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ARISTOCRAT LEISURE LIMITED v. DEUTSCHE BANK TRUST COMPANY

August 12, 2005.

ARISTOCRAT LEISURE LIMITED, Plaintiff,
v.
DEUTSCHE BANK TRUST COMPANY AMERICAS, as Trustee, Defendant. KBC FINANCIAL PRODUCTS UK LTD, KBC ALPHA MASTER FUND SPC KBC CONVERTIBLE OPPORTUNITIES FUND, KBC ALPHA MASTER FUND SPC KBC MULTI-STRATEGY ARBITRAGE FUND, AMARANTH LLC, ALEXANDRA GLOBAL MASTER FUND, LTD., UFJ INTERNATIONAL PLC, DEEPHAVEN INTERNATIONAL CONVERTIBLE TRADING, LTD., CALAMOS ADVISORS LLC ON BEHALF OF CALAMOS GROWTH AND INCOME FUND, CALAMOS GLOBAL GROWTH AND INCOME FUND AND CERTAIN OTHER INSTITUTIONAL CLIENTS, CQS CONVERTIBLE AND QUANTITATIVE STRATEGIES MASTER FUND LTD., D.E. SHAW INVESTMENT GROUP, LLC, D.E. SHAW VALENCE INTERNATIONAL, INC, and QVT FUND LP, Intervening Defendants.



The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

Plaintiff, Aristocrat Leisure Limited ("Aristocrat"), seeks reformation of a bond indenture ("Indenture") to correct a scrivener's error, and a declaration of plaintiff's immediate right to call the bonds for redemption under the Indenture. Plaintiff claims that it legitimately called the bonds on December 20, 2004, and that call simultaneously terminated the intervening defendants' ("Bondholders") right to convert their bonds to Aristocrat common stock. Defendant Trustee, Deutsche Bank Trust Company Americas ("Trustee"), defends this action on behalf of all of the convertible bondholders and is an affiliate of one of the lead underwriters and managers of the bond offering at issue. The Trustee and the Bondholders claim that notice is required to effect a call of the bonds, and that the Bondholders have a right to convert after notice is given. The Trustee and Bondholders argue that Aristocrat's December 20, 2004 alleged notice and call were not sufficient under the Indenture and seek declaratory judgment that the alleged notice and call did not terminate the Bondholders' right to convert their bonds to stock. The Trustee and Bondholders also seek declaratory judgment that the Bondholders' notices of conversion are valid and effective, and that Aristocrat is liable for any diminution in the value of its common stock effective after Aristocrat refused to honor the Bondholders' notices of conversion.*fn1 The Trustee seeks indemnification for its expenses in defending against this action. The parties now concurrently move for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). BACKGROUND*fn2

  I. The Parties

  Plaintiff Aristocrat, an Australian corporation, is a global supplier of gaming machines and video gaming machines. Plaintiff's supply area includes New York State. (Plaintiff's Complaint ("Compl.") ¶ 4.)

  Defendant Trustee is a New York corporation. The Trustee was originally named Bankers Trust Company ("BTC") as referenced on the Indenture, and was acquired by Deutsche Bank in 1999. In April 2002, the Trustee officially changed its name to Deutsche Bank Trust Company Americas, as referenced in the above caption. (Defendant Trustee's Answer ("Tr.'s Ans.") ¶ 5.)

  The intervening defendant Bondholders are various corporations organized in England, the Caribbean, and the United States (Delaware). The Bondholders own a substantial majority of the outstanding bonds here at issue. (Intervening Defendant's Answer ("BHs' Ans.") first unnumbered paragraph.)

  II. The Bonds

  On May 31, 2001, plaintiff issued US$130,000,000 of 5% convertible bonds, due May 2006, to qualified institutional buyers ("QIBs"). The bonds were issued under an Indenture which lays out the rights and obligations of the issuer (Aristocrat), the Trustee, and the Bondholders. Unfortunately, the Indenture contains a scrivener's error regarding the proper exchange rate. The exchange rate was mistakenly transposed so that, instead of reading "US$0.514 = A$1.00,"*fn3 the Indenture read "A$0.514 = US$1.00." This error is continuous and consistent throughout the Indenture.

  The Indenture allows the Bondholders to convert principal due under the bonds to newly-issued ordinary shares of Aristocrat stock. (Compl. Ex. A § 13.01.) In order to convert, the Bondholders must give effective irrevocable notice to the Trustee. (Id. § 13.02.) However, this right to convert terminates "immediately upon, and simultaneously with, any call by the Issuer for the redemption of the Bonds in accordance with Article 12." (Id. § 13.01.) Any bonds "not validly redeemed by the Issuer pursuant to such redemption shall regain" their conversion rights. (Id.)

  The bonds are redeemable at Aristocrat's option on or after May 31, 2004, "on not less than 30 nor more than 60 days' notice to the Holders and not less that 45 days' notice to the Trustee," provided that, prior to the notice, the closing price of Aristocrat's ordinary shares exceeds 140% of the conversion price of the bonds for 20 of 30 trading days. (Id. § 12.02(a).) Aristocrat must "mail notice of such redemption" to the Bondholders. (Id. § 12.04.) Such notice must:
specify the unpaid principal amount of each Bond held by such Holder to be redeemed, the Redemption Date, the redemption price and the amount of any accrued and unpaid interest payable on the Redemption date, the . . . identifying number of the Bonds and . . . that payment will be made upon presentation and surrender of the Bonds to be redeemed and . . . the Conversion Price then in effect and the date on which the right to convert such Bonds . . . to be redeemed expires.
(Id.) Further, prior to the issuance of notice, "the election of the Issuer to redeem any Bonds shall be evidenced by a Board Resolution." In order to effect redemption, Aristocrat must deposit funds, "[n]o later than 10:00 a.m. at least one Business Day prior to the Redemption date specified in the notice of redemption[,] . . . sufficient to redeem on the Redemption Date all of the Bonds so called for redemption." (Id.) If the deposit is over-funded "because of the conversion of such Bonds as provided in" article 12, the surplus "shall after such conversion be repaid to the Issuer by the Trustee." (Id. § 13.10.)

  The scrivener's error skewed the stock-price trigger for Aristocrat's right to redeem the bonds. As written into the Indenture, Aristocrat's right had not been triggered as of the parties' submissions on this motion. However, as corrected, Aristocrat's right materialized on November 22, 2004. Realizing the error, Aristocrat contacted the Trustee to correct it. The Trustee refused to correct the error because Aristocrat insisted the correction would allow it immediately to terminate Bondholders' right to convert their bonds to stock. All parties agree that the exchange rate is a scrivener's error and should be the converse of that written.

  On December 20, 2004, plaintiff attempted to give notice of redemption and call the bonds for redemption. Plaintiff sent a communique to the Bondholders titled "Notice of Redemption" and stating:
[t]he Issuer has elected to call for the redemption of all outstanding Bonds, such redemption to occur on the date that is 45 days after the date that the correction of the Exchange Rate to A$1.00=US$.5140 (such date, the "Redemption Date"). This redemption is made at the option of the Issuer under Article 12 of the Indenture.
(Memorandum of Law in Support of Defendant Trustee's Motion for Judgment on the Pleadings ("Tr.'s Mem.") Ex. A.) The notice identified the unpaid principal amount as US$130,000,000, and stated the Bondholders would receive 100% of the principal plus interest. (Id.) Further, the Bondholders were put on notice that "[p]ursuant to Section 13.01 of the Indenture, the Conversion Rights terminate immediately upon, and simultaneously with, the call by the Issuer for the redemption of the Bonds. Accordingly the Conversion Rights have terminated as of the date hereof." (Id.) This notice was faxed and mailed to the Trustee and the Bondholders. The next day, Aristocrat also made a media announcement that it had called the bonds for redemption.

  Also on December 20, 2004, Aristocrat instigated the instant suit against the Trustee, seeking declaratory judgment that Aristocrat's redemption right came into being on November 22, 2004, Aristocrat called for redemption on December 20, 2004, terminating the Bondholders' right to convert and requiring the Trustee to redeem the bonds. This Court allowed the Bondholders to intervene as of right as defendants on March 30, 2005. By stipulation dated March 9, 2005, the parties agreed that plaintiff need not ...


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