Friedman v. Airlift International, Inc. , 44 A.D.2d 459 ( 1974 )

Steuer, J.

Plaintiff is the owner and holder of some $32,000 face value of debenture bonds issued by defendant, payable in 1987 and bearing interest at the rate of 5.75% per annum payable semiannually. Defendant defaulted in the payment of five semiannual interest payments and this suit is for the interest in default. While the complaint states it is a representative action and plaintiff is suing on behalf of all other debenture holders, this phase of the complaint has not been advanced in the briefs nor in the arguments made at Special Term nor in this court, and the action is deemed to be solely on behalf of plaintiff individually.

■The defendant concedes the issuance of the bonds and the default in interest payments. It further does not contest that plaintiff is the beneficial owner of the bonds. It has pleaded several defenses, two of which it relies on. The first defense is that the text of the bond contains several references to the indenture and that the indenture provides that no suit for interest can be brought until holders of at least 25% of the outstanding debentures have demanded that the trustee bring suit, have offered to indemnify the trustee for its cost and expenses, and the trustee has failed to bring suit for 60 days.

Eestrictions against suit in an indenture are not effective unless the face of the bond gives adequate notice of the restriction (Cunningham v. Pressed Steel Car Co., 238 App. Div. 624, affd. 263 N. Y. 671). While the text of the bond, including the designedly almost illegible small print on the back of the bond, contains numerous references to the indenture, only two of these have any reference at all to payment of principal or interest at maturity. The first is that “ the interest payable hereon ” is “ subject to certain exceptions provided in the Indenture.” The other is reference to the indenture ‘ ‘ for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures.” Neither of those clauses affects the obligation to pay principal or interest on maturity. A reference to another document cannot contradict the promise to pay unless the exception is stated specifically. The law is clearly and comprehensively set out in Cunningham {supra). There are really two distinct agreements, one embraced in the debenture bond and the other in the indenture. The indenture provides certain rights of collection in the event of certain contingencies and also sets up procedural limitations on the enforcement of those rights. The bond itself is intended to be a negotiable instrument. Any limitation on the obligation to pay at maturity appearing on its face would render it non-negotiable. It would appear that defendant has circulated its negotiable promises to pay and now seeks to deny their negotiability. As a matter of law tie references in the bond to the indenture do not accomplish this.

The cases cited in opposition fall into two categories — instances where the limitation on the obligation to pay was clearly expressed in the bond itself, and cases where the bondholder sought not only payment but a collection right provided in the indenture. These decisions have no bearing on the present issue.

The second defense relied upon is that these bonds are registered in the name of a nominee, not the plaintiff herself. In view of the fact that defendant does not dispute that plaintiff is the beneficial owner and holder of the bonds, this fact is of no significance. True it is that defendant would be protected by the terms of the bond if it paid the nominee. But that is the sole effect of the term.

The order entered November 13, 1973, in New York County (Amsterdam, J.) denying plaintiff’s motion for summary judgment and granting defendant’s cross motion for summary judgment should be reversed on the law and plaintiff’s motion granted to the extent of granting judgment to plaintiff for $3,700 and interest, without costs.

Settle order on notice.