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Cortlandt Street Recovery Corp. v. Bonderman

New York Court of Appeals

February 20, 2018

Cortlandt Street Recovery Corp., Plaintiff,
David Bonderman, et al., Appellants, Wilmington Trust Company, Respondent, Hellas Telecommunications, II & c., et al., Defendants. And Three Other Actions.

          Robert S. Fischler, for appellants Apax Partners Europe Managers Limited et al.

          Paul M. O'Connor, III, for Bonderman appellants.

          Mark C. Zauderer, for respondent.


          RIVERA, J.

         On this appeal we must determine whether an indenture trustee may seek recovery on behalf of noteholders for defendants' alleged fraudulent redemptions intended to siphon off assets, leaving corporate obligors unable to pay the noteholders. The indenture at issue authorizes the trustee to "pursue any available remedy to collect... the payment of principal, premium, if any, and interest on the Notes, " and thus empowers that trustee to proceed at law and in equity to recover losses incurred by all noteholders from the unpaid notes. As such, the trustee may assert causes of action to recover pro-rata losses caused by defendants' scheme to render the note debtor insolvent. The trustee may also seek to pierce the corporate veil and impose corporate obligations on defendants under an alter ego theory of liability based on properly pleaded factual allegations - here that defendants created, for unlawful purposes, a corporate structure over which they exercised complete control and domination, and which they used to incur corporate debt so they could distribute the loan proceeds to themselves through fraudulent transfers, leaving the corporation unable to pay its creditors.

         I. Procedural and Factual Background

         The defendants on the appeal before us are private equity investment funds and their individual partners (collectively the Private Equity Defendants) who are part of a consortium controlled by the global private equity groups Apax Partners, L.L.P. (Apax) and TPG Capital Management (TPG) [1]. In 2005, these Private Equity Defendants created a group of shell companies incorporated in Luxembourg to acquire TIM Hellas Telecommunications (TIM Hellas), which at the time was the third largest cellular telephone company in Greece, profitable and nearly debt-free. The multi-company corporate group of shell companies (Hellas Group) include Hellas Telecommunications, S.à.r.l. (Hellas), the parent company of Hellas Telecommunications Finance, S.C.A. (Hellas Finance), Hellas Telecommunications I, S.à.r.l. (Hellas I), and Hellas Telecommunications II, S.C.A. (Hellas II) [2].

         By the end of 2005, the Hellas Group carried €1.6 billion in debt but only €38 million in equity and zero retained earnings [3]. The Hellas Group continued to borrow heavily, and by mid-2006 the Hellas Group's long-term debt had increased to almost €1.94 billion, as against shareholders' equity of €11.4 million. Notwithstanding this heavy debt to equity ratio, in December 2006, as part of Hellas Group's recapitalization, Hellas Finance issued €200 million in PIK (payment-in-kind) notes, [4] guaranteed by Hellas I, and governed by the indenture at issue in this case [5]. Simultaneously, as part of the recapitalization, Hellas redeemed Convertible Preferred Equity Certificates (Certificates) [6] that had been held by the Private Equity Defendants for approximately €973.7 million, which the Private Equity Defendants pocketed [7]. Two months after the redemption of the Certificates, defendants sold the Hellas Group to an investor.

         Less than three years later, during the global financial crisis in 2009, Hellas Finance and Hellas I defaulted on the PIK notes, leading to litigation to recover on behalf of the noteholders. Plaintiff Wilmington Trust Company (WTC), as the successor to the original indenture trustee, [8] brought the instant action against several Hellas entities and the Private Equity Defendants to recover payment due on the PIK notes from the assets allegedly looted by defendants from Hellas Finance and Hellas I, including the €973.7 million in certificate redemptions. [9]

         WTC claims that the recapitalization was not intended as a traditional restructuring of debt and equity, but in actuality was a scheme designed to distribute the loan proceeds to the Private Equity Defendants by redeeming securities from the Hellas Group, including the Certificates, and - in effect, paying out unlawful dividends - even though the Hellas Group was in considerable debt. The complaint alleges defendants adopted this scheme to "bleed-out" the Hellas Group, whereby:

"With an initial investment of €50 million, in 2005, TPG and Apax organized a group of interrelated companies to acquire a profitable, nearly debt-free company, then called TIM Hellas Telecommunications, S.A. (TIM Hellas'), creating a complex multi-company group. Under the control of Apax and TPG, the newly formed Hellas entities borrowed heavily, paid the loan proceeds to Apax and TPG and their investment funds, and were left debt-laden and insolvent to the detriment of their creditors."

         As against the Private Equity Defendants, the complaint asserts causes of action for breach of contract, fraudulent conveyances, unlawful corporate distribution, and unjust enrichment [10]. In addition to the various causes of action to hold liable the parties named for their own conduct, the complaint further seeks to pierce the corporate veil on the theory that the Private Equity Defendants are the alter egos of the Hellas Group and therefore liable for the corporate debt. For each cause of action, WTC requests payment of the €268 million owed on the PIK notes, [11] plus interest, trustee's fees, attorneys' fees, and the costs and disbursements of the action.

         As relevant to this appeal, Supreme Court granted defendants' motion to dismiss the complaint, concluding that WTC lacked standing because the indenture did not permit the trustee to sue the Private Equity Defendants for what the court considered "entirely separate claims" that could have been brought well before default (Cortlandt St. Recovery Corp. v Hellas Telecommunications, S.à.r.l., 47 Misc.3d 544, 569 [Sup Ct, New York County 2014]). The court dismissed the cause of action based on the alter ego theory of liability for the same reason, but noted that, in any case, it was inadequately pleaded and duplicative of the fraudulent conveyance causes of action that the trustee is not authorized to maintain (id. at 572 n 12). [12]

         On WTC's appeal, the Appellate Division modified on the law and denied the motion to dismiss the complaint, insofar as asserted by WTC as indenture trustee, and otherwise affirmed the orders (Cortlandt St. Recovery Corp. v Hellas Telecommunications, S.à.r.l., 142 A.D.3d 833');">142 A.D.3d 833 [1st Dept 2016]). The court concluded that the relevant language of the indenture "confers standing on the trustee to pursue... the fraudulent conveyance and other... claims, which seek recovery solely of the amounts due under the notes, for the benefit of all noteholders on a pro rata basis, as a remedy for an alleged injury suffered ratably by all noteholders by reason of their status as noteholders" (id. at 833-834). The court also found that the complaint sufficiently states a cause of action against these defendants under a veil-piercing theory (id. at 834) [13]. The Appellate Division granted defendants leave to appeal and certified the question whether the court properly modified the order of Supreme Court. We answer that question in the affirmative.

         II. Motion to Dismiss Standard of Review

         "When reviewing a defendant's motion to dismiss a complaint for failure to state a cause of action, a court must give the complaint a liberal construction, accept the allegations as true and provide plaintiffs with the benefit of every favorable inference" (Nomura Home Equity Loan, Inc. v Nomura Credit & Capital, Inc., ___ N.Y.3d ___ [2017], 2017 NY Slip Op 08622, at *3 [internal quotation marks omitted]). "Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss" (EBC I, Inc. v Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005]). Furthermore, "[u]nlike on a motion for summary judgment where the court searches the record and assesses the sufficiency of the parties' evidence, on a motion to dismiss the court merely examines the adequacy of the pleadings" (Davis v Boeheim, 24 N.Y.3d 262, 268 [2014] [internal quotation marks omitted]). The complaint here sufficiently pleads causes of action against defendants, in accordance with the indenture, based on the alleged fraudulent transfer scheme and in support of WTC's request to pierce the corporate veil.

         III. An Indenture Trustee's Role and Authority to Act on Behalf of Noteholders

         "An indenture is essentially a written agreement that bestows legal title of the securities in a single Trustee to protect the interests of individual investors who may be numerous or unknown to each other" (Quadrant Structured Prod. Co. v Vertin, 23 N.Y.3d 549, 555 [2014] [internal citation omitted]). As a partial solution to the collective-action problem presented by a fluctuating group of securities-holders with diverse interests, an indenture trustee "is appointed to act as a type of agent on behalf of the [securities-holders] collectively" (Steven L. Schwarcz & Gregory M. Sergi, Bond Defaults and the Dilemma of the Indenture Trustee, 59 Ala L Rev 1037, 1038 [2008]). "[U]nlike the ordinary trustee, who has historic common-law duties imposed beyond those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agreement" (Meckel v Continental Res. Co., 758 F.2d 811, 816 [2d Cir 1985]; cf. AG Capital Funding Partners, L.P. v State St. Bank & Tr. Co., 11 N.Y.3d 146, 156 [2008] [under corporate indenture, the rights of the trustee's pre-default duties are defined exclusively by the terms of the agreement]). Therefore, to determine the trustee's authority to pursue the causes of action in the appeal before us, we look to the language of the indenture.

         "[U]nder New York law[, ] interpretation of indenture provisions is a matter of basic contract law" (Quadrant, 23 N.Y.2d at 559 [internal quotation marks and citation omitted]), and we construe an indenture subject to the rule that "a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms" (id. at 559-560). "It is well established that when reviewing a contract, particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby" (Kolbe v Tibbetts, 22 N.Y.3d 344, 353 [2013] [internal quotation marks omitted]). "A reading of the contract should not render any portion meaningless" (Beal Sav. Bank v Sommer, 8 N.Y.3d 318, 324 [2007]). We now ...

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