Eighth Circuit Affirms Judgment Against Wilmington Trust in its Indenture Suit Against UnitedHealth Group

Holding:

In this appeal filed by defendant-appellant Wilmington Trust Co. (“Wilmington Trust”), the U.S. Court of Appeals for the Eighth Circuit ruled that UnitedHealth Group’s (“UHG”) failure to file timely reports with the Securities and Exchange Commission (“SEC”) violated no duties to its bondholders. The dispute arose when Wilmington Trust filed a default notice against UHG in 2006, seeking to collect the outstanding balance on the 30-year bond, then trading below the full value of the loan. Wilmington Trust alleged that UHG violated terms of the bond by failing to mail copies of its annual report to the SEC to bondholders within 15 days. In rejecting the claims of Wilmington Trust, the Eighth Circuit wrote that UHG had delayed filing reports to the SEC while it investigated potential options backdating claims. But UHG diligently forwarded to Wilmington Trust copies of its required reports within 15 days of actually submitting them to the SEC. UHG thus met all its contractual and statutory obligations. On the basis of the foregoing, the Eighth Circuit affirmed the decision of the U.S. District Court for the District of Minnesota.

Detailed Summary:

By way of background, on March 2, 2006, UHG publicly issued $850 million of 5.800% senior notes due March 15, 2036 (“notes”). The notes were issued pursuant to an indenture entered into by UHG and the Bank of New York as trustee. As trustee, the Bank of New York was charged with enforcing, as necessary, the indenture provisions against UHG. Opinion, p. 2.

Throughout the life of the notes, UHG has made all required interest payments and the debt has continuously been rated investment grade. As a publicly traded company, UHG is required to make periodic financial disclosures, including quarterly filings on SEC form 10-Q. Id., citing Securities and Exchange Act of 1934 (Exchange Act) §§ 13, 15(d), 15 U.S.C. §§ 78m, 78o(d).

On August 25, 2006, a notice of default was sent to UHG on behalf of certain hedge funds which collectively owned more than twenty five percent of the outstanding principal balance on the notes. The notice claimed that UHG’s failure to file a timely 2Q 10-Q violated § 504(i) of the trust indenture. UHG publicly disclosed the notice of default in an SEC form 8-K filing. The company asserted it was not in default and intended to defend itself against the allegation. Id., p. 3.

UHG finally filed its 2Q 10-Q on March 6, 2007, almost seven months late. It simultaneously submitted an amended form 10-Q for the first quarter of 2006, a tardy form 10-Q for the third quarter of that year, and a form 10-K for the year ending December 31, 2006. The financial information contained in the 2Q 10-Q differed by less than one percent from the preliminary data which had accompanied the August form 12b-25 notice of late filing.

Both parties filed cross motions for summary judgment. The district court granted summary judgment in favor of UHG on all claims and counterclaims. Wilmington Trust appealed, arguing the district court erroneously construed UHG’s contractual and statutory duties.

In this appeal, Wilmington Trust argued that UHG’s failure to file a timely 2Q 10-Q violated UHG’s obligations under section 504(i) of the indenture, Trust Indenture Act (“TIA”) section 314(a), and an implied covenant of good faith and fair dealing.

The Eighth Circuit rejected Wilmington Trust’s arguments.  In rejecting Wilmington Trust’s claim that UHG had violated section 504(i) of the indenture, the Eighth Circuit wrote that three federal courts had concluded, on nearly identical facts, that similar indenture provisions did not impose independent obligations to file timely SEC reports. Id., p. 8, citing Finisar Corp. v. U.S. Bank Trust Nat’l Ass’n, No. C 07-4052, 2008 WL 3916050 (N.D. Cal. Aug. 25, 2008); Affiliated Computer Servs., Inc. v. Wilmington Trust Co., No. 3:06-CV-1770-D, 2008 WL 373162 (N.D. Tex. Feb. 12, 2008); Cyberonics, Inc. v. Wells Fargo Bank Nat’l Ass’n, No. H-07-121, 2007 WL 1729977 (S.D. Tex. June 13, 2007).

Based on the plain meaning of § 504(i), the Eighth Circuit held that the indenture imposed no independent obligation to file timely SEC reports. UHG’s delay in filing its 2006 2Q 10-Q—while potentially a violation of SEC regulations—did not constitute a default under the indenture. Since UHG did ultimately file with the SEC its “then required” reports and within fifteen days afterwards did transmit to the trustee copies of the same, it fulfilled its contractual duties.

With regard to Wilmington Trust’s allegation that UHG violated the TIA, the Eighth Circuit held that the TIA imposes no new obligations or duties and is actually less burdensome than § 504(i) of the indenture insofar as it imposes no time constraints whatsoever.

The Eighth Circuit added that while the indenture creates a relative deadline of fifteen days after actual filing with the SEC, the TIA is completely silent as to when copies of SEC reports must be forwarded to the trustee. As was the case with § 504(i) of the indenture, the TIA’s reference to §§ 13 and 15(d) of the Exchange Act merely identifies which reports must eventually be forwarded to the trustee. It does not independently impose any particular timetable for filing nor does it incorporate the SEC’s regulatory deadlines.

The Eighth Circuit likewise brushed aside Wilmington Trust’s claim that UHG’s late filing constituted a violation of the covenant of good faith and fair dealing. Specifically, the Eighth Circuit found that UHG took all reasonable and necessary steps to provide its noteholders with as much information as possible and as accurately as possible. More importantly UHG continued to make all required payments on the notes.

The Eighth Circuit concluded therefore that UHG acted prudently and responsibly with respect to its investors and that the company’s delay in filing a certified 2Q 10-Q breached no express or implied covenant of the indenture agreement.

On the basis of the foregoing, the Eighth Circuit affirmed the judgment of the district court.

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