## Facts

- Interstate Department Stores, Inc. issued $20,000,000 of 4% convertible subordinated debentures under an August 1, 1967 indenture naming Bankers Trust Company as trustee.
- The indenture was registered with the SEC and drafted to conform to the Trust Indenture Act of 1939 (TIA).
- The debentures were unsecured and expressly subordinated to the issuer’s “senior indebtedness,” including later-incurred senior debt.
- The indenture provided that if the trustee became a creditor of the issuer, it could claim the benefit of the subordination provisions to the same extent as other holders of senior indebtedness.
- While serving as trustee, the Bank allegedly acted as lead bank in negotiating a $90,000,000 credit facility for the issuer that would constitute senior indebtedness and place the Bank in a secured, priority position over the debentureholders in a bankruptcy.
- Plaintiffs conceded the loan was consummated after the Bank resigned as trustee and was not negotiated within four months before a payment default under the indenture.
- Debentureholders (through a putative class) sued, alleging the Bank’s conduct violated the TIA, the Securities Act of 1933, and common-law fiduciary duties by creating and exploiting a conflict of interest.

## Issues

1. Whether the complaint stated a claim that an indenture trustee violated the TIA and related duties by negotiating or facilitating lending that positioned the trustee to become a preferred senior creditor over subordinated debentureholders.
2. Whether formal indenture compliance with the TIA and SEC registration foreclosed liability for alleged conflict-driven conduct by the trustee.
3. Whether the timing of the lending transaction (consummation after resignation and outside an asserted statutory conflict window) defeated the claims as a matter of law at the pleading stage.

## Decision

- The court denied Bankers Trust Company’s Rule 12(b)(6) motion to dismiss.
- Accepting the allegations as true, the court held the debentureholders plausibly stated claims under the TIA and related fiduciary theories based on the Bank’s alleged conflicted conduct.
- The court declined to treat technical compliance and timing arguments as dispositive where the pleaded facts suggested the trustee’s actions could have undermined the TIA’s protections.

## Legal Principles

- The TIA is a remedial statute aimed at preventing substantive abuses in indenture relationships, including conflicts of interest by trustees, not merely ensuring formal indenture provisions and registration.
- A trustee’s alleged use of its trustee position to obtain, arrange, or secure a later senior creditor position can support TIA-based and fiduciary-duty claims at the pleading stage.
- Formal compliance with statutory provisions and transaction timing does not automatically bar claims where the alleged conduct, in substance, may subvert the statutory requirement of an independent, disinterested trustee.
- On a Rule 12(b)(6) motion, conflict-of-interest and self-preference allegations tied to an indenture trustee’s creditor dealings may require factual development rather than dismissal as a matter of law.

## Conclusion

The court allowed bondholders’ claims to proceed past the pleadings, holding that allegations that an indenture trustee negotiated a major senior credit facility and positioned itself as a priority secured creditor could state actionable violations of the Trust Indenture Act and related fiduciary obligations despite asserted technical compliance and timing defenses.


Morris v. Cantor, 390 F. Supp. 817 (S.D.N.Y. 1975)