Rabinowitz v. Kaiser-Frazer Corp.

Graham-Page Motors Corporation (Graham-Page) (defendant), an automobile manufacturer, issued $11.5 million in debentures pursuant to an indenture under which Bank of America (defendant) was the trustee. The indenture’s sinking-fund provision required Graham-Page to pay Bank of America an annual amount equal to 25 percent of its net earnings for the previous calendar year. Graham-Page sold its automotive assets to Kaiser-Frazer Corporation (defendant) as part of a transaction in which Kaiser-Frazer agreed to assume the interest payments on the Graham-Page debentures. However, the agreement also provided that Kaiser-Frazer would not assume any of Graham-Page’s other obligations under the indenture. Kaiser-Frazer thus avoided paying the 25 percent amount stipulated by the sinking-fund provision. Meanwhile, Graham-Page’s sale of assets resulted in negative net income, which made Graham-Page likewise unable to pay the 25 percent amount. The indenture’s no-action provision placed limitations on the ability of the debenture holders to bring suit, including a requirement that holders of at least 25 percent of the total principal submit written requests for the trustee to initiate legal action. Nevertheless, Joseph Rabinowitz (plaintiff), a holder of debentures worth only a fraction of the total principal, brought suit in New York state court against Graham-Page, Kaiser-Frazer, and Bank of America. Part of Rabinowitz’s argument was that Bank of America was at fault for failing to prevent a foreseeable breach of the sinking-fund provision. It was further alleged that Bank of America made several loans to both Graham-Page and Kaiser-Frazer as part of the asset sale, giving rise to a conflict between the bank’s role as creditor and the bank’s duty to protect the interests of the debenture holders. Kaiser-Frazer moved to dismiss.