The tardiness of a technical services company in submitting financial reports to the Securities and Exchange Commission and the trustee responsible for managing its debt payments have prompted a potentially expensive default.
New York Supreme Court Justice Bernard J. Fried ruled in The Bank of New York v. BearingPoint, 600169/06, that by failing to file required SEC reports BearingPoint “repudiated its obligation” under two debt issues.
The case began after BearingPoint entered into an indenture agreement with the Bank of New York in December 2004. It then issued $400 million in unsecured debt — debentures — with payment due Dec. 15, 2024.
However, BearingPoint missed deadlines for filing with the SEC its 2004 10K report and two quarterly 10Q reports in 2005. The company ascribed the delays to problems with a new accounting system.
In September 2005, the Bank of New York, as trustee of the debt issues, sent the company a notice of default. Two months later it said that any accrued and unpaid liquidated damages were due immediately.
Since BearingPoint made no such payments to the bond holders, the bank sued for breach of contract, alleging that, as the indenture trustee, it was entitled to relief. Specifically, it argued that BearingPoint violated the financial reporting covenant in the indenture governing the debt.
Fried ruled that BearingPoint was required to provide annual and quarterly reports to its trustee under §314 (a) of the Trust Indenture Act of 1939 (TIA). This section of the act obligates an issuer of bonds to provide the trustee with its quarterly and annual SEC reports.
Fried held that, under this section of the statute, a company is required to file with the trustee at the same time it is supposed to file with the SEC. He ruled that §314(a) of the TIA “obligates an issuer of bonds or notes, such as BearingPoint, to provide the Indenture Trustee with current SEC filings.”
The indenture agreement also required BearingPoint to file with the trustee copies of its periodic and other reports “within 15 days after it files … such reports with the SEC.”
BearingPoint argued that this provision should be interpreted to mean that it must file with the trustee if it files with the SEC, but that it did not have an independent requirement to file periodic reports.
Fried, however, held that the agreement “unambiguously obligates BearingPoint to make the required SEC filings.”
After finding that the company was in default and liable for breach of contract, Fried said the amount of damages would be determined at trial