Harris Trust & Savings Bank v. E-II Holdings, Inc.

United States Court of Appeals for the Seventh Circuit · 1991 · Corporations

CorporationsIndenturesDeclaratory JudgmentTrust Indenture ActImplied Covenant of Good Faith and Fair DealingArticle IIIactual controversyadverse legal interests

Facts

After E-II issued $1.5 billion in high yield debt securities, it engaged in a series of transactions following a takeover battle and later acquisition-related restructuring, including a transaction involving Faberge that concerned the trustees and some investors. The trustees received notices of default from some holders and requested from E-II not only the certificates and opinions required by the indentures but also the underlying factual information supporting those documents. E-II provided the required certificates and opinions but refused to disclose the additional factual bases, asserting that the indentures did not require it. The trustees then sued, largely seeking judicial guidance without committing to substantive positions on whether the transactions violated the indentures.

Issue

Whether a declaratory judgment action presents an Article III case or controversy when the trustees seek judicial guidance but do not themselves take positions on most of the alleged disputes. Also, whether the trustees stated a claim to compel E-II to provide factual information beyond the certificates and opinions required by the indentures or the Trust Indenture Act.

Rule

A federal court has declaratory judgment jurisdiction only when the facts show a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality; a plaintiff who declines to express a position on the merits fails to establish such a controversy. In addition, neither an indenture's express terms, nor New York's implied covenant of good faith and fair dealing, nor section 314 of the Trust Indenture Act creates a right to factual material underlying required certificates and opinions unless the contract or statute specifically provides for it.

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Redwood Trust Company, an indenture trustee in Chicago, becomes concerned that issuer Lakefront Consumer Holdings completed several restructurings in Ohio that may have violated debt covenants. The trustee files in federal court seeking a declaration whether the restructurings complied with the indenture, but repeatedly alleges it lacks enough information to take any position and asks the court for "guidance."

Is the federal court most likely to have declaratory judgment jurisdiction over that claim?

Explanation. A declaratory judgment requires an actual controversy between parties with adverse legal interests of sufficient immediacy and reality. When the plaintiff seeks judicial guidance while declining to state its own merits position, the suit is effectively a request for an advisory opinion. The court's reasoning rejects the idea that a trustee may invoke jurisdiction merely by asking what it should do, and it also rejects the notion that importance or dollar value substitutes for adversity. A prior declaration of default is not required; the defect here is the lack of an adverse merits position. (Derived from Harris Trust & Savings Bank v. E-II Holdings, Inc. (n.d.).)