## Facts

- Centronics Data Computer Corp. issued 10% convertible subordinated debentures under a trust indenture qualified under the Trust Indenture Act of 1939 (TIA), with J. Henry Schroder Bank & Trust Co. as indenture trustee.
- The debentures paid semiannual interest and were convertible into Centronics common stock.
- The indenture allowed Centronics to redeem the debentures before maturity upon notice, including a requirement that Centronics give Schroder at least 50 days’ written notice before the redemption date.
- The indenture expressly permitted Schroder to waive the 50-day notice requirement.
- Centronics decided to redeem the debentures before the next interest payment date (June 1, 1986).
- Schroder concluded it needed only about one week to complete the administrative steps for redemption and waived the 50-day notice requirement in favor of a shorter period.
- Centronics sent redemption notice to debenture holders, advising that conversion before redemption was financially preferable because the stock obtainable on conversion exceeded the redemption price.
- All debenture holders converted their debentures to stock before the redemption date.
- Elliott Associates, a debenture holder, alleged the shortened timeline deprived holders of roughly $1.2 million in additional interest they would have received had the redemption occurred after June 1, 1986.
- Elliott sued, asserting Schroder’s waiver breached duties under the indenture, the TIA, and state law, and alleging Schroder and Centronics conspired to time the redemption to avoid paying the next interest installment.

## Issues

1. Whether, before an event of default, an indenture trustee under a TIA-qualified indenture owes broad fiduciary-type duties beyond the indenture’s express terms.
2. Whether the trustee breached contractual, TIA, or state-law duties by waiving an issuer-to-trustee redemption notice period that the indenture expressly made waivable, despite an alleged loss of interest to debenture holders.

## Decision

- The Second Circuit affirmed the judgment for Schroder and Centronics after a bench trial in the district court.
- The court held that, in the pre-default setting, an indenture trustee’s duties are generally limited to those undertaken in the indenture.
- The court held Schroder did not breach any duty by waiving the 50-day notice requirement because the indenture expressly authorized the waiver.
- The court rejected the claim that the TIA imposed additional obligations that required Schroder to refuse an authorized waiver to preserve debenture holders’ potential interest earnings.
- The court concluded Elliott failed to establish liability on state-law fiduciary-duty theories in the absence of a default and where the trustee acted within the indenture’s permitted discretion.
- The allegation that the redemption was timed to avoid an interest payment did not create liability where the transaction steps were allowed by the contract framework.

## Legal Principles

- Before default, an indenture trustee’s obligations are primarily defined by the indenture; courts generally do not impose broad common-law fiduciary obligations inconsistent with the contract allocation of rights and duties.
- The TIA primarily functions to require and police specified protective indenture provisions; it does not automatically convert an indenture trustee’s pre-default role into a generalized fiduciary beyond the indenture’s terms.
- When an indenture expressly grants the trustee discretion to waive a notice requirement, exercising that contractual authority is not a breach absent some independent violation of the indenture or applicable law.
- A trustee’s pre-default decision need not be judged by whether it maximizes debenture holders’ economic returns when the indenture does not impose that obligation.
- Post-default duties may be more fiduciary in character, but that expansion does not apply where no default has occurred.

## Conclusion

The court held that a TIA-qualified indenture trustee’s pre-default duties are largely contractual and that Schroder incurred no contractual, statutory, or state-law liability by waiving a redemption notice period the indenture expressly made waivable, even if the waiver contributed to debenture holders missing a later interest payment.


Elliott Assocs. v. J. Henry Schroder Bank & Tr. Co., 838 F.2d 66 (2d Cir. 1988)