830 F.3d 152
2d Cir.2016Background
- Plaintiffs (several hedge funds) held two SBA Communications convertible notes (2008 and 2009 issuances) that paid semiannual interest and were convertible into SBA stock or cash before maturity.
- Indentures provided interest payments to holders of record on Regular Record Dates, a Wash Clause requiring a converting holder (who converts after a Regular Record Date but before the Interest Payment Date) to pay the interest amount back to the company, and a Maturity exception to that Wash Clause for conversions after the final Regular Record Date.
- Plaintiffs converted during the final period (after the final Regular Record Date but before the Maturity Date), did not make the Wash payment (relying on the Maturity exception), and received conversion consideration; SBA did not pay the final accrued interest for the last six‑month period.
- Plaintiffs sued for breach of contract seeking the final interest payment; district court dismissed under Rule 12(b)(6), concluding the indentures unambiguously foreclosed plaintiffs’ claim and denying leave to amend as futile.
- On appeal, plaintiffs argued the indentures unambiguously required the final interest payment (or, alternatively, that the contract was ambiguous and industry custom should be considered); SBA argued the indentures unambiguously denied the final payment to converting holders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs are entitled to the final interest payment after converting in the final period | The indentures require SBA to pay final interest to holders of record on the final Regular Record Date; the Wash Clause and its Maturity exception mean converting holders in the final period should still receive final interest | The Payment of Interest Clause and Payment on Maturity Provision unambiguously direct final interest to whoever is paid principal on the Maturity Date; conversion before maturity makes plaintiffs not holders entitled to principal or final interest | Held for defendant: indentures unambiguous; converting holders who converted prior to Maturity Date are not entitled to final interest |
| Whether the Wash Clause/Maturity exception renders the Payment provisions ambiguous | The clauses must be read together to avoid rendering the Wash Clause or its exception superfluous; market practice supports plaintiffs’ view | The Wash Clause applies notwithstanding the Payment of Interest Clause; the Maturity exception simply prevents a windfall to the company and does not create ambiguity | Held for defendant: no reasonable ambiguity; plaintiffs’ reading is unreasonable and would grant preferential benefit to final-period converters |
| Whether conversion occurs on surrender or at later distribution (affecting who is paid principal) | Conversion is effectively completed on the Maturity Date when shares/cash are distributed, so plaintiffs were paid principal then | Indenture defines Conversion Date as when holder satisfies conversion requirements (surrender, payment of any required amounts), so conversion occurred before Maturity Date and converted holders are not paid principal on Maturity Date | Held for defendant: conversion date is when holder satisfies conversion requirements; plaintiffs converted earlier and thus were not holders entitled to principal or final interest |
| Whether dismissal without leave to amend was improper (plaintiffs could allege industry custom) | Plaintiffs could add market‑custom facts to show ambiguity and permit extrinsic evidence | Defendant: plain text is dispositive; amendment would be futile | Held for defendant: dismissal with prejudice affirmed because indentures are unambiguous and amendment would be futile |
Key Cases Cited
- Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2d Cir. 2014) (standard of review for Rule 12(b)(6) dismissal)
- Orlander v. Staples, Inc., 802 F.3d 289 (2d Cir. 2015) (New York law: ambiguity is question of law; courts construe contracts to give effect to all provisions)
- Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168 (2d Cir. 2004) (if contract ambiguous, dismissal under Rule 12(b)(6) inappropriate)
- Bank of N.Y. Trust Co. v. Franklin Advisers, Inc., 726 F.3d 269 (2d Cir. 2013) (interpretation of indenture provisions is contract law)
- Chesapeake Energy Corp. v. Bank of N.Y. Mellon Trust Co., 773 F.3d 110 (2d Cir. 2014) (contract ambiguity defined by objective reasonable meanings in trade context)
- Columbia Gas Sys., Inc. v. United States, 473 F.2d 1244 (2d Cir. 1973) (conversion treats unpaid interest as satisfied by stock/cash received)