## Facts

- Green Bay & Western Railroad Company (GB&W) emerged from bankruptcy in 1896 with a capital structure including common stock and Class A and Class B debentures.
- The common stock carried voting rights; the debentures did not.
- The instruments set an order for distributions and addressed allocation of proceeds upon a sale of the railroad, placing Class A debentures first and stock second.
- The Class B debenture certificates contained language that the minority Class B holders argued was ambiguous, asserting it granted them an equity-like residual right to “net proceeds” beyond stated priorities.
- Itel Corporation acquired all of GB&W’s common stock and about 78% of the Class B debentures.
- Itel sold the railroad for more than the amount needed to satisfy the stated amounts for Class A debentures, stock, and the aggregate face amount of Class B debentures.
- After the sale, Class B holders received $1,000 per debenture (face value), and Itel retained the remaining proceeds through its equity and majority debenture positions.
- Minority Class B holders filed a class action alleging they were entitled to additional sale proceeds beyond $1,000 per debenture and that Itel’s conduct (including allegedly diverting income before the sale) harmed their claimed residual interest.

## Issues

1. Whether the Class B debenture certificates entitled holders, upon a sale of GB&W, to more than $1,000 per debenture as a residual share of sale proceeds.
2. Whether the Class B debentures should be treated as equity-like instruments (residual claims) rather than debt, based on the certificates’ language and the overall capital structure.
3. Whether plaintiffs stated any viable claims (including conversion and related theories) absent a contractual entitlement to sale proceeds beyond face value.

## Decision

- The Seventh Circuit affirmed dismissal under Rule 12(b)(6).
- The court held the Class B instruments were debt, not equity, and did not confer residual rights in GB&W’s sale proceeds.
- Properly construed, the certificates limited Class B holders to the $1,000 face amount per debenture upon sale.
- Because all asserted theories depended on an entitlement to excess sale proceeds, the complaint failed to state a claim.

## Legal Principles

- A “debenture,” as commonly understood, is an unsecured bond; absent clear contractual terms to the contrary, it is treated as a debt instrument rather than equity.
- Courts interpret disputed language in securities and debt instruments in light of the overall transaction structure and the economic role assigned to each class of security.
- References to “pro rata” sharing may govern allocation among holders within a class and do not, without clear language, create an open-ended residual claim to enterprise value.
- Claims alleging misallocation or diversion of value fail where plaintiffs cannot show a contractual right to the alleged “residuum” of assets or proceeds.

## Conclusion

The court enforced the Class B debenture certificates as debt obligations capped at $1,000 per debenture upon sale of the railroad, rejecting the minority holders’ attempt to characterize the debentures as equity-like residual interests and thereby foreclosing their related claims for additional sale proceeds or damages.


Eliasen v. Itel Corp., 82 F.3d 731 (7th Cir. 1996)