Scandals May Prompt Suits from Bondholder Trustees

By Kaplan, Harold L.; Schaffer, David S. | American Banker, July 26, 2002 | Go to article overview

Scandals May Prompt Suits from Bondholder Trustees


Kaplan, Harold L., Schaffer, David S., American Banker


Recent disclosures of accounting irregularities at major public companies -- including some that involved securities fraud lawsuits and investigations by the Securities and Exchange Commission -- may put pressure on banks that act as indenture trustees representing bondholders to bring securities fraud actions themselves.

However, the general -- though sometimes forgotten -- rule is that indenture trustees do not have authority to bring such actions, no matter how much the companies' investors or other constituencies may clamor for them. These lawsuits are most typically brought on behalf of people who had bought the company's securities -- usually when they were first issued. Trustees, on the other hand, brought in to collect past-due amounts under the bonds on behalf of current securities holders, whom indenture trustees are deemed to protect.

Over the years, those who have sought to defend the right of indenture trustees to bring securities fraud actions have generally relied on several arguments, or variations on them. Trustees are typically authorized under indentures to pursue "any available remedy," and their heightened post-default duties require them to bring legal action, some arguments go. To the extent that individual bondholders do not take legal action because indenture provisions require them to satisfy certain conditions first, implicitly, the right to pursue securities fraud lawsuits must reside with the trustee.

Responding to these arguments, courts have consistently distinguished between ordinary trustees, who exercise common law duties, and indenture trustees, whose duties and obligations are defined exclusively by the terms of the indenture. Banks that act as indenture trustees are more like stakeholders whose duties and obligations are defined by the indenture.

Courts have held that the "any available remedy" clause common among indentures only authorizes certain remedial actions. These actions must be aimed at collecting the principal, premium (if any), and interest on the bonds, and to enforce the terms and provisions of the indenture and the bonds. Only in some instances -- in which indenture trustees have explicitly been given a broad grant of authority to protect and enforce the trustee's rights and the rights of the bondholders -- have courts upheld the standing of trustees to bring outside tort and fraud claims.

Conversely, if trustees do have the right to assert fraud claims against bond issuers and others -- such as the issuer's accountants and investment bankers -- they may have to consider the extent to which they have an obligation to investigate, perhaps at considerable expense and with potential liability, whether such claims are valid.

It is generally recognized that indenture trustees have expanded post-default duties. These include the duty to use the same degree of care and skill in the exercise of their rights and powers as a prudent person would use under the circumstances in conducting his or her own affairs. That said, courts have been consistently unwilling to expand trustees' post-default powers beyond those duties specifically set forth in the indenture.

Another argument sometimes used to make the case for trustee lawsuits is that forbidding these suits leaves bondholders virtually powerless to remedy the fraud committed by issuers of public debt. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Scandals May Prompt Suits from Bondholder Trustees
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.