Metropolitan Life Insurance Company v. RJR Nabisco, Inc. case brief

Metropolitan Life Insurance Company v. RJR Nabisco, Inc.
United States District Court, Southern District of New York, 1989
716 F.Supp. 1504.

-Leveraged Buyout, Bond Market, Experienced Investors.

FACTS
-In late 1988 CEO, Johnson, of RJR Nabisco proposed a Leveraged Buy-out (LBO) of the company’s shareholders, at $75/share.
-Bidding war broke out, Johnson (CEO) v. KKR.  Committee formed to consider competing proposals.  
-KKR LBO won at $24b, purchase of stock at $109/share.
-P allege that D’s actions drastically impaired value of their bonds, which were previously issued to P because of a misapportionment of the value of the bonds to help finance the LBO and distribute a windfall to company’s shareholders.

HOLDING
-Court agreed w/ D that no express covenant existed to restrict new debt and court will not imply one.

ANALYSIS
-The court stated that underwriters ordinarily negotiate the terms of indentures with issuers.
-P’s were sophisticated investors, they were well aware of the indenture terms, and are presumed to review them carefully before lending to the company.
-Court gets into the background stuff: the prospectus for the indentures contained a statement that “no restrictions on creation of unsecured short-term debt”, court noted that at one point some of the Nabisco bonds that Met Life held did include covenants that Met Life negotiated away. Met Life had circulated an internal memo discussing risks involved w/ absence of business covenants.
Court stressed that sophisticated investor like Met Life can’t plead ignorance to market-risks:
1)  Parol Evidence Rule bars P from arguing that speeches made by D executives prove D agreed or assented to term that does not appear in the indenture K’s
2)  Indenture language needs to be determined as a matter of law.  (see Sharon Steel)

Court looks at argument for an “implied covenant of good faith”
→ A P can always allege a violation of an express covenant.
-Implied covenants in circumstances where express terms may not have been technically breached but one party has still deprived the other party of some express bargained for benefit.
-Courts will thus read an implied covenant of good faith and fair dealing to ensure neither party deprives the other of the “fruit of the agreement”.
-The implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits.

→ In bond indentures: an “implied covenant” cannot give bondholders any rights inconsistent w/ those rights set out in the bond agreement.
-Where P’s contractual rights have not been violated, there can have been no breach of an implied covenant.
-Court looks at Van Gemert (below), states that courts use the implied covenant of good faith and fair dealing to ensure that the bondholders received the benefit of their bargain as determined from the face of the contracts at issue.
-Van Gemert involved less sophisticated investors.

Analysis requires that:
1) Examine the indenture to determine the fruits of the agreement between the parties.
2) Decide whether those fruits have been spoiled, i.e., whether P’s contractual rights have been violated by D.

Long Term Debt: holder ordinarily has not bargained for and does not expect any substantial gain in the value of the security to compensate for risk of loss.
-Fact which accounts in part for the detailed protective provisions in typical long-term debt financing instrument, is that the lender (purchaser of debt) can expect only interest at the prescribed rate plus the eventual return of principal

-Looking to indentures court determines what specific fruits are, and that P does not allege a breach of any of these.  Further holds that “fruits” do not include an implied covenant preventing new debt.
-Court will use implied covenant to ensure bargained for rights are performed and upheld it will not use it to shoehorn in a right that a party now wishes to have included

Discussed market expectations that term of indenture will be upheld and that courts will not add new substantive terms.  
-To respond to changed market forces, new indenture provisions can be negotiated.   No guarantee that companies such as RJR will accept new covenants, but parties retain freedom to enter into k’s as they choose.
“Promise by D should be implied only if court may rightfully assume that parties would have included it in their written agreement had their attention been called to it”-Final analysis on “implied covenant” argument is that courts should be reluctant to imply terms into an integrated agreement governed by specific and explicit provisions where parties are sophisticated investors versed in market assumption and not in a fiduciary relationship w/ the other