In re Envirodyne Industries, Inc.

Envirodyne Industries, Inc. (Envirodyne) went into Chapter 11 bankruptcy. Envirodyne’s unsecured debt was divided into three categories: senior discount notes, 14 percent senior subordinated debentures, and 13.5 percent subordinated notes. The indenture for the issuance of the 13.5 percent notes stipulated that holders of the 14 percent debentures were entitled to be paid in full before the holders of the 13.5 percent notes could receive anything in distribution. However, the indenture contained a clause—an X clause—that made an exception for “(1) shares of stock in the reorganized firm, or (2) securities in the reorganized firm or any other firm created by the reorganization, payment of which is subordinated to the claims of the holders of superior indebtedness.” The reorganization plan called for the 14 percent noteholders (defendants), who were owed $200 million, to receive common stock in the reorganized firm worth $121 million. The 13.5 percent noteholders (plaintiffs), who were owed $100 million, were to receive only $20 million worth of the stock. The 13.5 percent noteholders objected, arguing that they were not subordinate with respect to the common stock, because the portion of the X clause that mentioned subordination followed the mention of other securities rather than stock, and because the clause used the word payment, which does not apply to stock. The bankruptcy court rejected the objection. The 13.5 percent noteholders then appealed to federal district court, which agreed with the bankruptcy court. The 13.5 percent noteholders again appealed. The United States Court of Appeals for the Seventh Circuit granted certiorari. The 13.5 percent noteholders and the 14 percent noteholders both agreed that the X clause was unambiguous and that no extrinsic evidence was necessary.