Mutual Savings Life Insurance Co. v. James River Corp.

In 1988 James River Corporation issued 10.75 percent debentures. The debentures were callable bonds, meaning they could be redeemed by James River at any time as long as James River paid for the redeemed bonds with qualified funds. The bond indenture contained a redemption clause prohibiting James River from paying for redeemed bonds with money borrowed at an interest rate lower than the 10.75 percent rate of the bonds. In 1992 James River made a tender offer for the debentures, and 98 percent of the debenture holders accepted the offer. James River purchased the debentures by selling notes with an interest rate of 6.75 percent, meaning James River purchased the debentures with money borrowed at an interest rate lower than 10.75 percent. James River then redeemed the remaining 2 percent of debentures using money borrowed at an acceptable interest rate under the redemption clause. A group of debenture holders (the plaintiff debenture holders) filed a lawsuit against James River in Alabama state court, arguing that James River violated the indenture’s redemption clause by making a tender offer for callable bonds and paying for those bonds using money that it borrowed at an improperly low interest rate. The plaintiff debenture holders reasoned that the tender offer was made simultaneously with the redemption, coercing debenture holders to accept the tender offer and allowing James River to circumvent the redemption clause. James River filed a motion for summary judgment, arguing that the tender offer was not subject to the redemption clause. The trial court granted summary judgment for James River. The plaintiff debenture holders appealed.