The Trustee - Corporate Bonds and Credit Agreement

VI. The Trustee

Model Simplified Indenture, Section 7.01-7.11
Elliott Assocs. v. J. Henry Schroeder, 838 F.2d 66 (1988) (P. #1)

• Trustees can do anything: accelerate, notice of default, bring suit

  • Without 50% of bondholder, only the trustee can do these things

  • 25-50% bondholder trustee may but not obligated to bring suit

• Bondholders cannot rely on trustee - trustees are lazy as they are paid very little fixed fee by the company and are worried of potential liability (not compensated on hourly basis nor high rate) doing nothing is ideal for trustee, but trustee’s outside counsel would want more work so they get paid more (and trustee gets reimburse)

• Trustees are selected and paid by companies – bondholders sometimes can replace trustee

Freeport

• 7.01 Duties of Trustee

  • (a) If an Event of Default has occurred, Trustee shall exercise and use same degree of care and skill as a prudent person

    • Once E of D, prudent person standard

  • (b) Except during Event of Default

    • May rely on info provided by the company

    • Prior to Event of Default, Trustees only have duties that are set forth in this indenture

      • 7.05 If Trustee knows of default, must notify holders w/in 90 days unless no notice is in holders best interest

        • (Prof: cannot think of any situations)

        • Trustee doesn’t investigate it, but knows company has to do certain things in certain time or Trustee would be notified, e.g. SEC filings not filed

      • Event of default is bad for trustee, as obligation arises

  • See Elliott

• 7.07: Reimbursement of expenses

• 7.08 remove trustee by majority

• 6.10 when trustee collects money, will pay out the money to itself first, and the Company have to reimburse trustees (if suits brought by trustee)

Problem Set #22

1. Assume the Company has failed to comply with one of its covenants. What are the Trustee's duties? In particular:
(i) is the Trustee obligated to give a Notice of Default to the Company?
(ii) is the Trustee obligated to notify the holders of the default?
(iii) is the Trustee obligated to take any other steps (such as seeking an injunction)? Is the Trustee compensated (and if, by whom) for its expenses?

2. A holder writes a letter to the Trustee informing the Trustee that the Company has failed to comply with one of its covenants. What are the Trustee’s duties? What if the Trustee has received a compliance certificate from the Company two weeks beforehand stating that the Company has not violated any covenants?

3. Did...