## Facts

- Metropolitan Life Insurance Company and Jefferson-Pilot Life Insurance Company held substantial amounts of RJR Nabisco, Inc.’s long-term unsecured notes and debentures issued under multiple indentures.
- RJR’s CEO proposed a leveraged buyout (LBO), followed by competing bids, culminating in a board-approved transaction that took RJR private and added roughly $19 billion of new debt.
- The LBO materially increased RJR’s leverage, resulting in credit downgrades and reduced market value of plaintiffs’ bonds.
- The relevant indentures permitted mergers and consolidations (with successor obligations) and did not restrict RJR’s ability to incur additional indebtedness.
- The indentures lacked “event-risk” protections such as change-of-control covenants, mandatory redemption rights, or bondholder “put” provisions triggered by an LBO.
- Plaintiffs alleged the LBO transferred value to shareholders at bondholders’ expense and breached an implied covenant of good faith and fair dealing under New York law.

## Issues

1. Whether an LBO that substantially increases issuer leverage can breach the implied covenant of good faith and fair dealing in bond indentures when the indentures expressly permit mergers and additional indebtedness and contain no event-risk protection.
2. Whether a court may use the implied covenant to supply change-of-control or leverage-limiting terms that sophisticated bondholders did not obtain in the indentures.

## Decision

- The court granted summary judgment for RJR on the bondholders’ implied-covenant/contract-based challenge to the LBO.
- The court held RJR’s conduct complied with the express terms of the indentures.
- The court refused to imply event-risk protections or otherwise rewrite the indentures to protect bondholders from a leveraged transaction.

## Legal Principles

- Under New York law, the implied covenant of good faith and fair dealing cannot be used to add new substantive contract terms or confer benefits that the parties did not bargain for.
- For publicly issued debt, the “fruits” of the indenture are the bargained-for payment rights (principal and interest) as defined by the instrument, not a judicially imposed guarantee of a stable capital structure.
- Where indentures expressly permit mergers and additional indebtedness and omit change-of-control or similar protections, a leveraged buyout consistent with those terms does not violate the implied covenant.
- Courts are especially reluctant to imply protective terms into heavily negotiated, standardized debt instruments involving sophisticated market participants.

## Conclusion

The court held that sophisticated bondholders could not invoke the implied covenant of good faith and fair dealing to obtain retroactive protection from LBO-related “event risk” where the indentures permitted the transaction and omitted any change-of-control or leverage-limiting covenants.


Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504 (S.D.N.Y. 1989)