Chicago Title & Trust v. Telco Capital Corp.

THIRD DIVISION
SEPTEMBER 10, 1997

No. 1-96-2257

CHICAGO TITLE AND TRUST COMPANY, an
Illinois corporation, as Trustee under
Indenture between Technical Equipment
Leasing Corporation (now Telco Capital
Corporation), and Chicago Title and
Trust Company, as Trustee dated as of
March 14, 1981,

Plaintiff-Appellant,

v.

TELCO CAPITAL CORPORATION, a Delaware
corporation, formerly known as Technical
Equipment Leasing Corporation,

Defendant-Appellee.)
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)Appeal from the
Circuit Court of
Cook County

Honorable
Paddy H. McNamara,
Judge Presiding.

JUSTICE LEAVITT delivered the opinion of the court:
In March 1981, Telco Capital Corporation (Telco) issued
debentures in a principal amount exceeding $5.6 million. At that
time, Telco and Chicago Title and Trust Company (CTT) executed an
indenture pursuant to which CTT acted as trustee for the debenture
holders' benefit. The indenture was subject to the Trust Indenture
Act of 1939. 15 U.S.C. sec. 77 aaa et seq. (1981).
On April 1, 1995, Telco owed CTT $207,342.98 in interest. The
outstanding principal balance, at that time, was $2,256,790.76.
Telco did not pay the interest then due. Pursuant to the
indenture, CTT declared the principal due and payable immediately.
Nonetheless, Telco paid nothing.
CTT filed suit seeking the principal and interest Telco owed.
Telco filed an answer admitting the default and the amount owed,
but alleging an affirmative defense. Telco asserted that it owed
approximately $59.7 million to other parties and that debt was
senior to the debentures. Telco claimed the senior indebtedness
barred CTT from obtaining judgment against Telco based on the
indenture's language.
CTT moved to strike Telco's affirmative defense and for
summary judgment. No question of fact was raised. The court
denied CTT's motion to strike and it's motion for summary judgment.
The court then granted summary judgment in favor of Telco.
In reviewing a grant of summary judgment, we apply the de novo
standard. Demos v. National Bank of Greece, 209 Ill. App. 3d 655,
659-60, 567 N.E.2d 1083 (1991). Accordingly, we grant no deference
to the trial court's conclusion and conduct an independent review
of the legal issue. Demos, 209 Ill. App. 3d at 659-60. No fact
question was raised here. Because we disagree with the trial
court's interpretation of the indenture and find Telco was not
entitled to judgment as a matter of law, we reverse.
Telco claimed it was not obliged to pay CTT because it had
senior indebtedness. Section 1103 of the indenture, which was the
basis of Telco's affirmative defense, is part of Article Eleven.
That article is entitled "Subordination of Debentures." Section
1103 states:
"[U]pon the maturity of any Senior Indebtedness by
lapse of time, acceleration or otherwise, all principal
of and interest on all such matured senior indebtedness
shall first be paid in full, or such payment shall have
been duly provided for, before any payment on account of
principal or premium, if any, or interest is made upon
the debentures."
Senior Indebtedness is defined:
"*** the principal of, premium, if any, and interest
on indebtedness (other than the debentures), whether
outstanding on the date of the indenture or thereafter
and howsoever created, incurred, assumed or guaranteed by
[Telco] for any purpose whatsoever, and all renewals,
extensions and refunding thereof, unless in each case the
terms of the instrument creating or evidencing the
indebtedness provide that such indebtedness is not
superior in right of payment to the debentures."
The court agreed with Telco and found, based on section 1103, CTT
could not obtain judgment for past due principal and interest on
the debentures because Telco undisputedly had matured senior
indebtedness which was due and unpaid.
However, Article Eleven was not intended to allow Telco to
forever repudiate its debt to the debenture holders. Rather, it
establishes debenture holders' and holders' of senior indebtedness
relative rights to funds collected from Telco. Section 1102
states:
" *** the provisions of this Article Eleven are and
are intended solely for the purpose of defining the
relative rights of the holders of the debentures, on the
one hand, and the holders of the senior indebtedness, on
the other hand, and nothing contained in this Article
Eleven or elsewhere in this indenture or in the
debentures is intended to or shall impair, as between
[Telco], its creditors other than the holders of senior
indebtedness, and the holders of the debentures, the
obligation of [Telco], which is unconditional and
absolute, to pay to the holders of the debentures the
principal of (and premium if any) and interest on the
debentures as and when the same shall become due and
payable in accordance with their terms, and to affect the
relative rights of the holders of the debentures and
creditors of [Telco] other than the holders of the senior
indebtedness, nor shall anything herein or therein
prevent the Trustee or the holder of any debenture from
exercising all remedies otherwise permitted by applicable
law upon default under this indenture, subject to rights,
if any, under this Article 11, of the holders of senior
indebtedness in respect of cash, property or securities
of [Telco] received upon the exercise of any such
remedy."
In other words, upon Telco's default, CTT may exercise any remedy
the law provides, subject to holders' of senior indebtedness rights
to Telco's assets which the trustee might receive upon the exercise
of its remedies. CTT can obtain a judgment against Telco, but
holders of senior indebtedness have a primary right to assets CTT
obtains upon enforcement of its judgment.
Other provisions of the indenture harmonize with the
collection process contemplated by section 1102. Section 503,
contained in the indenture's remedies section, relevantly reads:
"If [Telco] fails to pay such *** amounts [in
default] forthwith upon *** demand, the Trustee, in its
own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the
sums so due, and unpaid, and may prosecute such
proceeding to judgment or final decree, and may enforce
the same against [Telco] or any other obligor upon the
debentures and, subject to the provisions of Article
11, collect the moneys adjudged or decreed to be payable
in the manner provided by law out of the property of
[Telco] or any other obligor upon the debentures wherever
situated." (Emphasis added).
Section 503 flatly contradicts the proposition that the existence
of senior indebtedness bars CTT from obtaining judgment against
Telco. It establishes that the Trustee may file suit to collect
sums due and unpaid, and may "prosecute such proceeding to
judgment." Judgment can be enforced; however, collected funds are
subject to Article Eleven.
Other provisions also contradict Telco's proffered
interpretation of the indenture. Section 506 reads in part:
"Any money collected by the Trustee pursuant to this
Article shall, subject to the provisions of Article
Eleven, be applied in the following order ***"
It expressly contemplates that the Trustee may collect funds,
notwithstanding the existence of senior indebtedness, and that
Article Eleven governs the distribution of such funds when senior
indebtedness exists.
Section 508 reads:
"Notwithstanding any other provision in this
indenture, the holder of any debenture shall have the
right, which is absolute and unconditional,
(i) subject to the provisions of Article
Eleven, to receive payment of the
principal of (and premium, if any) and *** interest on
such debenture on or after the respective due dates as
expressed in such debenture, and
(ii) to institute suit for the enforcement of
any such payment on or after such respective dates,
and such right shall not be impaired or affected without the
consent of such holder."
Section 508(i) subjects debenture holders' right to receive money
from Telco to Article Eleven. However, section 508(ii) does not
relate debenture holders' absolute right "to institute suit" to
Article Eleven, nor does it bar or limit entry of judgment.
Our interpretation of this indenture accords with the only
reported decision on the subject, UPIC & Co. v. Kinder-Care
Learning Centers, Inc., 793 F. Supp. 448 (S.D.N.Y. 1992). There,
the plaintiff, a subordinated debenture holder, sought to recover
unpaid principal and interest on its debentures. The defendant-
obligor moved to dismiss the complaint because it had matured
senior indebtedness. The relevant indenture provisions were
substantively identical to those of the CTT-Telco indenture.
Both seem to be based on the model indenture provisions adopted
by the Corporate Debt Financing Project of the American Bar
Foundation and are thus quite similar. UPIC & Co., 793 F. Supp.
at 457.
The court in UPIC & Co. rejected the idea that subordination
provisions exist to insulate issuers from liability to holders of
subordinated debentures. It stated:
"[R]ather than serve to diminish or impair the
rights of security holders as against [the issuer] or
function so as to protect [the issuer's] interests, the
subordination clause serves to protect the relative
rights of the holders of senior indebtedness as against
those of the security holders, without impairing the
security holders' absolute and unconditional right to
payment of principal of and interest on the
securities." UPIC & Co., 793 F. Supp. at 459.

As the court articulated in UPIC & Co., a debenture holder
benefits when he collects on a judgment then disgorges the
proceeds of that judgment to holders of senior indebtedness
because the debenture holder then becomes subrogated to the
senior holders' rights. UPIC & Co., 793 F. Supp. at 460. In
fact, Section 1102(d) of the indenture here explicitly provides
subrogation rights to debenture holders. It reads:
"[S]ubject to the payment in full of all senior
indebtedness, the rights of the holders of the
debentures shall be subrogated to the rights of the
holders of senior indebtedness to receive payments or
distributions of assets of [Telco] made in respect of
senior indebtedness until all the debentures shall have
been paid in full ***"
Finally, whenever practicable, we seek to avoid contractual
construction which reaches an absurd result. First Illinois Bank
& Trust v. Galuska, 255 Ill. App. 3d 86, 92, 627 N.E.2d 325
(1993). "Where a contract is susceptible to one of two
constructions, one of which makes it fair, customary, and such as
prudent men would naturally execute, while the other makes it
inequitable, unusual, or such as reasonable men would not be
likely to enter into, interpretation which makes rational and
probable agreement must be preferred." NutraSweet Co. v.
American National Bank & Trust Co., 262 Ill. App. 3d 688, 695,
635 N.E.2d 440 (1994). The interpretation suggested by Telco and
adopted by the trial court would allow Telco to forever renege on
its absolute and unconditional obligation to pay debenture
holders because Telco can make sure it always has "senior
indebtedness," as that term is defined in the indenture. Because
this construction would make the contract nonsensical if not
illusory, we reject it.
For all these reasons, we reverse the judgment of the trial
court granting Telco's summary judgment motion and remand this
cause.
REVERSED AND REMANDED.
Cousins, P.J., and Cahill, J. concur.