With its recent decision in Affiliated Computer Servs., Inc. v. Wilmington Trust Co.,1 the United States Court of Appeals for the Fifth Circuit has joined the Eighth Circuit in holding that a bond issuer’s failure to timely file financial reports with the SEC does not constitute a breach of the reporting covenant contained in its indenture agreement. In doing so, the Fifth Circuit has become the second federal appellate court to reject the reasoning of a New York state court in Bank of N.Y. v. BearingPoint, Inc.,2 which held that both the Trust Indenture Act of 1939 (“TIA”) and a standard indenture reporting provision impose independent obligations on a bond issuer to timely file reports with the SEC.
The facts underlying Affiliated Computer Servs. are as follows. In June 2005, Affiliated Computer Services (“ACS”) and The Bank of New York (“BNY”) entered into an indenture agreement under which ACS served as the bond issuer and BNY served as the indenture trustee. Section 4.03 of the indenture (the “reporting provision”) provided that ACS “shall file with the Trustee, within 15 days after it files the same with the SEC, copies of the annual reports and the information, documents and other reports . . . that [ACS] is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.”3 In addition, the reporting provision stated that ACS shall comply with the § 314(a) of the TIA, which requires a bond issuer to “file with the indenture trustee copies of the annual reports and of the information, documents and other reports . . . which [the bond issuer] is required to file with the [SEC].”4
In the fall of 2006, due to an internal investigation into ACS’ stock option practices, ACS was unable to timely file its annual Form 10-K with the SEC and instead, filed a Notification of Late Filing explaining its situation. Shortly thereafter, various noteholders declared ACS’ failure to timely file the report an indenture default and demanded accelerated payment of the notes. ACS eventually filed its 2006 10-K four months later, and two days later forwarded a copy of the 10-K to Wilmington Trust, BNY’s successor as indenture trustee.
In determining whether ACS’ failure to timely file its 2006 10-K with the SEC constituted a breach of the indenture, the Fifth Circuit rejected the New York state court’s analysis in BearingPoint as unpersuasive, choosing instead to follow the reasoning of the Eighth Circuit in UnitedHealth Group Inc. v. Wilmington Trust Co.5 Unlike the state court in BearingPoint, which focused on the purpose of the indenture “to provide information to the investors so that they may protect their investment,” the Fifth Circuit chose to focus on the specific language used in the indenture.
Parsing the language of the reporting provision in much the same way as the Eighth Circuit did in UnitedHealth, the Fifth Circuit found that the phrase “that [ACS] is required to file” merely indicates which reports ACS must file with the trustee and that the phrase “within 15 days after it files the same with the SEC” identifies the time in which the reports must be forwarded to the trustee.6 The Fifth Circuit adopted the Eighth Circuit’s reasoning that the plain language of the reporting provision makes clear that the duty to file reports with the SEC is imposed pursuant to Section 13 or 15(d) of the Exchange Act and not pursuant to the indenture.
In addition, with respect to the TIA, the Fifth Circuit also agreed with the Eighth Circuit that the TIA’s reference to filings under the Exchange Act does not impose an independent obligation to timely file reports with the SEC, as found in BearingPoint, but rather serves only to identify which reports must be forwarded to the trustee.7 Thus, the Fifth Circuit held that the TIA, like the reporting provision, merely requires that those reports that are actually filed with the SEC be forwarded to the trustee.
The Fifth Circuit’s decision in Affiliated Computer Servs. and the Eighth Circuit’s decision in UnitedHealth underscore the need to revise the standard indenture provision if noteholders want to be able to declare a default when an issuer fails to timely file SEC-required reports.
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1 No. 08-10235, 2009 U.S. App. LEXIS 8011 (5th Cir. Apr. 16, 2009).
2 No. 600169/06, 13 Misc.3d 1209(A), 2006 WL 2670143 (N.Y. Sup. Ct. Sept 18, 2006).
3 Affiliated Computer Servs., 2009 U.S. App. LEXIS 8011, at *4-5.
4 Id. at *5.
5 548 F.3d 1124 (8th Cir. 2008).
6 Affiliated Computer Servs., 2009 U.S. App. LEXIS 8011, at *16.
7 Id. at *15.
