    16

    On February 16, 1989, this Court heard oral argument on plaintiffs' motions. At the hearing, the Court denied plaintiffs' request for a preliminary injunction, based on their insufficient showing of irreparable harm.[5] An exchange between the Court and plaintiffs' counsel, like the submissions before it, convinced the Court that plaintiffs had failed to meet their heavy burden:

    17
    THE COURT: How do you respond to [defendants'] statements on irreparable harm? What we're looking at now is whether or not there's a basis for a preliminary injunction and if there's no irreparable harm then we're in a damage action and that changes ... the contours of the suit.... We're talking about the ability ... of the company to satisfy any judgment.
    18
    PLAINTIFFS: That's correct. And our point ... is that if we receive a judgment at any time, six months from now, after a trial for example, that judgment will almost inevitably be the basis for a judgment for everyone else ... But if we get a judgment, everyone else will get one as well ...
    19
    THE COURT: [Y]ou're ... asking me ... [to] infer a huge number of plaintiffs and a lot more damages than your clients could ever recover as being the basis for deciding the question of irreparable harm. And those [potential] actions aren't before me.
    20
    [1507] PLAINTIFFS: I think that's correct ...
    21

    Tr. at 39. See also P. Reply at 33. Plaintiffs failed to respond convincingly to defendants' arguments that, although plaintiffs have invested roughly $350 million in RJR Nabisco, their potential damages nonetheless remain relatively small and that, upon completion of the merger, the company will retain an equity base of $5 billion. See, e.g., Tr. at 32, 35; D. Opp. at 48, 49. Given plaintiffs' failure to show irreparable harm, the Court denied their request for injunctive relief. This initial ruling, however, left intact plaintiffs' underlying motions, which, together with defendants' cross-motions, now require attention.

    22

    The motions and cross-motions are based on plaintiffs' Amended Complaint, which sets forth nine counts.[6] Plaintiffs move for summary judgment pursuant to Fed.R. Civ.P. 56 against the company on Count I, which alleges a "Breach of Implied Covenant of Good Faith and Fair Dealing," and against both defendants on Count V, which is labeled simply "In Equity."

    23

    For its part, RJR Nabisco moves pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings on Count I in full; on Count II (fraud) and Count III (violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder) as to most of the securities at issue; and on Count V in full. In the alternative, the company moves for summary judgment on Counts I and V. In addition, RJR Nabisco moves pursuant to Fed.R.Civ.P. 9(b) to dismiss Counts II, III and IX (alleging violations of applicable fraudulent conveyance laws) for an alleged failure to plead fraud with requisite particularity. Johnson has moved to dismiss Counts II, III and V.[7]

    24

    Although the numbers involved in this case are large, and the financing necessary to complete the LBO unprecedented,[8] the legal principles nonetheless remain discrete and familiar. Yet while the instant motions thus primarily require the Court to evaluate and apply traditional rules of equity and contract interpretation, plaintiffs do raise issues of first impression in the context of an LBO. At the heart of the present motions lies plaintiffs' claim that RJR Nabisco violated a restrictive covenant — not an explicit covenant found within the four corners of the relevant bond indentures, but rather an implied covenant of good faith and fair dealing — not to incur the debt necessary to facilitate the LBO and thereby betray what plaintiffs claim was the fundamental basis of their bargain with the company. The company, plaintiffs assert, consistently reassured its bondholders that it had a "mandate" from its Board of Directors to maintain RJR Nabisco's preferred credit rating. Plaintiffs ask this Court first to imply a covenant of good faith and fair dealing that would prevent the recent transaction, then to hold that this covenant has been breached, and finally [1508] to require RJR Nabisco to redeem their bonds.

    25

    RJR Nabisco defends the LBO by pointing to express provisions in the bond indentures that, inter alia, permit mergers and the assumption of additional debt. These provisions, as well as others that could have been included but were not, were known to the market and to plaintiffs, sophisticated investors who freely bought the bonds and were equally free to sell them at any time. Any attempt by this Court to create contractual terms post hoc, defendants contend, not only finds no basis in the controlling law and undisputed facts of this case, but also would constitute an impermissible invasion into the free and open operation of the marketplace.

    26

    For the reasons set forth below, this Court agrees with defendants. There being no express covenant between the parties that would restrict the incurrence of new debt, and no perceived direction to that end from covenants that are express, this Court will not imply a covenant to prevent the recent LBO and thereby create an indenture term that, while bargained for in other contexts, was not bargained for here and was not even within the mutual contemplation of the parties.

    27
    II. BACKGROUND
    28

    Summary judgment, of course, is appropriate only where "there is no genuine issue as to any material fact ..." Fed.R. Civ.P. 56(c). A genuine dispute exists if "a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The burden is on the moving party to show that no relevant facts are in dispute. While the Court must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought, see, e.g., Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 444 (2d Cir.1980), the nonmoving party may not rely simply "on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 12 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).

    29

    Both sides now move for summary judgment on Counts I and V. In support of their motions, the parties have filed extensive memoranda and supporting exhibits. Having carefully reviewed the submissions before it, the Court agrees with the parties that there is no genuine issue as to any material fact regarding these counts, and given the disposition of the motions as to Counts I and V, the Court, as it must, draws all reasonable inferences in favor of the plaintiffs.

    30
    A. The Parties:
    31

    Metropolitan Life Insurance Co. ("MetLife"), incorporated in New York, is a life insurance company that provides pension benefits for 42 million individuals. According to its most recent annual report, MetLife's assets exceed $88 billion and its debt securities holdings exceed $49 billion. Bradley Aff. ¶ 11. MetLife is a mutual company and therefore has no stockholders and is instead operated for the benefit of its policyholders. Am.Comp. ¶ 5. MetLife alleges that it owns $340,542,000 in principal amount of six separate RJR Nabisco debt issues, bonds allegedly purchased between July 1975 and July 1988. Some bonds become due as early as this year; others will not become due until 2017. The bonds bear interest rates of anywhere from 8 to 10.25 percent. MetLife also owned 186,000 shares of RJR Nabisco common stock at the time this suit was filed. Am. Comp. ¶ 12.

    32

    Jefferson-Pilot Life Insurance Co. ("Jefferson-Pilot") is a North Carolina company that has more than $3 billion in total assets, $1.5 billion of which are invested in debt securities. Bradley Aff. ¶ 12. Jefferson-Pilot alleges that it owns $9.34 million in principal amount of three separate RJR Nabisco debt issues, allegedly purchased between June 1978 and June 1988. Those bonds, bearing interest rates of anywhere from 8.45 to 10.75 percent, become due in 1993 and 1998. Am.Comp. ¶ 13.

    33

    [1509] RJR Nabisco, a Delaware corporation, is a consumer products holding company that owns some of the country's best known product lines, including LifeSavers candy, Oreo cookies, and Winston cigarettes. The company was formed in 1985, when R.J. Reynolds Industries, Inc. ("R.J. Reynolds") merged with Nabisco Brands, Inc. ("Nabisco Brands"). In 1979, and thus before the R.J. Reynolds-Nabisco Brands merger, R.J. Reynolds acquired the Del Monte Corporation ("Del Monte"), which distributes canned fruits and vegetables. From January 1987 until February 1989, co-defendant Johnson served as the company's CEO. KKR, a private investment firm, organizes funds through which investors provide pools of equity to finance LBOs. Bradley Aff. ¶¶ 12-15.

    34
    B. The Indentures:
    35

    The bonds[9] implicated by this suit are governed by long, detailed indentures, which in turn are governed by New York contract law.[10] No one disputes that the holders of public bond issues, like plaintiffs here, often enter the market after the indentures have been negotiated and memorialized. Thus, those indentures are often not the product of face-to-face negotiations between the ultimate holders and the issuing company. What remains equally true, however, is that underwriters ordinarily negotiate the terms of the indentures with the issuers. Since the underwriters must then sell or place the bonds, they necessarily negotiate in part with the interests of the buyers in mind. Moreover, these indentures were not secret agreements foisted upon unwitting participants in the bond market. No successive holder is required to accept or to continue to hold the bonds, governed by their accompanying indentures; indeed, plaintiffs readily admit that they could have sold their bonds right up until the announcement of the LBO. Tr. at 15. Instead, sophisticated investors like plaintiffs are well aware of the indenture terms and, presumably, review them carefully before lending hundreds of millions of dollars to any company.

    36

    Indeed, the prospectuses for the indentures contain a statement relevant to this action:

    37
    The Indenture contains no restrictions on the creation of unsecured short-term debt by [RJR Nabisco] or its subsidiaries, no restriction on the creation of unsecured Funded Debt by [RJR Nabisco] or its subsidiaries which are not Restricted Subsidiaries, and no restriction on the payment of dividends by [RJR Nabisco].
    38

    Bradley Resp.Aff., Exh. L at 24.[11] Further, as plaintiffs themselves note, the contracts at issue "[do] not impose debt limits, since debt is assumed to be used for productive purposes." P. Reply at 34.

    39
    1. The relevant Articles:
    40

    A typical RJR Nabisco indenture contains thirteen Articles. At least four of them are relevant to the present motions and thus merit a brief review.[12]

    41

    Article Three delineates the covenants of the issuer. Most important, it first provides for payment of principal and interest. It then addresses various mechanical provisions regarding such matters as payment [1510] terms and trustee vacancies. The Article also contains "negative pledge" and related provisions, which restrict mortgages or other liens on the assets of RJR Nabisco or its subsidiaries and seek to protect the bond-holders from being subordinated to other debt.

    42

    Article Five describes various procedures to remedy defaults and the responsibilities of the Trustee. This Article includes the distinction in the indentures noted above, see supra n. 11. In seven of the nine securities at issue, a provision in Article Five prohibits bondholders from suing for any remedy based on rights in the indentures unless 25 percent of the holders have requested in writing that the indenture trustee seek such relief, and, after 60 days, the trustee has not sued. See, e.g., Bradley Aff.Exh. L, §§ 5.6, 5.7. Defendants argue that this provision precludes plaintiffs from suing on these seven securities. See D.Mem. at 22-25. Given its holdings today, see infra, the Court need not address this issue.

    43

    Article Nine governs the adoption of supplemental indentures. It provides, inter alia, that the Issuer and the Trustee can

    44
    add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors by Board Resolution and the Trustee shall consider to be for the protection of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth ...
    45

    Bradley Aff.Exh. L, § 9.1(c).

    46

    Article Ten addresses a potential "Consolidation, Merger, Sale or Conveyance," and explicitly sets forth the conditions under which the company can consolidate or merge into or with any other corporation. It provides explicitly that RJR Nabisco "may consolidate with, or sell or convey, all or substantially all of its assets to, or merge into or with any other corporation," so long as the new entity is a United States corporation, and so long as it assumes RJR Nabisco's debt. The Article also requires that any such transaction not result in the company's default under any indenture provision.[13]

    47
    2. The elimination of restrictive covenants:
    48

    In its Amended Complaint, MetLife lists the six debt issues on which it bases its claims. Indentures for two of those issues — the 10.25 percent Notes due in 1990, of which MetLife continues to hold $10 million, and the 8.9 percent Debentures due in 1996, of which MetLife continues to hold $50 million — once contained express covenants that, among other things, restricted the company's ability to incur precisely the sort of debt involved in the recent LBO. In order to eliminate those restrictions, the parties to this action renegotiated the terms of those indentures, first in 1983 and then again in 1985.

    49

    MetLife acquired $50 million principal amount of 10.25 percent Notes from Del Monte in July of 1975. To cover the $50 million, MetLife and Del Monte entered into a loan agreement. That agreement restricted Del Monte's ability, among other things, to incur the sort of indebtedness involved in the RJR Nabisco LBO. See promissory note §§ 2.6-2.15, attached as Exhibit A to Bradley Aff.Exh. E. In 1979, R.J. Reynolds — the corporate predecessor to RJR Nabisco — purchased Del Monte and [1511] assumed its indebtedness. Then, in December of 1983, R.J. Reynolds requested MetLife to agree to deletions of those restrictive covenants in exchange for various guarantees from R.J. Reynolds. See Bradley Aff. ¶ 17. A few months later, MetLife and R.J. Reynolds entered into a guarantee and amendment agreement reflecting those terms. See Bradley Aff. ¶ 17, Exh. G. Pursuant to that agreement, and in the words of Robert E. Chappell, Jr., MetLife's Executive Vice President, MetLife thus "gave up the restrictive covenants applicable to the Del Monte debt ... in return for [the parent company's] guarantee and public covenants." Chappell Dep. at 196.

    50

    MetLife acquired the 8.9 percent Debentures from R.J. Reynolds in October of 1976 in a private placement. A promissory note evidenced MetLife's $100 million loan. That note, like the Del Monte agreement, contained covenants that restricted R.J. Reynolds' ability to incur new debt. See Bradley Aff., Exh. H, §§ 2.5-2.9. In June of 1985, R.J. Reynolds announced its plans to acquire Nabisco Brands in a $3.6 billion transaction that involved the incurrence of a significant amount of new debt. R.J. Reynolds requested MetLife to waive compliance with these restrictive covenants in light of the Nabisco acquisition. See D.Mem. at 45; Bradley Aff. ¶ 18.

    51

    In exchange for certain benefits, MetLife agreed to exchange its 8.9 percent debentures — which did contain explicit debt limitations — for debentures issued under a public indenture — which contain no explicit limits on new debt. An internal MetLife memorandum explained the parties' understanding:

    52
    [MetLife's $100 million financing of the Nabisco Brands purchase] had its origins in discussions with RJR regarding potential covenant violations in the 8.90% Notes. More specifically, in its acquisition of Nabisco Brands, RJR was slated to incur significant new long-term debt, which would have caused a violation in the funded indebtedness incurrence tests in the 8.90% Notes. In the discussions regarding [MetLife's] willingness to consent to the additional indebtedness, it was determined that a mutually beneficial approach to the problem was to 1) agree on a new financing having a rate and a maturity desirable for [MetLife] and 2) modify the 8.90% Notes. The former was accomplished with agreement on the proposed financing, while the latter was accomplished by [MetLife] agreeing to substitute RJR's public indenture covenants for the covenants in the 8.90% Notes. In addition to the covenant substitution, RJR has agreed to "debenturize" the 8.90% Notes upon [MetLife's] request. This will permit [MetLife] to sell the 8.90% Notes to the public.
    53

    MetLife Southern Office Memorandum, dated July 11, 1985, attached as Bradley Aff.Exh. J, at 2 (emphasis added).

    54
    3. The recognition and effect of the LBO trend:
    55

    Other internal MetLife documents help frame the background to this action, for they accurately describe the changing securities markets and the responses those changes engendered from sophisticated market participants, such as MetLife and Jefferson-Pilot. At least as early as 1982, MetLife recognized an LBO's effect on bond values.[14] In the spring of that year, MetLife participated in the financing of an LBO of a company called Reeves Brothers ("Reeves"). At the time of that LBO, MetLife also held bonds in that company. Subsequent to the LBO, as a MetLife memorandum explained, the "Debentures of Reeves were downgraded by Standard & Poor's from BBB to B and by Moody's from Baal to Ba3, thereby lowering the value of the Notes and Debentures held by [1512] [MetLife]." MetLife Memorandum, dated August 20, 1982, attached as Bradley Reply Aff. Exh D, at 1.

    56

    MetLife further recognized its "inability to force any type of payout of the [Reeves'] Notes or the Debentures as a result of the buy-out [which] was somewhat disturbing at the time we considered a participation in the new financing. However," the memorandum continued,

    57
    our concern was tempered since, as a stockholder in [the holding company used to facilitate the transaction], we would benefit from the increased net income attributable to the continued presence of the low coupon indebtedness. The recent downgrading of the Reeves Debentures and the consequent "loss" in value has again raised questions regarding our ability to have forced a payout. Questions have also been raised about our ability to force payouts in similar future situations, particularly when we would not be participating in the buyout financing.
    58

    Id. (emphasis added). In the memorandum, MetLife sought to answer those very "questions" about how it might force payouts in "similar future situations."

    59
    A method of closing this apparent "loophole," thereby forcing a payout of [MetLife's] holdings, would be through a covenant dealing with a change in ownership. Such a covenant is fairly standard in financings with privately-held companies ... It provides the lender with an option to end a particular borrowing relationship via some type of special redemption ...
    60

    Id., at 2 (emphasis added).

    61

    A more comprehensive memorandum, prepared in late 1985, evaluated and explained several aspects of the corporate world's increasing use of mergers, takeovers and other debt-financed transactions. That memorandum first reviewed the available protection for lenders such as MetLife:

    62
    Covenants are incorporated into loan documents to ensure that after a lender makes a loan, the creditworthiness of the borrower and the lender's ability to reach the borrower's assets do not deteriorate substantially. Restrictions on the incurrence of debt, sale of assets, mergers, dividends, restricted payments and loans and advances to affiliates are some of the traditional negative covenants that can help protect lenders in the event their obligors become involved in undesirable merger/takeover situations.
    63

    MetLife Northeastern Office Memorandum, dated November 27, 1985, attached as Bradley Aff.Exh. U, at 1-2 (emphasis added). The memorandum then surveyed market realities:

    64
    Because almost any industrial company is apt to engineer a takeover or be taken over itself, Business Week says that investors are beginning to view debt securities of high grade industrial corporations as Wall Street's riskiest investments. In addition, because public bondholders do not enjoy the protection of any restrictive covenants, owners of high grade corporates face substantial losses from takeover situations, if not immediately, then when the bond market finally adjusts.... [T]here have been 10-15 merger/takeover/LBO situations where, due to the lack of covenant protection, [MetLife] has had no choice but to remain a lender to a less creditworthy obligor.... The fact that the quality of our investment portfolio is greater than the other large insurance companies ... may indicate that we have negotiated better covenant protection than other institutions, thus generally being able to require prepayment when situations become too risky ... [However,] a problem exists. And because the current merger craze is not likely to decelerate and because there exist vehicles to circumvent traditional covenants, the problem will probably continue. Therefore, perhaps it is time to institute appropriate language designed to protect Metropolitan from the negative implications of mergers and takeovers.
    65

    Id. at 2-4 (emphasis added).[15]

    66

    Indeed, MetLife does not dispute that, as a member of a bondholders' association, it [1513] received and discussed a proposed model indenture, which included a "comprehensive covenant" entitled "Limitations on Shareholders' Payments."[16] As becomes clear from reading the proposed — but never adopted — provision, it was "intend[ed] to provide protection against all of the types of situations in which shareholders profit at the expense of bondholders." Id. The provision dictated that the "[c]orporation will not, and will not permit any [s]ubsidiary to, directly or indirectly, make any [s]hareholder [p]ayment unless ... (1) the aggregate amount of all [s]hareholder payments during the period [at issue] ... shall not exceed [figure left blank]." Bradley Resp.Aff.Exh. H, at 9. The term "shareholder payments" is defined to include "restructuring distributions, stock repurchases, debt incurred or guaranteed to finance merger payments to shareholders, etc." Id. at i.

    67

    Apparently, that provision — or provisions with similar intentions — never went beyond the discussion stage at MetLife. That fact is easily understood; indeed, MetLife's own documents articulate several reasonable, undisputed explanations:

    68
    While it would be possible to broaden the change in ownership covenant to cover any acquisition-oriented transaction, we might well encounter significant resistance in implementation with larger public companies ... With respect to implementation, we would be faced with the task of imposing a non-standard limitation on potential borrowers, which could be a difficult task in today's highly competitive marketplace. Competitive pressures notwithstanding, it would seem that management of larger public companies would be particularly opposed to such a covenant since its effect would be to increase the cost of an acquisition (due to an assumed debt repayment), a factor that could well lower the price of any tender offer (thereby impacting shareholders).
    69

    Bradley Reply Aff.Exh. D, at 3 (emphasis added). The November 1985 memorandum explained that

    70
    [o]bviously, our ability to implement methods of takeover protection will vary between the public and private market. In that public securities do not contain any meaningful covenants, it would be very difficult for [MetLife] to demand takeover protection in public bonds. Such a requirement would effectively take us out of the public industrial market. A recent Business Week article does suggest, however, that there is increasing talk among lending institutions about requiring blue chip companies to compensate them for the growing risk of downgradings. This talk, regarding such protection as restrictions on future debt financings, is met with skepticism by the investment banking community which feels that CFO's are not about to give up the option of adding debt and do not really care if their companies' credit ratings drop a notch or two.
    71

    Bradley Resp.Aff.Exh. A, at 8 (emphasis added).

    72

    The Court quotes these documents at such length not because they represent an "admission" or "waiver" from MetLife, or an "assumption of risk" in any tort sense, or its "consent" to any particular course of conduct — all terms discussed at even greater length in the parties' submissions. See, [1514] e.g., P. Opp. at 31-36; P. Reply at 16-17; D. Reply at 15-16. Rather, the documents set forth the background to the present action, and highlight the risks inherent in the market itself, for any investor. Investors as sophisticated as MetLife and Jefferson-Pilot would be hard-pressed to plead ignorance of these market risks. Indeed, MetLife has not disputed the facts asserted in its own internal documents. Nor has Jefferson-Pilot—presumably an institution no less sophisticated than MetLife — offered any reason to believe that its understanding of the securities market differed in any material respect from the description and analysis set forth in the MetLife documents. Those documents, after all, were not born in a vacuum. They are descriptions of, and responses to, the market in which investors like MetLife and Jefferson-Pilot knowingly participated.

    73

    These documents must be read in conjunction with plaintiffs' Amended Complaint. That document asserts that the LBO "undermines the foundation of the investment grade debt market ...," Am. Comp. ¶ 16; that, although "the indentures do not purport to limit dividends or debt ... [s]uch covenants were believed unnecessary with blue chip companies ...", Am. Comp. ¶ 17[17]; that "the transaction contradicts the premise of the investment grade market ...", Am.Comp. ¶ 33; and, finally, that "[t]his buy-out was not contemplated at the time the debt was issued, contradicts the premise of the investment grade ratings that RJR Nabisco actively solicited and received, and is inconsistent with the understandings of the market ... which [p]laintiffs relied upon." Am.Comp. ¶ 51.

    74

    Solely for the purposes of these motions, the Court accepts various factual assertions advanced by plaintiffs: first, that RJR Nabisco actively solicited "investment grade" ratings for its debt; second, that it relied on descriptions of its strong capital structure and earnings record which included prominent display of its ability to pay the interest obligations on its long-term debt several times over, Am.Comp. ¶ 14; and third, that the company made express or implied representations not contained in the relevant indentures concerning its future creditworthiness. Id. ¶ 15. In support of those allegations, plaintiffs have marshaled a number of speeches made by co-defendant Johnson and other executives of RJR Nabisco.[18] In addition, plaintiffs rely on an affidavit sworn to by John Dowdle, the former Treasurer and then Senior Vice President of RJR Nabisco from 1970 until 1987. In his opinion, the LBO "clearly undermines the fundamental premise of the [c]ompany's bargain with the bondholders, and the commitment that I believe the [c]ompany made to the bondholders ... I firmly believe that the company made commitments ... that require it to redeem [these bonds and notes] before paying out the value to the shareholders." Dowdle Aff. ¶¶ 4, 7.

    75
    III. DISCUSSION
    76

    At the outset, the Court notes that nothing in its evaluation is substantively altered by the speeches given or remarks made by RJR Nabisco executives, or the opinions of various individuals — what, for instance, former RJR Nabisco Treasurer Dowdle personally did or did not "firmly believe" the indentures meant. See supra, and generally Chappell, Dowdle and Howard Affidavits. The parol evidence rule bars plaintiffs from arguing that the speeches made by company executives [1515] prove defendants agreed or acquiesced to a term that does not appear in the indentures. See West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 540, 307 N.Y.S.2d 449, 452, 255 N.E.2d 709, 712 (1969) ("The rule in this State is well settled that the construction of a plain and unambiguous contract is for the Court to pass on, and that circumstances extrinsic to the agreement will not be considered when the intention of the parties can be gathered from the instrument itself.") In interpreting these contracts, this Court must be concerned with what the parties intended, but only to the extent that what they intended is evidenced by what is written in the indentures. See, e.g., Rodolitz v. Neptune Paper Products, Inc., 22 N.Y.2d 383, 386-7, 292 N.Y.S.2d 878, 881, 239 N.E.2d 628, 630 (1968); Raleigh Associates v. Henry, 302 N.Y. 467, 473, 99 N.E.2d 289 (1951).

    77

    The indentures at issue clearly address the eventuality of a merger. They impose certain related restrictions not at issue in this suit, but no restriction that would prevent the recent RJR Nabisco merger transaction. See supra at 1510 (discussion of Article 10). The indentures also explicitly set forth provisions for the adoption of new covenants, if such a course is deemed appropriate. See supra at 1510 (discussion of Article 9). While it may be true that no explicit provision either permits or prohibits an LBO, such contractual silence itself cannot create ambiguity to avoid the dictates of the parol evidence rule, particularly where the indentures impose no debt limitations.

    78

    Under certain circumstances, however, courts will, as plaintiffs note, consider extrinsic evidence to evaluate the scope of an implied covenant of good faith. See Valley National Bank v. Babylon Chrysler-Plymouth, Inc., 53 Misc.2d 1029, 1031-32, 280 N.Y.S.2d 786, 788-89 (Sup.Ct. Nassau), aff'd, 28 A.D.2d 1092, 284 N.Y.S.2d 849 (2d Dep't 1967) (Relying on custom and usage because "[w]hen a contract fails to establish the time for performance, the law implies that the act shall be done within a reasonable time ...").[19] However, the Second Circuit has established a different rule for customary, or boilerplate, provisions of detailed indentures used and relied upon throughout the securities market, such as those at issue. Thus, in Sharon Steel Corporation v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir.1982), Judge Winter concluded that

    79
    [b]oilerplate provisions are ... not the consequences of the relationship of particular borrowers and lenders and do not depend upon particularized intentions of the parties to an indenture. There are no adjudicative facts relating to the parties to the litigation for a jury to find and the meaning of boilerplate provisions is, therefore, a matter of law rather than fact. Moreover, uniformity in interpretation is important to the efficiency of capital markets ... Whereas participants in the capital market can adjust their affairs according to a uniform interpretation, whether it be correct or not as an initial proposition, the creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets ... Just such uncertainties would be created if interpretation of boilerplate provisions were submitted to juries sitting in every judicial district in the nation.
    80

    Id. at 1048. See also Morgan Stanley & Co. v. Archer Daniels Midland Co., 570 F.Supp. 1529, 1535-36 (S.D.N.Y.1983) (Sand, J.) ("[Plaintiff concedes that the legality of [the transaction at issue] would depend on a factual inquiry ... This case-by-case approach is problematic ... [Plaintiff's [1516] theory] appears keyed to the subjective expectations of the bondholders ... and reads a subjective element into what presumably should be an objective determination based on the language appearing in the bond agreement."); Purcell v. Flying Tiger Line, Inc., No. 82-3505, at 5, 8 (S.D. N.Y. Jan. 12, 1984) (CES) ("The Indenture does not contain any such limitation [as the one proposed by plaintiff].... In light of our holding that the Indenture unambiguously permits the transaction at issue in this case, we are precluded from considering any of the extrinsic evidence that plaintiff offers on this motion ... It would be improper to consider evidence as to the subjective intent, collateral representations, and either the statements or the conduct of the parties in performing the contract.") (citations omitted). Ignoring these principles, plaintiffs would have this Court vary what they themselves have admitted is "indenture boilerplate," P. Reply at 2, of "standard" agreements, P. Mem. at 14, to comport with collateral representations and their subjective understandings.[20]

    81
    A. Plaintiffs' Case Against the RJR Nabisco LBO:
    82
    1. Count One: The implied covenant:
    83

    In their first count, plaintiffs assert that

    84
    [d]efendant RJR Nabisco owes a continuing duty of good faith and fair dealing in connection with the contract [i.e., the indentures] through which it borrowed money from MetLife, Jefferson-Pilot and other holders of its debt, including a duty not to frustrate the purpose of the contracts to the debtholders or to deprive the debtholders of the intended object of the contracts — purchase of investment-grade securities.
    85
    In the "buy-out," the [c]ompany breaches the duty [or implied covenant] of good faith and fair dealing by, inter alia, destroying the investment grade quality of the debt and transferring that value to the "buy-out" proponents and to the shareholders.
    86

    Am.Comp. ¶¶ 34, 35. In effect, plaintiffs contend that express covenants were not necessary because an implied covenant would prevent what defendants have now done.

    87

    A plaintiff always can allege a violation of an express covenant. If there has been such a violation, of course, the court need not reach the question of whether or not an implied covenant has been violated. [1517] That inquiry surfaces where, while the express terms may not have been technically breached, one party has nonetheless effectively deprived the other of those express, explicitly bargained-for benefits. In such a case, a court will read an implied covenant of good faith and fair dealing into a contract to ensure that neither party deprives the other of "the fruits of the agreement." See, e.g., Greenwich Village Assoc. v. Salle, 110 A.D.2d 111, 115, 493 N.Y.S.2d 461, 464 (1st Dep't 1985). See also Van Gemert v. Boeing Co., 553 F.2d 812, 815 ("Van Gemert II") (2d. Cir.1977) Such a covenant is implied only where the implied term "is consistent with other mutually agreed upon terms in the contract." Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329, 335, 514 N.Y.S.2d 209, 212, 506 N.E.2d 919, 922 (1987). In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation "`which would be inconsistent with other terms of the contractual relationship.'" Id. (citation omitted). Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits. See Collard v. Incorporated Village of Flower Hill, 75 A.D.2d 631, 632, 427 N.Y. S.2d 301, 302 (2d Dep't 1980). As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement. See, e.g., Wakefield v. Northern Telecom, Inc., 769 F.2d 109, 112 (2d Cir.1985) (Winter, J.)

    88

    In contracts like bond indentures, "an implied covenant ... derives its substance directly from the language of the Indenture, and `cannot give the holders of Debentures any rights inconsistent with those set out in the Indenture.' [Where] plaintiffs' contractual rights [have not been] violated, there can have been no breach of an implied covenant." Gardner & Florence Call Cowles Foundation v. Empire Inc., 589 F.Supp. 669, 673 (S.D.N.Y.1984), vacated on procedural grounds, 754 F.2d 478 (2d Cir.1985) (quoting Broad v. Rockwell, 642 F.2d 929, 957 (5th Cir.) (en banc), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981)) (emphasis added).

    89

    Thus, in cases like Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975) ("Van Gemert I"), and Pittsburgh Terminal Corp. v. Baltimore & Ohio Ry. Co., 680 F.2d 933 (3d Cir.), cert. denied, 459 U.S. 1056, 103 S.Ct. 475, 74 L.Ed.2d 621 (1982) — both relied upon by plaintiffs — the courts used the implied covenant of good faith and fair dealing to ensure that the bondholders received the benefit of their bargain as determined from the face of the contracts at issue. In Van Gemert I, the plaintiff bondholders alleged inadequate notice to them of defendant's intention to redeem the debentures in question and hence an inability to exercise their conversion rights before the applicable deadline. The contract itself provided that notice would be given in the first place. See, e.g., id. at 1375 ("A number of provisions in the debenture, the Indenture Agreement, the prospectus, the registration statement ... and the Listing Agreement ... dealt with the possible redemption of the debentures ... and the notice debenture-holders were to receive ..."). Faced with those provisions, defendants in that case unsurprisingly admitted that the indentures specifically required the company to provide the bondholders with notice. See id. at 1379. While defendant there issued a press release that mentioned the possible redemption of outstanding convertible debentures, that limited release did not "mention even the tentative dates for redemption and expiration of the conversion rights of debenture holders." Id. at 1375. Moreover, defendant did not issue any general publicity or news release. Through an implied covenant, then, the court fleshed out the full extent of the more skeletal right that appeared in the contract itself, and thus protected plaintiff's bargained-for right of conversion.[21] As the court observed,

    90
    [1518] What one buys when purchasing a convertible debenture in addition to the debt obligation of the company ... is principally the expectation that the stock will increase sufficiently in value that the conversion right will make the debenture worth more than the debt ... Any loss occurring to him from failure to convert, as here, is not from a risk inherent in his investment but rather from unsatisfactory notification procedures.
    91

    Id. at 1385 (emphasis added, citations omitted).[22] I also note, in passing, that Van Gemert I presented the Second Circuit with "less sophisticated investors." Id. at 1383. Similarly, the court in Pittsburgh Terminal applied an implied covenant to the indentures at issue because defendants there "took steps to prevent the Bondholders from receiving information which they needed in order to receive the fruits of their conversion option should they choose to exercise it." Pittsburgh Terminal, 680 F.2d at 941 (emphasis added).

    92

    The appropriate analysis, then, is first to examine the indentures to determine "the fruits of the agreement" between the parties, and then to decide whether those "fruits" have been spoiled — which is to say, whether plaintiffs' contractual rights have been violated by defendants.

    93

    The American Bar Foundation's Commentaries on Indentures ("the Commentaries"), relied upon and respected by both plaintiffs and defendants, describes the rights and risks generally found in bond indentures like those at issue:

    94
    The most obvious and important characteristic of long-term debt financing is that the holder ordinarily has not bargained for and does not expect any substantial gain in the value of the security to compensate for the risk of loss ... [T]he significant fact, which accounts in part for the detailed protective provisions of the typical long-term debt financing instrument, is that the lender (the purchaser of the debt security) can expect only interest at the prescribed rate plus the eventual return of the principal. Except for possible increases in the market value of the debt security because of changes in interest rates, the debt security will seldom be worth more than the lender paid for it ... It may, of course, become worth much less. Accordingly, the typical investor in a long-term debt security is primarily interested in every reasonable assurance that the principal and interest will be paid when due.... Short of bankruptcy, the debt security holder can do nothing to protect himself against actions of the borrower which jeopardize its ability to pay the debt unless he ... establishes his rights through contractual provisions set forth in the debt agreement or indenture.
    95

    Id. at 1-2 (1971) (emphasis added).

    96

    A review of the parties' submissions and the indentures themselves satisfies the Court that the substantive "fruits" guaranteed by those contracts and relevant to the present motions include the periodic and regular payment of interest and the eventual repayment of principal. See, e.g., Bradley Aff.Exh. L, § 3.1 ("The Issuer covenants ... that it will duly and punctually pay ... the principal of, and interest on, each of the Securities ... at the respective times and in the manner provided in such Securities ..."). According to a typical indenture, a default shall occur if the company either (1) fails to pay principal when due; (2) fails to make a timely sinking fund payment; (3) fails to pay within 30 days of the due date thereof any interest on the date; or (4) fails duly to observe or perform any of the express covenants or agreements set forth in the agreement. See, e.g., Brad.Aff.Exh.L, § 5.1.[23] Plaintiffs' [1519] Amended Complaint nowhere alleges that RJR Nabisco has breached these contractual obligations; interest payments continue and there is no reason to believe that the principal will not be paid when due.[24]

    97

    It is not necessary to decide that indentures like those at issue could never support a finding of additional benefits, under different circumstances with different parties. Rather, for present purposes, it is sufficient to conclude what obligation is not covered, either explicitly or implicitly, by these contracts held by these plaintiffs. Accordingly, this Court holds that the "fruits" of these indentures do not include an implied restrictive covenant that would prevent the incurrence of new debt to facilitate the recent LBO. To hold otherwise would permit these plaintiffs to straightjacket the company in order to guarantee their investment. These plaintiffs do not invoke an implied covenant of good faith to protect a legitimate, mutually contemplated benefit of the indentures; rather, they seek to have this Court create an additional benefit for which they did not bargain.

    98

    Although the indentures generally permit mergers and the incurrence of new debt, there admittedly is not an explicit indenture provision to the contrary of what plaintiffs now claim the implied covenant requires. That absence, however, does not mean that the Court should imply into those very same indentures a covenant of good faith so broad that it imposes a new, substantive term of enormous scope. This is so particularly where, as here, that very term — a limitation on the incurrence of additional debt — has in other past contexts been expressly bargained for; particularly where the indentures grant the company broad discretion in the management of its affairs, as plaintiffs admit, P.Mem. at 35; particularly where the indentures explicitly set forth specific provisions for the adoption of new covenants and restrictions, see, e.g., Bradley Aff.Exh.L, § 9.1(c); and especially where there has been no breach of the parties' bargained-for contractual rights on which the implied covenant necessarily is based. While the Court stands ready to employ an implied covenant of good faith to ensure that such bargained-for rights are performed and upheld, it will not, however, permit an implied covenant to shoehorn into an indenture additional terms plaintiffs now wish had been included. See also Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.) (en banc) (applying New York law), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981) (finding no liability pursuant to an implied covenant where the terms of the indenture, as bargained for, were enforced).[25]

    99

    [1520] Plaintiffs argue in the most general terms that the fundamental basis of all these indentures was that an LBO along the lines of the recent RJR Nabisco transaction would never be undertaken, that indeed no action would be taken, intentionally or not, that would significantly deplete the company's assets. Accepting plaintiffs' theory, their fundamental bargain with defendants dictated that nothing would be done to jeopardize the extremely high probability that the company would remain able to make interest payments and repay principal over the 20 to 30 year indenture term — and perhaps by logical extension even included the right to ask a court "to make sure that plaintiffs had made a good investment." Gardner, 589 F.Supp. at 674. But as Judge Knapp aptly concluded in Gardner, "Defendants ... were under a duty to carry out the terms of the contract, but not to make sure that plaintiffs had made a good investment. The former they have done; the latter we have no jurisdiction over." Id. Plaintiffs' submissions and MetLife's previous undisputed internal memoranda remind the Court that a "fundamental basis" or a "fruit of an agreement" is often in the eye of the beholder, whose vision may well change along with the market, and who may, with hindsight, imagine a different bargain than the one he actually and initially accepted with open eyes.

    100

    The sort of unbounded and one-sided elasticity urged by plaintiffs would interfere with and destabilize the market. And this Court, like the parties to these contracts, cannot ignore or disavow the marketplace in which the contract is performed. Nor can it ignore the expectations of that market — expectations, for instance, that the terms of an indenture will be upheld, and that a court will not, sua sponte, add new substantive terms to that indenture as it sees fit.[26] The Court has no reason to believe that the market, in evaluating bonds such as those at issue here, did not discount for the possibility that any company, even one the size of RJR Nabisco, might engage in an LBO heavily financed by debt. That the bonds did not lose any of their value until the October 20, 1988 announcement of a possible RJR Nabisco LBO only suggests that the market had theretofore evaluated the risks of such a transaction as slight.

    101

    The Court recognizes that the market is not a static entity, but instead involves what plaintiffs call "evolving understanding[s]." P.Opp. at 21. Just as the growing prevalence of LBO's has helped change certain ground rules and expectations in the field of mergers and acquisitions, so too it has obviously affected the bond market, a fact no one disputes. See, e.g., Chappell Dep. at 136 ("I think we would have been extremely naive not to understand what was happening in the marketplace."). To support their argument that defendants have violated an implied [1521] covenant, plaintiffs contend that, since the October 20, 1988 announcement, the bond market has "stopped functioning." Tr. at 9. They argue that if they had "sold and abandoned the market [before October 20, 1988], the market, if everyone had the same attitude, would have disappeared." Tr. at 15. What plaintiffs term "stopped functioning" or "disappeared," however, are properly seen as natural responses and adjustments to market realities. Plaintiffs of course do not contend that no new issues are being sold, or that existing issues are no longer being traded or have become worthless.

    102

    To respond to changed market forces, new indenture provisions can be negotiated, such as provisions that were in fact once included in the 8.9 percent and 10.25 percent debentures implicated by this action. New provisions could include special debt restrictions or change-of-control covenants. There is no guarantee, of course, that companies like RJR Nabisco would accept such new covenants; parties retain the freedom to enter into contracts as they choose. But presumably, multi-billion dollar investors like plaintiffs have some say in the terms of the investments they make and continue to hold. And, presumably, companies like RJR Nabisco need the infusions of capital such investors are capable of providing.

    103

    Whatever else may be true about this case, it certainly does not present an example of the classic sort of form contract or contract of adhesion often frowned upon by courts. In those cases, what motivates a court is the strikingly inequitable nature of the parties' respective bargaining positions. See generally, Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv.L.Rev. 1173 (1982). Plaintiffs here entered this "liquid trading market," P.Mem. at 17, with their eyes open and were free to leave at any time. Instead they remained there notwithstanding its well understood risks.

    104

    Ultimately, plaintiffs cannot escape the inherent illogic of their argument. On the one hand, it is undisputed that investors like plaintiffs recognized that companies like RJR Nabisco strenuously opposed additional restrictive covenants that might limit the incurrence of new debt or the company's ability to engage in a merger.[27] Furthermore, plaintiffs argue that they had no choice other than to accept the indentures as written, without additional restrictive covenants, or to "abandon" the market. Tr. at 14-15.

    105

    Yet on the other hand, plaintiffs ask this Court to imply a covenant that would have just that restrictive effect because, they contend, it reflects precisely the fundamental assumption of the market and the fundamental basis of their bargain with defendants. If that truly were the case here, it is difficult to imagine why an insistence on that term would have forced the plaintiffs to abandon the market. The Second Circuit has offered a better explanation: "[a] promise by the defendant should be implied only if the court may rightfully assume that the parties would have included it in their written agreement had their attention been called to it ... Any such assumption in this case would be completely unwarranted." Neuman v. Pike, 591 F.2d 191, 195 (2d Cir.1979) (emphasis added, citations omitted).

    106

    In the final analysis, plaintiffs offer no objective or reasonable standard for a court to use in its effort to define the sort of actions their "implied covenant" would permit a corporation to take, and those it would not.[28] Plaintiffs say only that investors like themselves rely upon the "skill" and "good faith" of a company's board and management, see, e.g., P.Mem. at 35, and that their covenant would prevent the company [1522] from "destroy[ing] ... the legitimate expectations of its long-term bondholders." Id. at 54. As is clear from the preceding discussion, however, plaintiffs have failed to convince the Court that by upholding the explicit, bargained-for terms of the indenture, RJR Nabisco has either exhibited bad faith or destroyed plaintiffs' legitimate, protected expectations.

    107

    Plaintiffs argue that defendants have sought to blame plaintiffs themselves for whatever losses they may have incurred. Yet this Court need not address whether plaintiffs are at fault, or whether they assumed a risk in any tort sense, or whether they should never have agreed to exchange the specific debt provisions in at least two of the covenants at issue for alternative benefits and public covenants. Instead, it concludes that courts are properly reluctant to imply into an integrated agreement terms that have been and remain subject to specific, explicit provisions, where the parties are sophisticated investors, well versed in the market's assumptions, and do not stand in a fiduciary relationship with one another.

    108

    It is also not to say that defendants were free willfully or knowingly to misrepresent or omit material facts to sell their bonds. Relief on claims based on such allegations would of course be available to plaintiffs, if appropriate[29] — but those claims properly sound in fraud, and come with requisite elements. Plaintiffs also remain free to assert their claims based on the fraudulent conveyance laws, which similarly require specific proof.[30] Those burdens cannot be avoided by resorting to an overbroad, superficially appealing, but legally insufficient, implied covenant of good faith and fair dealing.

    109
    2. Count Five: In Equity:
    110

    Count Five substantially restates and realleges the contract claims advanced in Count I. Compare, e.g., Am.Comp. ¶¶ 33, 35 ("The transaction contradicts the premise of the investment grade market and invalidates the blue chip rating that [RJR Nabisco] solicited and took the benefit from.... In the `buy-out,' [RJR Nabisco] breaches the duty of good faith and fair dealing ...") with Am.Comp. ¶¶ 51-52 ("The `buy-out' was not contemplated at the time the debt was issued, contradicts the premise of the investment grade ratings that RJR Nabisco actively solicited and received, and is inconsistent with the understandings of the market.... The `buy-out' ... is contrary to the implied representations made by RJR Nabisco ... that it would act consistently with its obligations of good faith and fair dealing.") Along with these repetitions, plaintiffs blend in allegations that the transaction "frustrates the commercial purpose" of the parties, under "circumstances [that] are outrageous, and ... it would [therefore] be unconscionable to allow the `buy-out' to proceed ..." Id. ¶¶ 52-53. Those very issues — frustration of purpose and unconscionability — are equally matters of contract law, of course, and plaintiffs could just as easily have advanced them in Count I. Indeed, to some extent plaintiffs did advance these claims in that Count. See, e.g., Am.Comp. ¶ 34 ("RJR Nabisco owes a continuing duty ... not to frustrate the purpose of the contracts ..."). For present purposes, it makes no difference how plaintiffs characterize their arguments.[31] Their equity claims cannot survive [1523] defendants' motion for summary judgment.

    111

    In their papers, plaintiffs variously attempt to justify Count V as being based on unjust enrichment, frustration of purpose, an alleged breach of something approaching a fiduciary duty, or a general claim of unconscionability. Each claim fails. First, as even plaintiffs recognize, an unjust enrichment claim requires a court first to find that "the circumstances [are] such that in equity and good conscience the defendant should make restitution." See, e.g., Chase Manhattan Bank v. Banque Intra, S.A., 274 F.Supp. 496, 499 (S.D.N.Y.1967); P.Mem. at 56. Plaintiffs have not alleged a violation of a single explicit term of the indentures at issue, and on the facts alleged this Court has determined that an implicit covenant of good faith and fair dealing has not been violated. Under these circumstances, this Court concludes that defendants need not, "in equity and good conscience," make restitution.

    112

    Second, in support of their motions plaintiffs claim frustration of purpose. Yet even resolving all ambiguities and drawing all reasonable inferences in plaintiffs' favor, their claim cannot stand. A claim of frustration of purpose has three elements:

    113
    First, the purpose that is frustrated must have been a principal purpose of that party in making the contract.... The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Second, the frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract. Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.
    114

    Restatement (Second) of Contracts, 265 comment a (1981). In The Murphy Door Bed Co., Inc. v. Interior Sleep Systems, Inc., 874 F.2d 95 (2d Cir.1989), defendants argued that the contract was void ab initio since its purpose, allegedly the conveyance of trademark rights, was frustrated because the mark was generic. However, the Second Circuit concluded, "there is no indication that a transfer of trademark rights was the essence of the distributorship agreement ..." Id. at 102-03. Similarly, there is no indication here that an alleged refusal to incur debt to facilitate an LBO was the "essence" or "principal purpose" of the indentures, and no mention of such an alleged restriction is made in the agreements. Further, while plaintiffs' bonds may have lost some of their value, "[d]ischarge under this doctrine has been limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party." United States v. General Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir.1974) (emphasis added). That is not the case here. Moreover, "the frustration of purpose defense is not available where, as here, the event which allegedly frustrated the purpose of the contract ... was clearly foreseeable." VJK Productions v. Friedman/Meyer Productions, 565 F.Supp. 916 (S.D.N.Y.1983) (citation omitted). Faced with MetLife's internal memoranda, see, e.g., Bradley Resp.Aff.Exh. A, plaintiffs cannot but admit that "MetLife has been concerned about `buy-outs' for several years." P.Opp. at 5. Nor do plaintiffs provide any reasonable basis for believing that a party as sophisticated as Jefferson-Pilot was any less cognizant of the market around it.[32]

    115

    [1524] Third, plaintiffs advance a claim that remains based, their assertions to the contrary notwithstanding, on an alleged breach of a fiduciary duty.[33] Defendants go to great lengths to prove that the law of Delaware, and not New York, governs this question. Defendants' attempt to rely on Delaware law is readily explained by even a cursory reading of Simons v. Cogan, 549 A.2d 300, 303 (Del.1988), the recent Delaware Supreme Court ruling which held, inter alia, that a corporate bond "represents a contractual entitlement to the repayment of a debt and does not represent an equitable interest in the issuing corporation necessary for the imposition of a trust relationship with concomitant fiduciary duties." Before such a fiduciary duty arises, "an existing property right or equitable interest supporting such a duty must exist." Id. at 304. A bondholder, that court concluded, "acquires no equitable interest, and remains a creditor of the corporation whose interests are protected by the contractual terms of the indenture." Id. Defendants argue that New York law is not to the contrary, but the single Supreme Court case they cite — a case decided over fifty years ago that was not squarely presented with the issue addressed by the Simons court — provides something less than dispositive support. See Marx v. Merchants' National Properties, Inc., 148 Misc. 6, 7, 265 N.Y.S. 163, 165 (1933). For their part, plaintiffs more convincingly demonstrate that New York law applies than that New York law recognizes their claim.[34]

    116

    Regardless, this Court finds Simons persuasive, and believes that a New York court would agree with that conclusion. In the venerable case of Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928), then Chief Judge Cardozo explained the obligations imposed on a fiduciary, and why those obligations are so special and rare:

    117
    Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market [1525] place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty ... Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.
    118

    Id. at 464 (citation omitted). Before a court recognizes the duty of a "punctilio of an honor the most sensitive," it must be certain that the complainant is entitled to more than the "morals of the market place," and the protections offered by actions based on fraud, state statutes or the panoply of available federal securities laws. This Court has concluded that the plaintiffs presently before it — sophisticated investors who are unsecured creditors — are not entitled to such additional protections.

    119

    Equally important, plaintiffs' position on this issue — that "A Company May Not Deliberately Deplete its Assets to the Injury of its Debtholders," P.Mem. at 42 — provides no reasonable or workable limits, and is thus reminiscent of their implied covenant of good faith. Indeed, many indisputably legitimate corporate transactions would not survive plaintiffs' theory. With no workable limits, plaintiffs' envisioned duty would extend equally to trade creditors, employees, and every other person to whom the defendants are liable in any way. Of all such parties, these informed plaintiffs least require a Court's equitable protection; not only are they willing participants in a largely impersonal market, but they also possess the financial sophistication and size to secure their own protection.

    120

    Finally, plaintiffs cannot seriously allege unconscionability, given their sophistication and, at least judging from this action, the sophistication of their legal counsel as well. Under the undisputed facts of this case, see supra at 13-20, this Court finds no actionable unconscionability.

    121
    B. Defendants' Remaining Motions:
    122

    Defendants attack plaintiffs' fraud claims on various fronts. The Court has determined that repleading is necessary. In drafting a Second Amended Complaint, plaintiffs must bear in mind the Court's conclusions below.

    123
    1. Rule 10b-5:
    124

    Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(c) Count III, the Rule 10b-5 counts, as to those six debt issues purchased by plaintiffs prior to September 1987, which is when plaintiffs allege in their complaint that defendants first began to develop an LBO plan. Plaintiffs admit that Rule 10b-5 is limited to purchases or sales during the period of non-disclosure or misrepresentation. See Pross v. Katz, 784 F.2d 455 (2d Cir.1986). The rule does not afford relief to those who forgo a purchase or sale and instead merely hold in reliance of a nondisclosure or misrepresentation. See, e.g., Bonime v. Doyle, 416 F.Supp. 1372, 1387 (S.D.N.Y.1976), aff'd, 556 F.2d 554 (2d Cir.), cert. denied, 434 U.S. 924, 98 S.Ct. 401, 54 L.Ed.2d 281 (1977). The first, second, third, fifth, seventh and eighth securities listed in the Amended Complaint fail to satisfy this requirement, at least on the facts as presently pleaded.[35] Accordingly, the Court grants defendants' motion on Count III as to those issues. Plaintiffs correctly note, however, that the disclosure-related common law fraud claims are not restricted to purchases and sales. See Weinberger v. Kendrick, 698 F.2d 61, 78 (2d Cir.1982) (Friendly, J.), cert. denied, 464 U.S. 818, 104 S.Ct. 77, 78 L.Ed.2d 89 (1983); Continental Insurance Co. v. Mercadante, 222 A.D. 181, 186, 225 N.Y.S. 488, 494 (1st Dep't 1927). Thus, the Court denies defendants' motion to dismiss Count II on this basis.

    125
    2. Rule 9(b):
    126

    The parties are well aware of the purposes and requirements of Rule 9(b), mandating [1526] particularity in pleading fraud. Those principles have often been reaffirmed by the Second Circuit. See, e.g., Stern v. Leucadia National Corp., 844 F.2d 997 (2d Cir.), cert. denied, ___ U.S. ___, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988); Di Vittorio v. Equidyne Extractive Industries, 822 F.2d 1242 (2d Cir.1987). As it now stands, the Amended Complaint cannot not on its own survive scrutiny under that rule. Plaintiffs must heed the guidelines established by the controlling Second Circuit authority. On previous occasions, this Court has left little doubt about what it expects to see in a complaint that pleads fraud. It will not take this opportunity to repeat itself and instead refers the parties to those opinions. See, e.g., Philan v. Hall, 712 F.Supp. 339 (S.D.N.Y.1989). The Court notes that the complaint currently before it was filed even before the January 12 close of the expedited discovery period for these motions. Moreover, since January additional discovery has taken place. Today's ruling, of course, should not be misperceived as an invitation to submit a Second Amended Complaint indiscriminately larded with factual recitations and legal boilerplate. The Court has no reason to believe that plaintiffs, represented by skilled counsel, intend to follow that unwise course.

    127
    III. CONCLUSION
    128

    For the reasons set forth above, the Court grants defendants summary judgment on Counts I and V, judgment on the pleadings for certain of the securities at issue in Count III, and dismisses for want of requisite particularity Counts II, III, and IX. All remaining motions made by the parties are denied in all respects. Plaintiffs shall have twenty days to replead.

    129

    SO ORDERED.

    130

    [1] A leveraged buy-out occurs when a group of investors, usually including members of a company's management team, buy the company under financial arrangements that include little equity and significant new debt. The necessary debt financing typically includes mortgages or high risk/high yield bonds, popularly known as "junk bonds." Additionally, a portion of this debt is generally secured by the company's assets. Some of the acquired company's assets are usually sold after the transaction is completed in order to reduce the debt incurred in the acquisition.

    131

    [2] On December 7, 1989, this Court agreed to accept as related all actions growing out of the RJR Nabisco LBO. On January 4, 1989, the Court consolidated with the present suit an action brought by three KKR affiliates — RJR Holdings Corp., RJR Holdings Group, Inc., and RJR Acquisition Corporation — against the Jefferson-Pilot Life Insurance Company. KKR established those entities to effect the buyout of RJR Nabisco. Throughout this Opinion, these entities and their parent will be referred to collectively as "KKR." When this action was filed, those entities and KKR were not formally named as parties. However, in its January 4 Order, the Court granted KKR's request to participate fully in the present action. Pursuant to that Order, KKR filed joint briefs with RJR Nabisco and participated in oral argument before the Court on February 16, 1989.

    132

    [3] The Court set January 12, 1989 as the close of the expedited discovery period for these motions, which were filed the next day.

    133

    [4] Agencies like Standard & Poor's and Moody's generally rate bonds in two broad categories: investment grade and speculative grade. Standard & Poor's rates investment grade bonds from "AAA" to "BBB." Moody's rates those bonds from "AAA" to "Baa3." Speculative grade bonds are rated either "BB" and lower, or "Ba1" and lower, by Standard & Poor's and Moody's, respectively. See, e.g., Standard and Poor's Debt Rating Criteria at 10-11. No one disputes that, subsequent to the announcement of the LBO, the RJR Nabisco bonds lost their "A" ratings.

    134

    [5]In their papers, plaintiffs had argued that the LBO "should be Preliminarily Enjoined Unless Provision is Made to Ensure That Funds for Redemption will be Available after Trial." P.Mem. at 59 (capitalization in original). The preliminary injunction requested "is not intended to stop the transaction, but only to enjoin any substantial encumbrance on the [c]ompany until the [c]ompany posts a bond or otherwise provides security to ensure its ability to redeem Plaintiffs' bonds after trial." P.Mem. at 60.

    135

    References throughout this Opinion are as follows: Transcript of February 16, 1989 Argument ("Tr."); Amended Complaint ("Am. Comp."); [Name of affiant] Affidavit ("[Name of affiant] Aff."); [Name of affiant] Response Affidavit ("[Name of affiant] Resp.Aff."); [Name of affiant] Reply Affidavit ("[Name of affiant] Reply Aff."); Exhibit ("Exh."); Plaintiffs' Exhibit ("P.Exh."); [Name of deponent] Deposition ("[Name of deponent] Dep."); Plaintiffs' Memorandum in Support of Summary Judgment ("P.Mem."); Plaintiffs' Answering Brief [in Opposition to Defendants' Motions] ("P.Opp."); Plaintiffs' Reply Brief ("P. Reply"); Defendants' Memorandum in Support of their Motion for Judgment on the Pleadings [and Partial Summary Judgment and Partial Dismissal] ("D.Mem."); Defendants' Memorandum in Opposition to Plaintiffs' Motion ("D.Opp."); Defendants' Reply Memorandum ("D. Reply").

    136

    [6] Count I alleges a breach of an implied covenant of good faith and fair dealing (against defendant RJR Nabisco); Count II alleges fraud (against both defendants); Count III alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (against both defendants); Count IV alleges violations of Section 11 of the 1933 Act (on behalf of plaintiff Jefferson-Pilot Life Insurance Company against both defendants); Count V is labeled "In Equity," and is asserted against both defendants; Count VI alleges breach of duties (against defendant Johnson); Count VII alleges tortious interference with property (against Johnson); Count VIII alleges tortious interference with contract (against Johnson); and Count IX alleges a violation of the fraudulent conveyance laws (against RJR Nabisco).

    137

    [7] Johnson has not filed memoranda in support of his motions but instead incorporates the arguments set forth in the papers filed by RJR Nabisco and KKR. Johnson has not moved with respect to Counts IV, VI, VII or VIII. Counts VI, VII and VIII apply only to Johnson. Count IV is the only count with respect to which RJR Nabisco has not moved.

    138

    [8] On February 9, 1989, KKR completed its tender offer for roughly 74 percent of RJR Nabisco's common stock (of which approximately 97% of the outstanding shares were tendered) and all of its Series B Cumulative Preferred Stock (of which approximately 95% of the outstanding shares were tendered). Approximately $18 billion in cash was paid out to these stockholders. KKR acquired the remaining stock in the late April merger through the issuance of roughly $4.1 billion of pay-in-kind exchangeable preferred stock and roughly $1.8 billion in face amount of convertible debentures. See Bradley Reply Aff. ¶ 2.

    139

    [9] For the purposes of this Opinion, the terms "bonds," "debentures," and "notes" will be used interchangeably. Any distinctions among these terms are not relevant to the present motions.

    140

    [10] Both sides agree that New York law controls this Court's interpretation of the indentures, which contain explicit designations to that effect. See, e.g., P.Mem. at 26; D. Mem at 15 n. 23. The indentures themselves provide that they "shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State, except as may otherwise be required by mandatory provisions of law." Bradley Aff., Exh. L, § 12.8.

    141

    [11] While nine securities are at issue in this suit, the parties agree — and the Court's review confirms — that the separate indentures mirror one another in all important respects, with one exception that is discussed herein. Indeed, plaintiffs have submitted a helpful Addendum in which they outline what they term "[t]ypical RJR Nabisco [i]ndenture [t]erms." SeeP. Reply, Addendum.

    142

    Thus, the prospectus statement quoted above has its counterpart in each of the other prospectuses. See Bradley Aff. ¶ 9.

    143

    [12] For the following discussion, see generally, Indenture dated as of October 15, 1982, between R.J. Reynolds Industries, Inc., Issuer, and Bankers Trust Company, Trustee, included as Bradley Aff.Exh. L, and Plaintiffs' Exh. 1.

    144

    [13] The remaining Articles are not relevant to the motions currently before the Court. Article One contains definitions; Article Two contains mechanical terms regarding, for instance, the issuance and transfer of the securities; Article Four concerns such mechanical matters as securityholders' lists and annual reports; Article Six addresses the rights and responsibilities of the Trustee; Article Seven contains mechanical provisions concerning the securityholders; Article Eight concerns procedural matters such as securityholders' meetings and consents; Article Eleven deals with the satisfaction and discharge of the indenture; Article Twelve sets forth various miscellaneous provisions; and Article Thirteen includes provisions regarding the redemption of securities and sinking funds. See, e.g., Bradley Aff.Exh. L.

    145

    [14] MetLife itself began investing in LBOs as early as 1980. See MetLife Special Projects Memorandum, dated June 17, 1989, attached as Bradley Aff.Exh. V, at 1 ("[MetLife's] history of investing in leveraged buyout transactions dates back to 1980; and through 1984, [MetLife] reviewed a large number of LBO investment opportunities presented to us by various investment banking firms and LBO specialists. Over this five-year period, [MetLife] invested, on a direct basis, approximately $430 million to purchase debt and equity securities in 10 such transactions ...").

    146

    [15] During discovery, MetLife produced from its files an article that appeared in The New York Timeson January 7, 1986. The article, like the memoranda discussed above, reviewed the position of bondholders like MetLife and Jefferson-Pilot:

    147

    "Debt-financed acquisitions, as well as those defensive actions to thwart takeovers, have generally resulted in lower bond ratings ... Of course, a major problem for debtholders is that, compared with shareholders, they have relatively little power over management decisions. Their rights are essentially confined to the covenants restricting, say, the level of debt a company can accrue."

    148

    Bradley Reply Aff.Exh. H (emphasis added).

    149

    [16] See Bradley Resp.Aff.Exh. F. That exhibit is an August 5, 1988 letter from the New York law firm of Kaye, Scholer, Fierman, Hays & Handler. A partner at that firm sent the letter to "Indenture Group Members," including MetLife, who participated in the Institutional Bondholders' Rights Association ("the IBRA"). The "Limitations on Shareholders' Payments" provision appears in a draft IBRA model indenture. See Bradley Resp.Aff. ¶¶ 3, 7.

    150

    [17] Due to a typographical error, the Amended Complaint contains two paragraphs numbered "17." The passage above refers to the first such paragraph.

    151

    [18] See, e.g., Address by F. Ross Johnson, November 12, 1987, P.Exh. 8, at 5 ("Our strong balance sheet is a cornerstone of our strategies. It gives us the resources to modernize facilities, develop new technologies, bring on new products, and support our leading brands around the world."); Remarks of Edward J. Robinson, Executive Vice President and Chief Financial Officer, February 15, 1988, P.Exh. 6, at 1 ("RJR Nabisco's financial strategy is ... to enhance the strength of the balance sheet by reducing the level of debt as well as lowering the cost of existing debt."); Remarks by Dr. Robert J. Carbonell, Vice Chairman of RJR Nabisco, June 3, 1987, P.Exh. 10, at 5 ("We will not sacrifice our longer-term health for the sake of short term heroics.").

    152

    [19] In support of this proposition, plaintiffs also rely on Reback v. Story Productions, Inc., 15 Misc.2d 681, 181 N.Y.S.2d 980, modified and aff'd, 9 A.D.2d 880, 193 N.Y.S.2d 520 (1st Dep't 1959). The court in that case, however, was presented with an ambiguous written agreement. See 181 N.Y.S.2d at 983. Plaintiffs similarly rely on Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975) ("Van Gemert I"). In that case, however, the right asserted was addressed by an express provision which provided a framework for determining the scope and effect of the implied covenant. See infra.

    153

    [20] To a certain extent, this discussion is academic. Even if the Court did consider the extrinsic evidence offered by plaintiffs, its ultimate decision would be no different. Based on that extrinsic evidence, plaintiffs attempt to establish that an implied covenant of good faith is necessary to protect the benefits of their agreements. That inquiry necessarily asks the Court to determine whether the existing contractual terms should be construed to preclude defendants from engaging in an LBO along the lines of the recently completed transaction. However, even evaluating all facts—such as the public statements made by company executives—in the light most favorable to plaintiffs, these plaintiffs fail as a matter of law to establish that the purported "fundamental basis" of their bargain with defendants created a contractual obligation on the part of the defendants not to engage in an LBO. It is first worth noting that plaintiffs have quoted selectively from certain speeches and remarks made by RJR Nabisco executives; in some respects, those public statements are more equivocal than plaintiffs would have this Court believe. See, e.g., P.Exh. 3 at 25 ("[W]e believe our strong balance sheet and our debt capacity ... provide us with the flexibility to pursue any conceivable strategy or financial option we choose.") More important, those representations are improperly raised under the rubric of an implied covenant of good faith when they cannot properly or reasonably be construed as evidencing a binding agreement or acquiescence by defendants to substantive restrictive covenants. Moreover, nothing like the mutual understanding plaintiffs now advance has been shown; in fact, as far as these parties are concerned, quite the opposite is true. See infraat 39-40. Thus, as a matter of law, and accepting all extrinsic evidence offered, the "implied covenant of good faith" does not serve these plaintiffs in the way they represent. As explained more fully below, by relying on extrinsic evidence and the familiar implied covenant of good faith, plaintiffs do not seek to protect an existing contractual right; they seek to create a new one, and thus to obtain a better bargain than originally agreed upon. Therefore, even if the parole evidence rule did not block plaintiffs' path, their course would not be followed.

    154

    The parole evidence rule of course does not bar descriptions of either the background of this suit or market realities consistent with the contracts at issue.

    155

    [21] Since newspaper notice, for instance, was promised in the indenture, the court used an implied covenant to ensure that meaningful, reasonable newspaper notice was provided. See id. at 1383.

    156

    [22] See also id. at 1383 ("An issuer of [convertible] debentures has a duty to give adequate notice either on the face of the debentures, ... or in some other way, of the notice to be provided in the event the company decides to redeem the debentures. Absent such advice as to the specific notice agreed upon by the issuer and the trustee for the debenture holders, the debenture holders' reasonable expectations as to notice should be protected.").

    157

    [23]Plaintiffs originally indicated that, depending on the Court's disposition of the instant motions, they might seek to amend their complaint to allege that "they are not equally and ratably secured under the [express terms of the] `negative pledge' clause of the indentures." P. Reply at 12 n. 7. On May 26, 1989, shortly before this Opinion was filed, the Court granted defendants' request to assert a counterclaim for a declaratory judgment that those "negative pledge" covenants have not been violated by the post-LBO financial structure of RJR Nabisco. This counterclaim was advanced in response to notices of default by plaintiffs based on matters not raised in the Amended Complaint.

    158

    The Court of course will not now determine whether an alleged implied covenant flowing from a "negative pledge" provision has been breached. That inquiry necessarily must follow the Court's determination of whether or not the "negative pledge" provision has been expressly breached.

    159

    [24] The Court here incorporates by reference its earlier discussion not only of plaintiffs' failure to demonstrate sufficiently a risk of irreparable harm on their motion for a preliminary injunction, but also defendants' proof concerning the financing of the LBO and the company's current equity base. See supra at 4-5. Consequently, the Court rejects plaintiffs' general assertion that the LBO "subjects existing debtholders to dramatically greater risk of non-payment, and the Company to a significant risk of insolvency." Am.Comp. ¶ 26. In brief, there is no implied covenant restricting any action that might subject plaintiffs' investment to greater risk of non-payment. What plaintiffs have failed to allege is that an interest or principal payment due them has not been paid, or that any other explicit contractual right has not been honored.

    160

    [25] The cases relied on by plaintiffs are not to the contrary. They invoke an implied covenant where it proves necessary to fulfill the explicit terms of an agreement, or to give meaning to ambiguous terms. See, e.g., Grad v. Roberts, 14 N.Y.2d 70, 248 N.Y.S.2d 633, 636, 198 N.E.2d 26, 28 (1964) (court relied on implied covenant to effect "performance of [an] option agreement according to its terms"); Zilg v. Prentice-Hall, Inc., 717 F.2d 671 (2d Cir.1983), cert. denied, 466 U.S. 938, 104 S.Ct. 1911, 80 L.Ed.2d 460 (1984). In Zilg, the Second Circuit first described a contract which, on its face, established the publisher's obligation to publish, advertise and publicize the book at issue. The court then determined that "the contract in question establishes a relationship between the publisher and author which implies an obligation upon the former to make certain [good faith] efforts in publishing a book it has accepted notwithstanding the clause which leaves the number of volumes to be printed and the advertising budget to the publisher's discretion." 717 F.2d at 679. In other words, the court there sought to ensure a meaningful fulfillment of the contract's express terms. See also Van Gemert I, supra; Pittsburgh Terminal, supra. In the latter two cases, the courts sought to protect the bondholders' express, bargained-for rights.

    161

    [26] Cf. Broad v. Rockwell, 642 F.2d at 943 ("Not least among the parties `who must comply with or refer to the indenture' are the members of the investing public and their investment advisors. A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets: uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another, focusing only on the business provisions of the issue ...") (citation omitted); Sharon Steel Corporation v. Chase Manhattan Bank, N.A., 691 F.2d. 1039, 1048 (2d Cir.1982) (Winter, J.) ("[U]niformity in interpretation is important to the efficiency of capital markets ... [T]he creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets.").

    162

    [27] See, e.g., MetLife Memorandum, dated August 20, 1982, attached as Bradley Reply Aff. Exh. D, at 3; MetLife Memorandum, dated November 1985, attached as Bradley Resp.Aff.Exh. A, at 8.

    163

    [28] Under plaintiffs' theory, bondholders might ask a court to prohibit a company like RJR Nabisco not only from engaging in an LBO, but also from entering a new line of business — with the attendant costs of building new physical plants and hiring new workers — or from acquiring new businesses such as RJR Nabisco did when it acquired Del Monte.

    164

    [29] The Court, of course, today takes no position on this issue.

    165

    [30] As noted elsewhere, plaintiffs can also allege violations of express terms of the indentures.

    166

    [31] For much the same reason, the Court rejects defendants' reliance on cases like In re Kemp & Beatley, Inc., 64 N.Y.2d 63, 70, 484 N.Y.S.2d 799, 803, 473 N.E.2d 1173, 1177 (1984), for "the ancient principle that equity jurisdiction will not lie when there exists a remedy at law." See, e.g., D.Mem. at 26. That case contemplated a classic equitable remedy — the dissolution of a corporation. And in that respect, it accurately set forth a rule of law; no court will, for instance, enter an injunction or order specific performance or dissolution if an adequate legal remedy remains available. The Court has already denied plaintiffs' request for an injunction. To the extent that Count V does in fact merely restate plaintiffs' prayer for injunctive relief — "it would be unconscionable to allow the `buy-out' to proceed until defendants make restitution to the debtholders," Am.Comp. ¶ 53 — it is of course inappropriate. As far as the Court can determine, however, and reading plaintiffs' "In Equity" Count as charitably as possible, the claims advanced by plaintiffs in Count V do not necessarily seek such an exclusive remedy. In general, remedies based on claims of unjust enrichment or frustration of purpose are certainly quantifiable and subject to money damages, and would thus support a legal remedy.

    167

    [32] At least one of Jefferson-Pilot's directors— Clemmie Dixon Spangler — not only was aware of the possibility of an LBO of a company like RJR Nabisco, but he also in fact proposed an LBO of RJR Nabisco itself, a fact plaintiffs do not dispute. See Bradley Aff. ¶ 28, Exh. R. Spangler apparently never mentioned his unsolicited bid for RJR Nabisco to his fellow Jefferson-Pilot directors.

    168

    [33] While the Court reads plaintiffs' Amended Complaint and submissions as charitably as it can, it nonetheless has trouble with assertions such as this: "The right of unsecured creditors [like plaintiffs] against having the [c]ompany's assets stripped away is not in the nature of broad fiduciary duty, but rather a specific charge, founded in principles of equity and tort law of New York and other jurisdictions ..." P.Mem. at 51-52. Any such "charge" — beyond a potential fiduciary duty the Court now addresses, see infra — is not, however, so "specific" as to have been stated with any clarity by any one court. Indeed, cases relied upon by plaintiffs to support their "In Equity" Count focus on fraudulent schemes or conveyances. See, e.g., United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1295 (3d Cir.1986) (explaining lower court's findings in United States v. Gleneagles Investment Co., 565 F.Supp. 556 (M.D.Pa.1983)); Pepper v. Litton, 308 U.S. 295, 296, 60 S.Ct. 238, 84 L.Ed. 281 (1939) ("The findings by the District Court, amply supported by the evidence, reveal a scheme to defraud creditors ..."); Harff v. Kerkorian, 347 A.2d 133, 134 (Del.1975) (bondholders limited to contract claims in absence of "`fraud, insolvency, or a violation of a statute.'") (citation omitted). Moreover, if the Court here were confronted with an insolvent corporation, which is not the case, the company's officers and directors might become trustees of its assets for the protection of its creditors, among others. See, e.g., New York Credit Men's Adjustment Bureau v. Weiss, 278 A.D. 501, 503, 105 N.Y.S.2d 604, 606 (1st Dep't 1951), aff'd,305 N.Y. 1, 110 N.E.2d 397 (1953).

    169

    If not based on a fiduciary duty and the other equitable principles addressed by the Court, plaintiffs' claim, in effect, asks this Court to use its broad equitable powers to fashion a new cause of action that would adopt precisely the same arguments the Court rejected in Count I.

    170

    [34] The indenture provision designating New York law as controlling, see supra n. 10, would, one might assume, resolve at least the issue of the applicable law. In quoting the relevant indenture provision, however, plaintiffs omit the proviso "except as may otherwise be required by mandatory provisions of law." P.Mem. at 52, n. 46. Defendants, however, fail to argue that the internal affairs doctrine, which they assert dictates that Delaware law controls this question, is such a "mandatory provision of law." Nor do defendants respond to plaintiffs' reliance on First National City Bank v. Banco Para El Comercio, 462 U.S. 611, 621, 103 S.Ct. 2591, 2597, 77 L.Ed.2d 46 (1983) ("Different conflicts principles apply, however, where the rights of third parties external to the corporation are at issue.") (emphasis in original, citation omitted). Ultimately, the point is academic; as explained below, the Court would grant defendants summary judgment on this Count under either New York or Delaware law.

    171

    [35] It remains unclear how the fourth security listed in the Amended Complaint fares under the controlling law. If plaintiffs purchased portions of that issue prior to September 1987, then, of course, the Court's above holding applies equally here.

  • 3 Note on Statutory Rules and Equitable Principles Protecting Creditors

    As Gheewalla and MetLife show, creditors must mostly rely on explicit contractual provisions for protection. This note explains the little protection that is offered by statutory rules and equitable principles. How might these have helped bondholders in MetLife v. RJR Nabisco (or a tobacco tort claimant of RJR)? Should they have?

    Minimum Legal Capital

    In the old days, founding shareholders needed to provide some statutorily determined minimum amount of capital to a corporation. In some jurisdictions, that is still the case. In particular, Art. 6(1) of the Recast (2nd EU Company Law) Directive 2012/30/EU requires a minimum capital of €25,000 for European public limited liability companies. The Directive also prescribes elaborate provisions “for maintaining the capital, which constitutes the creditors' security, in particular by prohibiting any reduction thereof by distribution to shareholders where the latter are not entitled to it and by imposing limits on the company's right to acquire its own shares.”

    Such minimum legal capital rules are fundamentally flawed. They consume much of corporate lawyers’ time and attention without affording creditors genuine protection. The basic problem is that the minimum is not calibrated to the proposed business of the corporation. For example, €25,000 is laughable for a large corporation like JPMorgan or Alcoa, but possibly prohibitive for a small grocery store. And even if the initial minimum capital were adequate, it would very quickly become outdated as the business of the corporation grows, shrinks, or changes. Nor do shareholders need to replenish capital once it is depleted – after all, that is the nature of limited liability. Even a small start-up corporation, however, might spend €25,000 on wages in the first month of its existence, leaving nothing of the minimum capital. As a result, minimum legal capital provides no guarantee whatsoever to a creditor that the corporation is adequately capitalized (whatever that means).

    To be sure, capital regulation need not be as blunt as the European directive. Certain industries, notably banking, are subject to more finely calibrated capital requirements. In particular, these requirements tend to use ratios (e.g., debt to equity) rather than absolute amounts. Moreover, they are adapted to the risks of that particular industry, and perhaps even to the specific risks of individual companies — for example, bank capital requirements depend on the assets held by each bank. Last not least, they apply not only at the creation of the company but throughout its life. Similarly, debt contracts often contain finely calibrated covenants regarding financial ratios, permissible investments, and the like. General minimum capital rules, however, lack such finesse.

    In recognition of these flaws, U.S. jurisdictions have fully abandoned minimum legal capital requirements.

    Distribution Constraints

    Under the DGCL, the only remaining role for legal capital is in determining the permissible amount of distributions to shareholders, i.e., dividends and share repurchases. The enforcement of the limits is quite strict: Directors are jointly and severally liable for negligent violations (DGCL 174). However, the limits are rarely binding outside of insolvency because legal capital can be, and usually is, reduced to a minimal amount.

    DGCL 173 and 170 provide that dividends can be paid out of “surplus” (or, if there is no surplus, out of net profits for the last two years). DGCL 154 defines surplus as net assets minus capital, and net assets as total assets minus total liabilities (i.e., equity). In other words, Delaware corporations can declare dividends up to the value of their equity minus capital.

    So, what is “capital”? It is what the board resolves it to be, provided it is at least aggregate “par value” (DGCL 154, 1st sentence). Par value is another number determined by the charter or, if authorized by the charter, the board (DGCL 151(a)). Par value’s only other role is that the corporation cannot issue shares for consideration less than par value (DGCL 153(a)). In practice, Delaware corporations tend to issue stock with no par value or very low par value (e.g., 0.00001 cent per share), and set capital near zero. The bottom line is that the DGCL permits corporations to pay out almost their entire equity as dividends.

    DGCL 160(a)(1) contains an equivalent restriction on share repurchases —  practically none short of insolvency. Again, the limit is capital: repurchases may not impair capital. The only difference here is that the repurchase of par value shares reduces the aggregate par value of outstanding shares. This allows for a reduction in stated capital, if aggregate par value was previously a binding constraint (cf. DGCL 244(a)(2)).

    By the way, it makes sense that the limits on dividends and repurchases are the same. Dividends and repurchases are largely equivalent as means for payouts to shareholders. Consider a corporation with equity worth $100 and 10 shares outstanding (such that the value of each share is $10). Imagine that the corporation wants to distribute $10 to shareholders. One option is to pay a $1 dividend on each share. Another option is to buy back one share for $10. The amount of cash returned to shareholders collectively will be the same. In the dividend option, 10 shares will remain outstanding, with a value of $9 per share. In the repurchase option, 9 shares will remain outstanding, with a value of $10 per share. The aggregate value of shares outstanding, or “market capitalization,” will be the same under either option: $90. The choice between the two methods is mostly relevant for tax purposes. In particular, many shareholders would prefer not to receive dividends (taxed at personal income tax rates) and instead sell some of their shares to the corporation or a third party buyer (taxed at the lower capital gains tax rate).

    Fraudulent Transfer

    Of more practical relevance are restrictions on so-called fraudulent transfers (a/k/a fraudulent conveyances). The animating purpose behind fraudulent transfer rules is that creditors should be able to claim back an asset from a transferee who obtained the asset from the debtor without paying adequate consideration. A paradigmatic case is the heavily indebted wife who transfers her assets to her husband to shield them from her creditors. But the rules are considerably more general. Their main advantage over the aforementioned corporate distribution constraints is that they also catch transactions in which the recipients paid some, but insufficient, consideration.

    Both state law and federal bankruptcy law contain fraudulent transfer rules. Please read both!

    Bankruptcy Code §548

    (a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily —

    (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or

    (B)

    (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

    (ii)

    (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

    (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

    (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or

    (IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

    . . .

    (C) Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.

    Uniform Fraudulent Transfer Act

    § 2. Insolvency.

    (a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.

    (b) A debtor who is generally not paying his [or her] debts as they become due is presumed to be insolvent.

    (c) . . .

    § 4. Transfers Fraudulent as to Present and Future Creditors.

    (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

    (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or

    (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

    (i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

    (ii) intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.

    (b) In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether: (1) the transfer or obligation was to an insider; . . .

    § 5. Transfers Fraudulent as to Present Creditors.

    (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

    (b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

    § 7. Remedies of Creditors.

    (a) In an action for relief against a transfer or obligation under this [Act], a creditor, subject to the limitations in Section 8, may obtain: (1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim; . . .

    § 8. Defenses, Liability, and Protection of Transferee.

    (a) A transfer or obligation is not voidable under Section 4(a)(1) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee. . . .

    Equitable Subordination

    In bankruptcy, courts may subordinate some creditors on equitable grounds. In particular, they may treat loans from shareholders to the corporation as corporate equity, i.e., rank these loans after all other creditor claims. Cf. Bankr. Code §510(c)(1).

    Mere undercapitalization is generally not sufficient grounds for equitable subordination. But the exchange of capital (equity) for debt at a critical moment probably would be.

    Piercing the Corporate Veil

    Most radically, courts can hold shareholders directly liable for corporate debt under a doctrine called “piercing the corporate veil.”

    The conditions for this radical step are not well defined, to put it mildly. Generally, courts require at a minimum a “unity of interest and ownership” between shareholders and the corporation.  They tend to find such “unity” if there has been (a) a disregard of corporate formalities (meetings, minutes, etc.), (b) a commingling of funds, and/or (c) undercapitalization. That is, mere control of the corporation by the shareholders, even in a single-owner corporation, is not sufficient for veil piercing.

    From a practitioner’s point of view, the lesson here is to respect corporate formalities. From a policy point of view, this makes some sense because enforcing any claim against anyone becomes difficult when ownership of assets cannot be established because formalities were not followed and funds were commingled.

    Practically speaking, piercing hardly ever occurs in large corporations (perhaps because they follow formalities). Courts mostly (but still rarely) pierce the veil of small, single-owner corporations. And they mostly do so for the benefit of involuntary creditors such as tort creditors who did not choose their debtor. See Peter Oh, Veil-Piercing.

    In addition to the general principle of veil piercing, special statutory rules impose direct liability on (controlling) shareholders for particular types of obligations. For example, the Employee Retirement Income Security Act of 1974 (ERISA), as amended, holds controlling shareholders liable for the corporation’s pro rata share of vested but unfunded pension benefits when withdrawing from a multi-employer plan.

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