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Jamie Securities Co. v. Limited Inc.

decided: July 27, 1989.


Appeal from summary judgment entered in the United States District Court for the Southern District of New York (Haight, J.) in favor of plaintiff on issue of liability in action to recover interest on debentures called for redemption on redemption date falling within interval between interest record date and interest payment date but converted to common stock during same interval. Reversed and remanded.

Meskill, Kearse and Miner, Circuit Judges.

Author: Miner

MINER, Circuit Judge

This is an appeal from a summary judgment entered in the United States District Court for the Southern District of New York (Haight, J.) in favor of plaintiff-appellee, Jamie Securities Co. ("Jamie"), on the issue of the liability of defendant-appellant, The Limited, Inc. ("The Limited"), for interest on debentures converted to common stock. Jamie claims that it is entitled to accrued interest, in accordance with the terms of the Debenture and of the Indenture entered into between Jamie and the Trustee for the debenture holders, because the conversion occurred between the interest record date and the interest payment date. Jamie had elected to convert its Securities following a call for redemption that fixed a redemption date falling within the same interval of time. The Limited, issuer of the Securities, contends that the governing instruments make no provision for the payment of accrued interest in the event of conversion after a call for redemption.

Relying on various provisions of the governing instruments, including the Indenture provision for cancellation of surrendered debentures in the event of conversion, and the Debenture provision declaring cancellation of the Securities after the interest record date and before the interest payment date no bar to the payment of interest to those who were registered holders on the record date, the District Court found sufficient grounds for the award of accrued interest to Jamie. See Jamie Securities Co. v. The Limited, Inc., 682 F. Supp. 746 (S.D.N.Y. 1988). We read the provisions relied upon by the District Court differently and find that the Indenture and Debenture terms, taken as a whole, unambiguously preclude the payment of any interest on the debentures converted by Jamie. Accordingly, we reverse the judgment entered in favor of plaintiff and certified to this Court for interlocutory review, and remand the matter for entry of final judgment in favor of The Limited.


The Limited, a Delaware corporation with its principal place of business in Ohio, is engaged in the purchase, distribution and sale of women's apparel. Proposing to issue convertible, subordinated debentures to finance the expansion of distribution facilities, it filed a Registration Statement under the Securities Act of 1933 with the Securities and Exchange Commission ("SEC") on June 19, 1985. Also filed were the forms of Indenture and Debenture to be employed as the governing instruments for the issue. After an amendment to the Registration Statement was filed on July 2, 1985, the SEC declared the Statement effective as amended. In accordance with the approved registration, The Limited on July 10, 1985 issued debentures in the principal amount of $125 million, bearing interest at 7 1/2% per annum and due on July 1, 2010.

According to the terms of the Debenture, interest payments were to be made semi-annually, on the first days of January and July in each year, the first interest payment date being January 1, 1986. As is common in large, widely-distributed Securities issues, a record date was established to simplify the duties of the Trustee obligated to make the interest payments. In this case, the Debenture specified that holders of record on December 15 in each year would receive the January 1 payments, and holders of record on June 15 would receive the July 1 payments.

The Limited reserved the right at any time to redeem, at specific redemption prices plus interest accrued to the date of redemption, any part or all of the Securities issued. The governing instruments provided that "once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date at the redemption price," Indenture ยง 3.04, and "on and after the redemption date interest ceases to accrue on Securities or portions of them called for redemption," Debenture para. 8.

Holders of the Securities were afforded the privilege of converting the Securities to common stock at any time prior to the expiration of the issue or, in the event of a redemption call, at any time prior to the close of business on the day preceding the redemption date. The initial conversion price was specified in the Debenture, subject to adjustment as provided in the Indenture. Included in paragraph 9 of the Debenture, entitled Conversion, was the following:

To determine the number of shares issuable upon conversion of a Security, divide the principal amount to be converted by the conversion price in effect on the conversion date. On conversion no payment or adjustment for interest will be made. The [Limited] will deliver a check for any fractional share. Securities surrendered for conversion during the period from the close of business on any record date for the payment of interest to the opening of business on such interest payment date shall (except in the case of Securities or portions thereof which have been called for redemption on a date which occurs within such period) be accompanied by payment . . . of any amount equal to the interest payable on such interest date on the principal amount of the Securities being surrendered. . . .

Tracking one of the provisions in paragraph 9, subdivision (b) of Section 10.02 of the Indenture (Conversion Procedure) declares: "No payment or adjustment will be made for accrued interest on a converted Security." Section 12.11 of the Indenture provides: "The laws of the State of Ohio shall govern this Indenture and the Securities."

On June 12, 1986, less than one year after issuance of the Securities, The Limited gave notice by mail for the redemption of all outstanding debentures on June 30, 1986. The notice provided for a redemption price of $1,075 plus accrued interest to the date of redemption of $37.29, for a total of $1,112.29 per $1,000 in principal amount of debentures. The notice also advised debenture holders of their right to convert their debentures into common stock of The Limited, through the close of business on June 27, 1986, at a conversion price of $20.916667 per share. By June 27, the market price of the stock was approximately $33 per share, allowing those who elected to convert to receive $1,601.59 worth of stock for each $1,000 in principal amount of debentures. As is apparent, conversion would save The Limited the large outlays of cash required for redemption while providing a substantial benefit to those electing to take the stock. Not unexpectedly, virtually all debenture holders preferred conversion to redemption. Among those holders was Jamie, a company then engaged in arbitrage and trading securities for its own account. Between June 23 and June 27, 1986, Jamie converted to common stock debentures having a principal value of $25,715,000.

The refusal of The Limited to pay interest on the debentures converted by Jamie gives rise to this lawsuit. In its class action complaint, filed on July 2, 1986, Jamie alleges that The Limited "has persisted in its refusal to pay interest notwithstanding the contractual right to such interest which is expressly provided in [paragraphs] 2 and 9 of the Debenture and Section 2.11 of the Indenture." In its prayer for relief, Jamie therefore claims damages "which shall be the dollar amount of interest due on Debentures formerly held by Plaintiff and each other class ...

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