DocketNumber: No. 14
Citation Numbers: 96 N.E.3d 191, 73 N.Y.S.3d 95, 31 N.Y.3d 30
Judges: Rivera
Filed Date: 2/20/2018
Status: Precedential
Modified Date: 7/24/2022
On this appeal we must determine whether an indenture trustee may seek recovery on behalf of noteholders for defendants' alleged fraudulent redemptions intended to siphon off assets, leaving corporate obligors unable to pay the noteholders. The indenture at issue authorizes the trustee to "pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes," and thus empowers that trustee to proceed at law and in equity to recover losses incurred by all noteholders from the unpaid notes. As such, the trustee may assert causes of action to recover pro rata losses caused by defendants' scheme to render *194**98the note debtor insolvent. The trustee may also seek to pierce the corporate veil and impose corporate obligations on defendants under an alter ego theory of liability based on properly pleaded factual allegations-here that defendants created, for unlawful purposes, a corporate structure over which they exercised complete control and domination, and which they used to incur corporate debt so they could distribute the loan proceeds to themselves through fraudulent transfers, leaving the corporation unable to pay its creditors.
I. Procedural and Factual Background
The defendants on the appeal before us are private equity investment funds and their individual partners (collectively the private equity defendants) who are part of a consortium controlled by the global private equity groups Apax Partners, L.L.P. (Apax) and TPG Capital Management (TPG).
By the end of 2005, the Hellas Group carried €1.6 billion in debt but only €38 million in equity and zero retained earnings.
Less than three years later, during the global financial crisis in 2009, Hellas Finance and Hellas I defaulted on the PIK notes, leading to litigation to recover on behalf of the noteholders. Plaintiff Wilmington Trust Company (WTC), as the successor to the original indenture trustee,
WTC claims that the recapitalization was not intended as a traditional restructuring of debt and equity, but in actuality was a scheme designed to distribute the loan proceeds to the private equity defendants by redeeming securities from the Hellas Group, including the certificates, and-in effect, paying out unlawful dividends-even though the Hellas Group was in considerable debt. The complaint alleges defendants adopted this scheme to "bleed-out" the Hellas Group, whereby:
"With an initial investment of €50 million, in 2005, TPG and Apax organized a group of interrelated companies to acquire a profitable, nearly debt-free company, then called Tim Hellas Telecommunications, S.A. ('TIM Hellas'), creating a complex multi-company group. Under the control of Apax and TPG, the newly formed Hellas entities borrowed heavily, paid the loan proceeds to Apax and TPG and their investment funds, and were left debt-laden *196**100and insolvent to the detriment of their creditors."
As against the private equity defendants, the complaint asserts causes of action for breach of contract, fraudulent conveyances, unlawful corporate distribution, and unjust enrichment.
As relevant to this appeal, Supreme Court granted defendants' motion to dismiss the complaint, concluding that WTC lacked standing because the indenture did not permit the trustee to sue the private equity defendants for what the court considered "entirely separate claims" that could have been brought well before default ( Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.a`.r.l.,
On WTC's appeal, the Appellate Division modified on the law and denied the motion to dismiss the complaint, insofar as asserted by WTC as indenture trustee, and otherwise affirmed the orders ( Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.a`.r.l.,
II. Motion to Dismiss Standard of Review
"When reviewing a defendant's motion to dismiss a complaint for failure to state a cause of action, a court must give the complaint a liberal construction, accept the allegations as true and provide plaintiffs with the benefit of every favorable inference" ( Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc.,
III. An Indenture Trustee's Role and Authority to Act on Behalf of Noteholders
"An indenture is essentially a written agreement that bestows legal title of the securities in a single Trustee to protect the interests of individual investors who may be numerous or unknown to each other" ( Quadrant Structured Prod. Co. v. Vertin,
"[U]nder New York law[,] interpretation of indenture provisions is a matter of basic contract law" ( Quadrant,
IV. The Indenture's Trustee Authorization to Collect the PIK Note Debt
Indenture section 6.03, titled "Other Remedies," states, in relevant part: "If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture." Occurrences that would be considered an "Event of Default" are enumerated in section 6.01, and include a default in the payment of interest when due for 30 days, default in the payment of principal of any note when due at its maturity, and the failure by Hellas I or Hellas Finance to comply for 60 days after notice with its other agreements contained in the indenture.
The text of the indenture authorizes the trustee to pursue "any available remedy." This, by its terms, includes all remedies available at law and in equity. The indenture further provides that those remedies may be pursued "to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture." The plain meaning of section 6.03, then, is to authorize a trustee to pursue any lawful means of enforcing the noteholders' rights, against any individual or entity, based on any viable theory of recovery in order to secure repayment upon the event of a default on the debt to noteholders.
Interpreting "any available remedy to collect ... on the Notes" to include causes of action to recover noteholders' pro rata losses also gives effect to other sections of the indenture. Section 7.01(a) provides that a trustee in ''an Event of Default ... will exercise such of the rights and powers vested in it by the Indenture." Under section 4.01, an event of default includes *199the failure of an issuer to "pay or cause to **103be paid the principal of, premium, if any, and interest on, the Notes" as prescribed in the notes and the indenture. In such a case, the trustee may pursue any available remedy to collect the payment due, not for its own benefit or for some of the noteholders, but for all the noteholders, under a common claim of default (see Kolbe,
Defendants argue section 6.03 should be read narrowly, so that a claim for payment "on the Notes" is construed to mean solely a claim for payment due "under the terms and conditions of the Notes." The trustee, they argue, is therefore not permitted to assert third-party actions based on defendants' alleged fraudulent conduct and may only bring claims against the parties who actually agreed to make payments on the PIK notes: the issuer and guarantor. Defendants' arguments are unsupported by law and the language of the indenture. The words actually used in the indenture are dispositive; not, as defendants would have it, a phrase found nowhere in the document (see Quadrant,
Nevertheless, defendants' assert that persuasive authority from other jurisdictions stands for the proposition that a trustee may not sue third parties in actions such as this one. A careful reading of the cases cited by defendants in support of its construction of section 6.03 makes clear that courts do not, in fact, limit the trustee in such way. Regions Bank v. Blount Parrish & Co.,
WTC's fraudulent conveyance claim does not suffer from the flaw identified by Regions and other courts as a "carte blanche" to sue on common law and securities claims (see Regions,
We find unpersuasive defendants' argument that section 6.06 of the indenture-the "no-action clause"-supports its interpretation of section 6.03 and limits the trustee's power here. That clause provides, in relevant part, that in the event of default, the trustee is "under no obligation to exercise any of the rights or powers under this Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory to the Trustee against any loss, liability or expense'' (§ 6.06 [a] ). It also provides that noteholders may not pursue any remedy with respect to the indenture or the notes "[e]xcept to enforce the right to receive payment of principal, premium (if any) or interest when due,"
*201**105" 'by delegating the right to bring a suit enforcing rights of bondholders to the trustee, or to the holders of a substantial amount of bonds, and by delegating to the trustee the right to prosecute such a suit in the first instance. These clauses also ensure that the proceeds of any litigation actually prosecuted will be shared ratably by all bondholders' "
( Quadrant,23 N.Y.3d at 566 ,992 N.Y.S.2d 687 ,16 N.E.3d 1165 , citing Feldbaum v. McCrory Corp.,1992 WL 119095 at *6 (Del Ch, June 2, 1992)) ).
Here, the trustee's suit is in fact on behalf of all noteholders, and its proceeds will be distributed ratably. In other words, this suit upon default "is an attempt to secure payment, and resolution of the matter is of interest to the entire class of security holders" ( Quadrant,
Contrary to defendants' argument, the analyses in Feldbaum v. McCrory Corp.,
While the plain language of the indenture is dispositive, we also note that our construction of section 6.03 is in line with the intended meaning of nearly identical language from the Revised Model Simplified Indenture, also numbered section 6.03, and, given the similarities between the two, apparently the model for the agreement at issue in this case (see Revised Model Simplified Indenture, 55 Bus L 1115, 1137 [2000] ).
For the preceding reasons, the language of section 6.03 of the indenture permits the kind of third-party action at issue here. If the parties to the indenture intended to limit the trustee to actions against the issuer and guarantor only-as defendants maintain-the signatories to the indenture could have easily said so. They did not. Therefore, WTC is empowered under section 6.03 to pursue causes of action to recover pro rata payment for all noteholders against those who WTC alleges bled dry the issuer and guarantor for defendants' profit, to the detriment of the noteholders.
V. Alter Ego Theory of Liability to Pierce the Corporate Veil
The complaint also asserts liability based on the theory that individual defendants acted as the alter egos of the issuer *203**107and guarantor, and caused those entities to divest the funds that would have otherwise been available to pay the notes. WTC thus seeks to persuade the court to pierce the corporate veil and impose corporate liability on these defendants. Defendants argue that the complaint is deficient because it fails to allege adequate facts, and in any event, WTC's claim should be dismissed as duplicative of the fraudulent conveyance causes of action that underlie WTC's alter ego theory. Defendants are wrong on both counts.
As discussed above, "[o]n a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction. We accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" ( Leon v. Martinez,
"Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, 'pierce the corporate veil', whenever necessary 'to prevent fraud or to achieve equity' " Morris v. Department of Taxation,
"Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury" ( Conason v. Megan Holding, LLC,
Applying these principles here, we conclude that the complaint is sufficient and survives defendants' motion to dismiss. The complaint alleges Hellas Finance issued the PIK notes guaranteed by Hellas I, the noteholders purchased the notes for €200 million, then, after Hellas Finance and Hellas I failed to pay the amounts due under the notes, the trustee made demand for payment, and the amounts remain unpaid. These factual allegations are sufficient to support WTC's claim that Hellas Finance and Hellas I are liable for repayment plus interest. Having set forth the threshold corporate liability, the complaint must then allege "facts and circumstances which will persuade the court to impose the corporate obligation on its owners" ( Morris,
To meet this requirement, the complaint alleges that the private equity defendants owned and controlled Hellas, the parent company of Hellas I and Hellas Finance, and, as the alter egos of the issuer and guarantor, the private equity defendants had control and domination of the corporate form of the companies that defaulted on the PIK notes. The complaint further alleges that the private equity defendants misused the corporate form and describes a borrowing scheme that employed the Hellas Group shell companies to acquire long-term debt which dwarfed shareholder equity, all the while distributing the PIK loan proceeds and certificate redemptions to the private equity defendants. Critically, the complaint alleges these shell companies were created both to facilitate this flow of funds from the offering of the PIK and subordinated notes, and to conceal the true nature of these transactions from the noteholders (cf. TNS Holdings,
Defendants argue that the complaint is inadequate because it fails to plead with *205**109specificity the conduct alleged against each defendant that would support alter ego liability. While the complaint refers to the "Private Equity Defendants" throughout, the complaint also alleges various details about Apax- and TPG-affiliated entities, as well as the individuals that manage the funds that owned Hellas, which suggests a strong suspicion of fraud. It points to various individuals and entities tasked with directing Apax and TPG's day-to-day activities at the time of the fraudulent conveyances, it lists their titles and management positions, and it also identifies specific transferees of the fraudulent conveyance proceeds. It would be unreasonable to require greater detail from WTC as to each individual's daily conduct and involvement in the fraud at this pre-answer, pre-discovery stage (see Tap Holdings,
It is sufficient at the pleading stage that the alleged facts and the inferences drawn from them establish the basic elements of the doctrine of piercing the corporate veil: the individual defendants adopted the corporate scheme, created the corporate shells to further the scheme, misused the corporate form to commit a fraud that injured noteholders by defendants' decisions to issue debt in the form of the PIK notes, and distributed the loan proceeds and the certificates to themselves, with the known and intended result that Hellas I and Hellas Finance would be rendered insolvent and unable to pay the PIK note creditors.
Nor is the claim duplicative of the fraudulent conveyance causes of action. "The key to determining whether a claim is duplicative ... is discerning the essence of each claim" ( Johnson v. Proskauer Rose LLP,
Accordingly, the order of the Appellate Division, insofar as appealed from, should be affirmed, with costs, and the certified question answered in the affirmative.
Order, insofar as appealed from, affirmed, with costs, and certified question answered in the affirmative.
Chief Judge DiFiore and Judges Stein, Fahey, Wilson and Feinman concur.
Judge Garcia took no part.
This appeal pertains only to certain claims by plaintiff Wilmington Trust Company against the following defendants-appellants: Apax Partners L.P., Apax Partners Europe Managers Limited, Apax Europe VI GP Co. Ltd., Apax Europe VI GP, L.P., Apax Europe VI-A, L.P., Apax Europe VI-I, L.P., Troy L.P. Inc., Apax WW Nominees Ltd., Martin Halusa, John F. Megrue, Jr., and Giancarlo Aliberti, TPG Capital N.Y., Inc. (sued as TPG Capital-N.Y., LLP), TPG Partners IV, L.P., TPG Advisors IV, Inc., TPG GenPar IV, L.P., TPG Advisors II, Inc., T3 GenPar II, L.P., T3 Partners II, L.P., T3 Parallel II, L.P., TPG Troy LLC, T3 Troy LLC, David Bonderman, James Coulter, and Matthias Calice (collectively, defendants). Hellas Telecommunications Co-Invest Ltd.; Hellas Telecommunications Employees Ltd.; and Hellas Telecommunications II, S.C.A, who were named as defendants, are no longer parties to this action.
In the period relevant to this appeal, the private equity defendants owned all shares in Hellas, which is the 100% owner of Hellas I, which is the limited partner and majority owner of Hellas II and Hellas Finance. Hellas II is a 100% owner of various additional Hellas subsidiaries.
"€" refers to "euros."
"Deferred interest or payment-in-kind (PIK) notes are promissory notes issued by the borrower in lieu of cash payments of principal, interest, or both, that are due under the original note. PIK notes are likely to be issued by start-up companies, highly leveraged companies, or companies with tight, short-term cash flows. In these situations, the borrower may not have enough cash on hand to make interest payments. Rather, the borrower issues a note in a principal amount equal to the cash payment then due. Often, a loan agreement that contemplates the issuance of PIK notes will give the borrower the option to pay the interest when due in cash or to execute such a note in the amount equal to the past due principal or interest" (Richard W. Grice & Rick D. Blumen, Georgia's Usury Laws and Interest on Interest: The Need to Transcend the Nineteenth Century,
Simultaneously with the issuance of the PIK notes, Hellas II issued subordinated notes. Plaintiff alleged Hellas borrowed approximately €1.5 billion in total, which included issuance of the PIK notes and the subordinated notes of Hellas II.
"PECs (preferred equity certificates) or CPECs (convertible preferred equity certificates) are hybrid financial instruments that are typically used in a cross-border context to finance Luxembourg holding companies. Under Luxembourg tax law, these instruments qualify as debt for capital duty and for corporate income tax and net wealth tax purposes. Consequently, payments or accruals made under the PECs or CPECs are, similar to interest payments, deductible from the tax base of the Luxembourg entity and are exempt from withholding tax" (New York State Bar Association, Tax Section, Employee Benefits Committee, Report on Rules Governing Nonqualified Deferred Compensation Under Section 457A at 71 n 160 [Oct. 5, 2009] ).
The complaint alleges that Hellas II redeemed 27.3 million CPECs issued to and held by Hellas I for €979 million, that Hellas I redeemed 27.4 million CPECs issued to and held by Hellas for €973.7 million, and that Hellas redeemed 27.4 million CPECs issued to and held by the private equity defendants for €973,657,610. It also alleges Hellas redeemed PECs issued to and held by the private equity defendants for approximately €211 million. Plaintiffs allege the total payments to the private equity defendants were over €1.185 billion. Hellas reported €946,284,610 of the payments as a dividend to shareholders.
The original trustee was The Bank of New York.
The dismissal of co-plaintiff, Cortlandt Street Recovery Corporation, is not at issue on this appeal (Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l.,
The complaint asserted 10 causes of action in total. The first cause of action is against Hellas Finance, Hellas I, and Hellas for payment of PIK notes. The fourth and tenth are against the private equity defendants as alter egos for payment of the PIK notes and for unjust enrichment and imposition of a constructive trust. The remaining causes of action are against all defendants for breach of contract, violation on prohibitions on distributions, for conveyances by insolvents, conveyances by persons in business, conveyances made with intent to incur debt beyond the ability to pay, intentional fraudulent conveyances, and conveyances of partnership property. All of the conveyance claims are based on New York's Debtor and Creditor Law (§§ 273 -277 ).
The complaint alleges this is the principal amount due on the PIK notes as of November 27, 2009-the date on which the original trustee issued a notice of event of default due to the commencement of an insolvency proceeding by Hellas II. On the tenth cause of action against the private equity defendants for unjust enrichment, plaintiff seeks imposition of a constructive trust as well as an order to disgorge the €268 million plus interest, fees, and costs.
In its order, Supreme Court addressed four related matters (Cortlandt St. Recovery Corp. v. Hellas Telecommunications, S.a`.r.l.,
The merits of defendant's alternative grounds for dismissal raised before Supreme Court were not briefed by defendants to the Appellate Division nor on this appeal. They were not addressed by the Appellate Division (Cortlandt,
Section 6.02 of the indenture also provides for acceleration of payment as a remedy for an event of default. It authorizes the trustee and noteholders of at least 25% in aggregate principal amount of the then outstanding notes to declare immediately due and payable the principal and unpaid, accrued interest on the notes.
"If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the principal of, premium, if any, or interest on the Bonds or to enforce the performance of any provision of the Bonds, this Indenture, the Facility Lease Agreement or the Guaranty" (
This provision does not contain the "any available remedy" language found in section 6.03 of the indenture at issue on this appeal.
Defendants' references to other sections of the indenture to support its argument against WTC's standing in this case fare no better. The language in section 14.07 of the indenture, namely, "for any claim based on, in respect of, or by reason of such obligations or their creation" is an addition to the language that states there is no liability for the notes-evincing that the first provision is on the notes, which is exactly what the plaintiff pursues here. The same is true of section 14.09. All that these provisions establish is that the parties included language for claims that are not for recovery triggered by an event of default. Here, the action is in response to and for recovery on an event of default, i.e., the failure to pay the debt on the notes.
Section 6.03 of the Revised Model Simplified Indenture reads: "If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of Principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture" (55 Bus Law at 1137 ). The corresponding passage in the prior 1965 model indenture reads
, "[i]f an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Debentureholders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy" (American Bar Foundation, Commentaries on Model Debenture Indenture Provisions § 5.3 at 224 [1971] ).
Without the customary language subsumed, the provision would read:
"If an Event of Default occurs and is continuing, the Trustee may pursue actions, suits or proceedings at law or in equity under this Indenture or otherwise by law to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture."