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John Hancock Mutual Life Insurance Co. v. Carolina Power & Light Co.

August 31, 1983

JOHN HANCOCK MUTUAL LIFE INSURANCE CO., ETC., PLAINTIFFS-APPELLANTS,
v.
CAROLINA POWER & LIGHT COMPANY AND IRVING TRUST COMPANY, DEFENDANTS-APPELLEES.



John Hancock Life Insurance Company and eighteen other insurance companies appeal from an order of the United States District Court for the Southern District of New York, Leval, J., dismissing their complaint against Carolina Power & Light for breach of a corporate mortgage indenture and related documents. John Hancock requests this court to reverse the order dismissing the breach of contract claim or, alternatively, to reform the contract. We affirm the judgment of the district court.

Author: Wisdom

Before: VAN GRAEEFEILAND, PIERCE and WISDOM,*fn* Circuit Judges.

WISDOM, Circuit Judge.

This a diversity action for breach of contract or, alternatively, for reformation of the contract. Nineteen insurance companies, purchasers of bonds from Carolina Power & Light ("CP&L"), challenge CP&L's special redemption of those bonds with cash from a special maintenance fund provided for in the mortgage securing the bonds. The plaintiffs contend that CP&L breached an agreement not to redeem the bonds for ten years using borrowed funds with a lower effective interest rate than that provided for in the bonds. We conclude that the district court correctly rejected the plaintiffs' contentions and dismissed their complaint.

I. Background

A.The Sale of the Bonds.

CP&L is an investor-owned North Carolina electric utility serving large parts of North and South Carolina. Like most utilities, CP&L obtained most of its financing through the issuance of series of first mortgage bonds either in underwritten public offerings registered with the Securities and Exchange Commission or in unregistered private placements, as was the case here. On December 31, 1974, and January 23, 1975, CP&L sold $50,000,000 of its First Mortgage Bonds, 11-1/8% Series, due 1994 (the "Bonds") to John Hancock Mutual Life Insurance Company and twenty-two other insurance companies ("Hancock")*fn1 in a private placement not registered under the Securities Act of 1933. Irving Trust Co. ("Irving"), also a defendant, served as corporate trustee for the issuance under a mortgage and deed of trust which secures bonds issued by CP&L.

The terms of this sale were contained in a series of documents. In November 1974, CP&L issued its Summary of Proposed Terms ("Terms Sheet"), a one-page document soliciting expressions of interest in the Bonds and indicating that the Bonds would be "non-refundable for 10 years with borrowings having a lower effective interest cost than the bonds". The non-refundability provision of the Terms Sheet was repeated in a letter ("Letter of Agreement") exchanged on December 16, 1974 between CP&L and Hancock, which bought $25,000,000 of the issue. This letter, however, clearly stated that the parties were "not attempting in this letter to prepare a definitive contract of purchase nor otherwise to define all the substantive terms of the transaction."

CP&L and Hancock then negotiated a formal Purchase Agreement and a Supplemental Indenture ("Supplement") for this specific issue and sale of bonds. The Supplement was an exhibit to, bound with, and incorporated into, the Purchase Agreement dated December 17, 1974. The Purchase Agreement provides that the Bonds "shall be subject to redemption" as provided in the Supplement and that the bonds are "to be issued under and secured as provided" in the Mortgage and Supplement. The Mortgage under which CP&L issued the bonds contains various provisions to regulate the ratio of outstanding bonds to the security for those bonds. CP&L and various purchasers of its bonds negotiated the Mortgage in 1940, and the SEC approved the Mortgage and first bond issued under it in 1940. In re Carolina Power & Light Co., SEC Holding Company Act Release No. 2090, (June 5, 1940).

B. The Relevant Details of the Agreements.

Various provisions in the Terms Sheet, Purchase Agreement, Supplement, and Mortgage are relevant to whether the special redemption was proper. Hancock relies on the Terms Sheet and Letter of Agreement to argue that CP&L agreed not to redeem the bonds for a ten-year period with funds borrowed at a lower interest rate. Hancock also refers to § 11 of the Purchase Agreement:

all agreements, representations, and warranties contained herein and otherwise made in writing by or on behalf of [CP&L] in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement, any investigation at any time made by you or on your behalf, and the issue and delivery to you of the bonds to be sold to you hereunder. All statements contained in any document delivered to you by or on behalf of [CP&L] in connection with the transactions contemplated hereby shall constitute representations and warranties by [CP&L] hereunder.

According to Hancock, § 11 expressly preserves its right stated in the Terms Sheet and Letter of Agreement not to have the Bonds redeemed for a ten-year period with borrowed funds at an interest rate lower than the 11-1/8% rate of the Bonds.

CP&L argues that the Purchase Agreement, Supplement, and Mortgage authorize the special redemption. The Purchase Agreement states that the Bonds shall be subject to redemption (including redemption through operation of a sinking fund) as provided in the Supplement.*fn2 Section 1(I) of the Supplement contains the provisions for general redemptions including a limitation against using borrowed funds for redemption at ...


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