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Universal Investment Advisory SA v. Bakrie Telecom PTE, Ltd.

Supreme Court of New York, First Department

August 29, 2017

Universal Investment Advisory SA, et al., Plaintiffs-Appellants-Respondents,
Bakrie Telecom PTE, Ltd., et al., Defendants-Respondents-Appellants, PT Bakrie & Brothers TBK, et al., Defendants-Respondents.

         Plaintiffs appeal from the judgment of the Supreme Court, New York County (Saliann Scarpulla, J.), entered September 29, 2016, dismissing the complaint (third, fifth and seventh causes of action) as against the individual defendants and defendant PT Bakrie & Brothers TBK for lack of personal jurisdiction. Cross appeals from the orders of the Supreme Court, New York County (Saliann Scarpulla, J.), entered April 22, 2016, which, to the extent appealed from as limited by the briefs, granted plaintiffs' cross motion to convert defendants' motion to dismiss the first cause of action (breach of contract) into a motion for summary judgment, and granted plaintiffs' partial summary judgment on that cause of action, denied defendants' motion to dismiss the claims asserted by plaintiffs Universal Investment Advisory SA and Vaquero Master EM Credit Fund Ltd. for lack of standing, and to dismiss the second and fourth causes of action (fraud), purportedly denied defendants' motion to dismiss the cause of action for a declaratory judgment, and granted defendants' motion to dismiss the eighth cause of action (breach of contract).

          Greenberg Traurig, LLP, New York (James W. Perkins and Anne C. Reddy of counsel), and Hal Hirsch, New York, for appellants-respondents.

          Schnader Harrison Segal & Lewis LLP, New York (Theodore L. Hecht, Kenneth R. Puhala and Jessica M. Lau of counsel), for respondents-appellants and respondents.

          Tom, J.P., Moskowitz, Gische, Kapnick, JJ.

          Barbara R. Kapnick, J

         This case arises out of an issuer's and guarantors' default in the payment of notes that were publicly offered in the international financial markets. Defendant PT Bakrie Telecom Tbk (BTEL) is a telecommunications company organized under the laws of Indonesia and is the parent of defendant Bakrie Telecom Pte. Ltd (issuer). Defendants PT Bakrie Network (PT Network) and PT Bakrie Connectivity (PT Connectivity) are Indonesian subsidiaries of BTEL (BTEL, issuer, PT Network and PT Connectivity, collectively, the manager defendants). Defendant PT Bakrie & Brothers (B & B) is the Indonesian parent company of BTEL and the other Bakrie defendants, has effective control over the management of BTEL, and is the controlling shareholder of BTEL, owning 39.6% of BTEL stock at the time of the offering. The individually named defendants are/were directors or commissioners of BTEL either at the time of the offering or thereafter (individual defendants).

         Under an indenture dated May 7, 2010, as supplemented by a supplemental indenture dated January 27, 2011, the issuer, on behalf of BTEL, issued $380 million of guaranteed senior notes, due on May 7, 2015 (notes). Plaintiffs are holders of more than 25% of the notes. By way of an intercompany loan from the issuer, BTEL received the $380 million proceeds of the offering, and issued an unconditional parent guarantee of the issuer's payment obligations under the notes. BTEL's subsidiaries, PT Network and PT Connectivity, executed subsidiary guarantees of the issuer's payment obligations under the notes. Neither B & B nor the individual defendants, in their individual capacities, executed the indenture or the subsequent supplemental indenture or provided any guarantee of the issuer's payment obligations under the notes.

         Under the terms of the notes and the indenture, the issuer was obligated to make semi-annual interest payments of approximately $21.8 million by funding a New York interest reserve account maintained by the indenture trustee, BNY Mellon. Sections 12.07(a) - (b) of the indenture contain a New York choice of law and forum selection clause. Section 6.07 of the indenture, referred to by the parties as the "no impairment" clause, provides as follows:

Rights of the holders to Receive Payment. Notwithstanding anything to the contrary, the right of any holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note, or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes of such series, which right shall not be impaired or affected without the consent of the holder.

         Defendants distributed an offering memorandum for the notes, dated April 30, 2010, which incorporated BTEL's 2009 audited financial statements. Defendants distributed a supplemental offering memorandum, dated January 24, 2011. Plaintiffs allege that the offering memoranda falsely portrayed BTEL as a successful wireless provider that continued to experience growth and remained competitive in an ever expanding and developing industry, when in actuality, at the time the offering memoranda were distributed, BTEL was insolvent, its technology was outdated, and the offering memoranda had inflated the value of its assets. Plaintiffs further allege that B & B and BTEL's directors and commissioners at the time of the offering (offering defendants), by virtue of their positions of decision-making control and management responsibility, were aware that BTEL was incapable of meeting its obligations, or refinancing the $380 million intercompany loan, when the notes matured.

         Specifically, plaintiffs allege that BTEL's capital expenditures from 2004 to 2011 were more than 100% of its operating cash flow, such that BTEL had to obtain high interest loans in order to build and maintain the telephone network that is the core of its business; that BTEL's returns continually declined between 2006 and 2013, causing it to lose its competitive market position; and that BTEL improperly depreciated its telephone network assets, claiming a longer useful life than they actually had. Plaintiffs further allege that BTEL's working capital substantially declined since 2008, because its current debt payments were increasing at a greater rate than the cash it generated from operations and financing.

         Under the indenture and supplemental indenture, interest on the notes was payable on May 7 and November 7 of each year. In November 2012, BTEL missed its biannual interest payment. Plaintiffs allege that BTEL's directors at the time caused BTEL to issue false assurances to plaintiffs that BTEL had plans to improve its cash flow, which would allow it to pay off the November 2012 interest payment and the upcoming May 2013 interest payment. Plaintiffs contend that the plan to improve cash flow consisted of a short-term infusion from the Bakrie family to make the payments, which further deceived plaintiffs as to BTEL's financial health and status.

         In November 2013, and then again in May 2014, BTEL defaulted on its interest payments on the notes. On the eve of the May 2014 payment date, BTEL issued a notice to bondholders that the company was engaged in negotiations concerning its operations and potential restructuring of the notes, and that pending these negotiations, BTEL would not be making any further interest payments on the notes. Plaintiffs were not part of these negotiations.

         In response to this notice, plaintiffs and other noteholders, holding an aggregate of $106 million of the notes, formed an Ad Hoc Committee in order to engage in discussions with BTEL about its financial and operational plans, including its plans to restructure the notes. The Ad Hoc Committee entered into a memorandum of understanding (MOU) with BTEL that they would "enter into a process to reach a resolution to the default, " and that for a two-week period, the Ad Hoc Committee would not accelerate or enforce the debt. BTEL allegedly refused to grant the Ad Hoc Committee access to technical, financial and economic data ...

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