The opinion of the court was delivered by: CARTER
This action concerns two series of bonds issued in 1896 by the Northern Pacific Railway Company ("Northern Pacific"). The first, 4 percent Prior Lien Railway and Land Grant Gold Bonds ("Prior Lien Bonds"), were issued pursuant to a mortgage dated November 10, 1896. The Prior Lien Bonds pay 4 percent annual interest and mature on January 1, 1997. They were issued in a face amount of $121.6 million, of which approximately $69.9 million remained outstanding as of April 22, 1985. The second series of bonds, 3 percent General Lien Railway and Land Grant Gold Bonds ("General Lien Bonds"), were issued pursuant to a second mortgage dated November 10, 1896. The General Lien Bonds pay 3 percent interest and mature on January 1, 2047. They were issued in a face amount of $60 million, of which approximately $47.8 million remain outstanding. Neither issue of bonds is callable by the issuer before maturity. Both mortgages were executed in New York and the bonds were issued in New York.
Northern Pacific was merged into the Burlington Northern Railroad Company ("Railroad") in 1970, and Railroad is now obligor of the bonds. Since 1981, Railroad has been a wholly-owned subsidiary of Burlington Northern Inc., a holding company. Bankers Trust Company is the successor trustee of the Prior Lien Bonds, and Citibank, N.A., is the successor trustee of the General Lien Bonds (collectively,trustees").
The bonds are secured by two types of collateral--first, by railroad property owned by Northern Pacific as of November 10, 1896 ("Railroad Properties"). The Railroad Properties include the lines of railroad and related rights of way, all extensions and branches and any improvements and appurtenances thereto. Railroad Properties also include all equipment (including after-acquired equipment) used on the mortgaged railway lines, as well as locomotives and other rolling stock, and the buildings, stations and shops pertaining to the mortgaged railway lines. Second, the bonds are secured by millions of acres of land in the northwestern United States (the "Resource Properties") originally granted to Northern Pacific's predecessor by Congress to encourage construction of the railroad. Today, the Resource Properties remaining subject to the mortgage liens comprise approximately 1.9 million acres of land in fee simple, and 2.4 million acres of mineral rights.
Plaintiffs are bondholders, who collectively hold $439,000 par value of the bonds. They are supported in this suit by other individuals and institutions holding or representing holders of more that $43 million par value, out of a total of $117.7 million par value, of the bonds outstanding. Plaintiffs bring this suit as a class action on behalf of all bondholders.
All the parties to this litigation agree that the Resource Properties are now worth many times the $117.7 million face value of the bonds they secure; plaintiffs estimate the land's current value at "billions of dollars "(Plaintiffs' brief at 6). So long as the Resource Properties remain subject to the mortgage liens, however, the Railroad cannot benefit from the development or sale of the properties. That is because the mortgages do not provide for the withdrawal of excess collateral, or for the substitution of collateral. Further, in the event of sale of Resource Properties, the mortgages require the Railroad to deposit all the proceeds with the trustees, as collateral. Thus the Railroad would reap no benefit from the sale or development of the properties. Since the bonds are not callable before maturity, the bondholders can effectively block or hold up the Railroad from exploiting the Resource Properties until all the bonds mature in 2047.
Precisely because they have this "hold up" value, the bonds (which are traded over the counter on the New York Stock Exchange (NYSE)) have commanded prices far above their value as debt obligations alone. For instance, on April 19, 1985, the Prior Lien Bonds traded at 3 percent above their value as debt obligations, and the General Lien Bonds at 66 percent above such value (Batkin Aff. PP 7-8). Bondholders speculated that the Railroad would be so eager to release the land from the mortgage liens that it would some day offer to buy back the bonds at a premium--perhaps even above par (Railroad's brief at 24).
The Railroad wishes to have the Resource Properties released from the mortgage liens. It has attempted to accomplish this without buying back the bonds from the holders. Instead, on April 19, 1985, it entered into agreements with the trustees (the "Letter Agreements") whereby the trustees will release the Resource Properties from the mortgage liens on June 22, 1985, provided that certain conditions are met to protect the bondholders. The central condition is the so-called Deposit Plan, under which the Railroad will deposit in irrevocable trusts sufficient United States securities to satisfy fully all future financial obligations of the bonds as they become due. In essence, the government securities would substitute for the Resource Properties as collateral for the bonds and would guarantee timely payment of all bond obligations.
The Railroad has already purchased a portfolio of government securities for $63.4 million, containing bonds with varying maturity dates totaling $184.315 million in principal amount. This is sufficient to meet all outstanding bond obligations as they become due. For instance, the portfolio will yield $4,815,205 in 1986, when the Railroad's obligations under the bonds will not exceed $4,814,752. In 1997, the year in which the Prior Lien Bonds mature, the Railroad's total obligations will be approximately $67.5 million. The portfolio that year will yield $67.56 million in interest and principal amount. The longest-term securities will mature in 2014 and 2015. The yield then will be sufficient, without reinvestment, to pay the principal and all future interest payments due on the General Lien bonds, which mature in 2047.
With government paper securing every dollar of bond interest and principal, the plaintiffs certainly cannot argue that the Deposit Plan would impair their security. On the contrary, the Deposit Plan would give plaintiffs an iron-clad guarantee of timely payment of interest and principal. See, e.g., Taxpayers and Citizens of Shelby Co. v. Shelby Co., 246 Ala. 192, 20 So.2d 36, 39 (1944) (United States securities are "uniformly regarded as a perfectly safe investment"); Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 76 (1983) (government securities are "essentially risk free as to the amount, timing, and collection of interest and principal") (emphasis in original). Nevertheless, plaintiffs oppose the plan, because it would eliminate the hold up value of their bonds. If the Letter Agreements are implemented, the Railroad will not be required to offer plaintiffs large premiums to buy back the bonds in order to free up the Resource Properties for sale and development. The bonds would then be valuable only as debt obligations, and it is anticipated that their value on the market will plummet.
To protect the bondholders against this sudden drop in bond value, the trustees included a tender offer at current market prices as a second condition for the release of the Resource Properties. Pursuant to the Letter Agreements, the Railroad is currently offering to buy back all outstanding bonds at $53.50 per $100 par value for the Prior Lien Bonds and $39 per $100 par value for the General Lien Bonds, a price slightly above their market price on the day before the Letter Agreements were made public. The bondholders thus have the opportunity to sell their bonds back to the Railroad at slightly above current market price. Since the market price is expected to fall precipitously once the Resource Properties are released and the bonds lose their hold up value, prudent bondholders will feel compelled to accept the Railroad's price.
Plaintiffs oppose the agreement between the trustees and the Railroad, even though it includes the tender offer. They hope to block the plan to substitute collateral and force the Railroad to negotiate with them for the release of the Resource Properties. Presumably, plaintiffs believe they will be able to hold out for prices higher than those now offered by the Railroad in its tender offer.
The case is currently before the court on plaintiffs' motions for class certification and for a preliminary injunction.
The motion for class certification is unopposed. The class for which certification is sought consists of all persons and entities who hold the bonds, or their successors in interest, excluding those bonds held by the Railroad in its treasury. The requirements for class certification under Rule 23(a), F.R.Civ.P., are satisfied in this case: the class is so numerous--as of April 22, 1985, there were more than 1,000 geographically dispersed bondholders (Complaint P10)--that joinder of all members is impractical, there are questions of law and fact common to the class, plaintiffs' claims are typical of the claims of the class, and plaintiffs will fairly and adequately protect the interest of the class. Similarly, the requirements of Rule 23(b)(1)(A) and (b)(2), F.R.Civ.P., are satisfied: prosecution of separate actions would create a risk of inconsistent or varying adjudications, and the defendants have acted on grounds generally applicable to the class, thereby making appropriate relief with respect to the class as a whole. Accordingly, the motion for class certification is granted.
II. PRELIMINARY INJUNCTION
To obtain a preliminary injunction in this circuit, "a movant must make a 'showing of (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly' in its favor. Rockwell International Systems, Inc. v. Citibank, N.A., 719 F.2d 583, 586 (2d Cir. 1983), quoting Jackson Dairy, Inc. v. ...