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Broenen v. Beaunit Corp.

440 F.2d 1244 (1970)

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Broenen v. Beaunit Corp.

United States Court of Appeals for the Seventh Circuit

440 F.2d 1244 (1970)

Facts

In 1965 Beaunit Corporation (old Beaunit) issued convertible debentures. The debenture indenture provided that old Beaunit could not merge with another corporation unless the successor corporation assumed all obligations under the debenture. The indenture also provided that in the event of a merger, the convertible debentures could be converted into some other security rather than old Beaunit common stock. In 1967 El Paso Natural Gas Company (El Paso) (defendant) acquired old Beaunit, and old Beaunit was merged through a three-corner merger into EPNG Corporation, a subsidiary of El Paso. The merged companies were renamed Beaunit Corporation (new Beaunit) (defendant). New Beaunit assumed all the obligations under the convertible-debenture indenture, and a supplemental indenture was created under which the debentures could be converted into El Paso common stock. Ora Alva Broenen (plaintiff), a convertible-debenture holder, sued El Paso and new Beaunit in federal district court, alleging that the merger violated the debenture indenture. Though Broenen alleged specific breaches of the indenture, the central argument of her lawsuit was that the three-corner merger caused the future conversion of her debentures into El Paso common stock to be recognized for tax purposes. Under the standard convertible-bond rule created by Treasury regulations, the conversion of a bond into a security of the obligor corporation was nonrecognizable. Under the merger, new Beaunit was the obligor corporation, but the debentures could be converted into El Paso common stock, meaning the debentures did not fall under the convertible-bond rule. Broenen argued that the original nonrecognition of the conversion of the debentures was an inducement for her to purchase the debentures and that the loss of nonrecognition reduced the market value of the debentures. The district court granted summary judgment for El Paso and new Beaunit, holding that the merger did not violate the indenture. Broenen appealed.

Rule of Law

Issue

Holding and Reasoning (Swygert, C.J.)

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