Metropolitan Life Ins. Co. v. RJR Nabisco, Inc.
716 F.Supp. 1504 (S.D.N.Y. 1989)

PROCEDURAL POSTURE: Plaintiff investors filed an amended complaint against defendants, corporation and its chief executive officer (CEO), alleging injuries sustained in connection with the corporation's leveraged buy-out (LBO) of its shareholders. The court considered the investors' motion for summary judgment on the breach of the implied covenant of good faith and fair dealing and equity counts of their complaint, and the corporation and CEO's cross-motions

FACTS: Metropolitan Life (P) sued RLR. (D) for its actions relating to the leveraged buyout of RJR by KKK for $109 per share for total of $21 billion P alleges that D's actions have drastically impaired the value of the bonds issued to P P alleged that D in fact had misappropriated the value of the bonds to help finance the LBO and to distribute an enormous windfall to the company's shareholders P moved for summary judgment under Rule 56.

ISSUE: Does an issuer whose bond value is impaired breach of an implied covenant of good faith by engaging in a leveraged buyout?

RULE: A bond indenture does not contain an implied covenant restricting any action that might subject the bondholder's investment to an increased risk of nonpayment.

ANALYSIS(Walker, J.) No. The indenture governing the bonds permits Nabisco (D) to engage in mergers and assume other debts. The parties knew the indenture's terms at the time Nabisco (D) sold the bonds. Imposing additional terms on the indenture through implied covenants would create a burden that was not part of the parties' bargain. Even though indentures are not often the result of face-to-face negotiations between the buyer and the seller, underwriters typically consider the buyer's needs and concerns when negotiating the agreement. The agreement controlling these bonds contains no restriction on company debt. Article Three of the indenture provides for payment of interest and principal and contains a negative pledge against mortgages and other liens. Article Five addresses the procedures to remedy defaults and restricts bondholders from bringing suit on the indentures without a demand by twenty-five percent of the bondholders.