Davis Polk & Wardwell Newsflash

Another Texas District Court Interprets Reporting Covenant and Section 314(a) of the TIAct to Impose Merely a Delivery and Not a Filing Obligation

February 14, 2008

Earlier this week, the US District Court for the Northern District of Texas, Dallas Division, found that no default had occurred under a reporting covenant contained in Affiliated Computer Services, Inc.’s (“ACI”) indenture even though ACI was delinquent in making certain filings with the SEC.

ACI had sought a declaratory judgment against the trustee under its indenture after certain holders of its senior notes sent various notices alleging that ACI was in default of its indenture reporting covenant as a result of ACI’s failure to timely file certain Exchange Act reports with the SEC while ACI investigated stock option backdating allegations. During the delinquency period, ACI continued to make Form 8-K filings that included updates about the status of the investigations as well as ACI’s financial condition and later filed the required reports with the SEC and the trustee.

The court found that ACI was not in default of the reporting covenant contained in the indenture because the covenant “merely requires the issuer to timely file with the indenture trustee the reports that the issuer has filed with the SEC” and did not impose an obligation on ACI to file the reports with the SEC. The court imparted a similar meaning to Section 314(a) of the Trust Indenture Act. ACI’s reporting covenant, which is similar to the covenant found in many indentures, reads as follows:

            The Company 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 (or copies of those portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall also comply with the provisions of the TIA 314(a).

This is the second Texas District Court to interpret a standard reporting covenant and Section 314 of the TIA in a similar manner. In June 2007, the US District Court for the Southern District of Texas made a parallel ruling with respect to an almost identical reporting covenant in Cyberonics, Inc. v. Wells Fargo Bank Nat’l Ass’n (“Cyberonics”), Civ.A.No. H-07-121,2007 WL 1729977 (S.D.Tex. June 13, 2007). Both the Cyberonics and ACI cases had been closely watched after a New York state court made a contrary ruling that surprised many in Bank of New York v. Bearingpoint, Inc. (“BearingPoint”), 13 Misc.3d 1209(A), 824 N.Y.S.2d 752 (Sup. Ct. N.Y.County 2006), and held that a similar reporting covenant and Section 314(a) of the TIA obligated the issuer of bonds to provide the trustee with “current filings,” meaning filings made in accordance with the time frames prescribed by the SEC.

As we noted in connection with the Cyberonics case, each of these decisions are by trial courts and therefore are not binding on other courts. The ACI court, however, cited heavily to Cyberonics and noted that it found the analysis in Cyberonics persuasive while it “respectfully disagree[d]” with the conclusions in BearingPoint.

Davis Polk & Wardwell