## Facts

- In 1896, Northern Pacific Railway Company issued two bond series secured by mortgages executed in New York: 4% “Prior Lien” bonds maturing in 1997 and 3% “General Lien” bonds maturing in 2047; neither series was callable before maturity.
- The bonds were secured by railroad property and extensive land and mineral interests (“Resource Properties”) granted by Congress and covered by the mortgage liens.
- Over time, the Resource Properties became highly valuable relative to the outstanding bond principal.
- In 1970, Northern Pacific merged into Burlington Northern Railroad Company, which became the successor obligor on the bonds; Bankers Trust and Citibank were successor trustees under the respective mortgages.
- Burlington asserted the liens prevented effective development or sale of the Resource Properties and would trap sale proceeds with the trustees.
- In 1985, Burlington and the trustees agreed on a plan to remove the Resource Properties from the lien structure by substituting cash (and certain securities) as collateral in an amount asserted to be sufficient to secure the bonds.
- The plan included a tender offer to purchase the bonds at prevailing market prices to address investor concerns that the bonds traded at a premium due to the Resource-Property backing.
- Bondholder plaintiffs sued to enjoin the plan, contending the mortgages did not authorize a unilateral release of the Resource Properties or an exchange of collateral without bondholder consent.

## Issues

1. Whether bondholders would suffer irreparable harm if the collateral-substitution plan and tender offer proceeded before a merits determination.
2. Whether plaintiffs showed a likelihood of success on the merits, or sufficiently serious questions going to the merits plus a balance of hardships favoring interim relief.
3. Whether the 1896 mortgage indentures authorized Burlington and the trustees to release the Resource Properties and substitute cash/securities collateral.

## Decision

- The court granted a preliminary injunction barring Burlington and the trustees from implementing the collateral-substitution plan pending further proceedings.
- The court found irreparable harm based on the threatened loss of the bonds’ distinctive collateral-backed character and expected adverse effects on liquidity/marketability, including anticipated delisting.
- The court concluded plaintiffs raised sufficiently serious questions on the merits concerning indenture authority to justify interim relief.
- The court held the balance of hardships favored bondholders because the challenged transaction could permanently alter collateral and market conditions, while Burlington’s harm was principally delay in monetizing assets.

## Legal Principles

- A preliminary injunction may issue upon a showing of irreparable harm and either (a) likelihood of success on the merits or (b) serious questions on the merits with the balance of hardships tipping toward the movant.
- Injury may be irreparable when a proposed transaction would permanently alter rights in specific collateral or fundamentally change the nature and market for a security in ways not readily measured or repaired through damages.
- A tender offer at current market price does not necessarily eliminate irreparable harm where holders may be unable or unwilling to tender and the transaction may destroy long-term collateral-linked value.
- Where indenture language and financing context support plausible limits on an issuer’s and trustee’s authority to release core collateral, unresolved interpretive disputes can constitute “serious questions” warranting interim relief.

## Conclusion

The court preliminarily enjoined Burlington and the trustees from releasing the Resource Properties and substituting cash/securities collateral because the transaction threatened irreparable, non-compensable changes to the bonds’ collateral and market characteristics and raised substantial interpretive questions about whether the 1896 indentures permitted the plan without bondholder consent.


Rievman v. Burlington N. R.R. Co., 618 F. Supp. 592 (S.D.N.Y. 1985)