On April 1, 2010, the New York Court of Appeals rejected holders’ claims against an indenture trustee that could have meant new and greatly expanded duties and legal liability for indenture trustees. The New York Court of Appeals declined to adopt a holders’ proposed interpretation of the SEC filing delivery provision of an indenture, which would require indenture trustees to review the substance of SEC filings, and, as a consequence, greatly expand indenture trustees’ recognized administrative duties far beyond anything found in the indenture or the Trust Indenture Act. The New York Court of Appeals instead concluded that indentures containing the required delivery provisions pursuant to section 314(a) of the Trust Indenture Act refer to the Exchange Act only to identify the types of reports that should be forwarded to indenture trustees and do not create contractual duties on the part of the trustee to review or assure that the information contained in any report filed is true and accurate.

The background of the case is as follows: On February 7, 2001, Enron executed an indenture agreement with Chase Manhattan Bank (“Chase”), naming Chase as the indenture trustee for the holders of certain Enron notes. The agreement contained a standard provision setting forth a covenant by Enron to file with Chase, within 15 days of filing the same with the Securities and Exchange Commission (the “SEC”), copies of its annual reports and other required SEC filings. That same provision also provided that “Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such information shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuer’s compliance with any of its covenants [under the agreement].”

After Enron’s bankruptcy filing in December 2001, plaintiffs Racepoint Partners, LLC and Willow Capital-II, L.L.C., bought approximately $1 billion of the notes from their holders. Plaintiffs then brought a common law action against Chase for breach of contract, making two claims: (i) Enron defaulted under the indenture agreement; and (ii) Chase had actual knowledge of this default and that its failure to notify Enron and the noteholders of the default constituted a breach of the agreement.

Plaintiffs argued that Enron agreed to file with Chase copies of all reports that it was required to file with the SEC, and because the financial reports filed by Enron with Chase were inaccurate and did not comply with federal securities law, they were not the reports Enron was required to file with the SEC. Therefore, by filing these same fraudulent reports with Chase, Enron defaulted under the relevant covenant.

The New York Court of Appeals disagreed, noting that in drafting the Trust Indenture Act, Congress intended simply to ensure that an indenture trustee was provided with up to date reports on a company’s financial status by requiring the company to send the trustee a copy of filed financial reports. Indeed, the legislative history of section 314(a) of the Trust Indenture Act suggests that Congress intended to create a delivery requirement and no more. The New York Court of Appeals cited to federal court holdings which provided that similar provisions impose nothing more than the ministerial duty to forward copies of certain reports, which are reports identified by reference to the Exchange Act.

The New York Court of Appeals concluded by holding that indenture agreements containing the required delivery provisions pursuant to section 314(a) of the Trust Indenture Act refer to the Exchange Act only to identify the types of reports that should be forwarded to indentured trustees and do not create contractual duties on the part of the trustee to assure that the information contained in any report filed is true and accurate. The New York Court of Appeals declined to adopt Plaintiff’s proposed interpretation, which would require indenture trustees to review the substance of SEC filings, and, as a consequence, greatly expand indenture trustees’ recognized administrative duties far beyond anything found in the contract.