Eliasen v. Itel Corp.

82 F.3d 731 (1996)

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Eliasen v. Itel Corp.

United States Court of Appeals for the Seventh Circuit
82 F.3d 731 (1996)

Facts

In 1896 the Green Bay & Western Railroad Company (the railroad) emerged from bankruptcy with a new capital structure under which the first mortgagees acquired all the capital stock and the second mortgagees and the shareholders received Class A and Class B debentures, or bonds unsecured by liens. Only the stock had voting rights. Annual dividends were allocable in set amounts to the Class A debenture holders first, the shareholders second, and both the Class A debenture holders and the shareholders third. Anything remaining after those distributions was payable to the Class B debenture holders. The Class B debenture certificate provided that in the event of a sale of the railroad, the first $600,000 was to be distributed to the Class A debenture holders and the next $2.5 million to the shareholders. As for the total amount to which the Class B debenture holders were entitled in their third-priority position, the certificate’s wording was ambiguous. One sentence indicated that the Class B debenture holders were entitled to the next $7 million—i.e., the total face value of all the Class B debentures, which were individually valued at $1,000—but another alluded to a pro rata distribution of net proceeds. Itel Corporation (defendant) acquired 100 percent of the railroad’s stock and 78 percent of the Class B debentures. In 1993 Itel sold the railroad for well over $10.1 million (the sum of the stated values of the three classes of security). Axel Eliasen and other owners of the remaining 22 percent of Class B debentures (the Class B debenture holders) (plaintiffs) brought a class-action suit in federal district court. The Class B debenture holders argued that the Class B debentures, rather than the stock, constituted equity in the railroad, and that they were entitled to amounts from the sale above the face value of the Class B debentures. Itel moved to dismiss, and the motion was granted. The Class B debenture holders appealed. The United States Court of Appeals for the Seventh Circuit granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Posner, C.J.)

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