Embarq, LLC v. The Bank of N.Y. Mellon Tr. Co.

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2024 NY Slip Op 31397(U)

EMBARQ, L.L.C., Plaintiff, v. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., CAPITAL RESEARCH AND MANAGEMENT COMPANY, and DISCOVERY CAPITAL MANAGEMENT, LLC, Defendant.

Index No. 651404/2023, Motion Seq. Nos. 006, 007

Supreme Court, New York County

April 14, 2024

Unpublished Opinion

DECISION + ORDER ON MOTION

HON ANDREA MASLEY, JUDGE

The following e-filed documents, listed by NYSCEF document number (Motion 006) 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75 76, 91, 96, 100, 101, 102 were read on this motion to/for JUDGMENT-SUMMARY.

The following e-filed documents, listed by NYSCEF document number (Motion 007) 77, 78, 79, 80, 81, 82, 83, 84, 92, 94, 97, 98 99, 103 were read on this motion to/for JUDGMENT-SUMMARY

Upon the foregoing documents, it is

Plaintiff Embarq, L.L.C. (Embarq) brings this declaratory judgment action against defendants Capital Research and Management Company and Discovery Capital Management, LLC (together, the Noteholders), seeking a declaration that the recent issuance of liens and guarantees by certain Embarq subsidiaries does not constitute a breach of the indenture (Indenture) governing the unsecured notes that Embarq issued to the Noteholders in 2006. (NYSCEF Doc. No. [NYSCEF] 2, Complaint at ¶19.) Defendant The Bank of New York Mellon Trust Company, N.A. is the successor trustee under the Indenture. (NYSCEF 46, Joint Statement of Undisputed Material Fact [JS] ¶ 3.) ^[1] In their answer, the Noteholders contend that Embarq has breached the Indenture and counterclaim for declaratory judgment, breach of contract and breach of the implied covenant of good faith and fair dealing. (NYSCEF 11, Answer with Counter-claim(s), ¶¶ 41-78.)

Embarq and the Noteholders move for summary judgment. (NYSCEF 64 and 77, Notices of Motion [Motion #006 and Motion #007 respectively].)

I. Background

In May 2006, Embarq issued $1,485 billion in unsecured 7.995% notes due in 2036 (the Embarq Notes), which are governed by the Indenture. (NYSCEF 46, JS ¶¶ 1, 2; see also NYSCEF 47, Indenture; NYSCEF 48, Global Note.) Embarq, which has no capital assets, is the sole obligor under the Indenture. (NYSCEF 46, JS ¶¶ 7, 8.) Section 1008 of the Indenture titled "Limitation Upon Mortgages and Liens of the Company," provides that:

"The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or suffer to be created or to exist, any Lien (other than Permitted Liens) upon any of its Property, unless it has made or will make effective provision whereby the Outstanding Securities will be secured by such Lien equally and ratably with (or prior to) all other indebtedness of the Company or such Restricted Subsidiary secured by such Lien for so long as any such other indebtedness of the Company or such Restricted Subsidiary shall be so secured. Notwithstanding the foregoing, the Company may, and may permit any Restricted Subsidiary to, issue, assume, guarantee, create or suffer to be created or to exist indebtedness secured by Liens on Property that are not Permitted Liens without equally and ratably securing the Outstanding Securities, so long as the sum of all such indebtedness then being issued or assumed together with all remaining outstanding indebtedness secured by a Lien that is not a Permitted Lien together with the Attributable Debt in respect of any Sale and Leaseback Transaction does not exceed 15% of the Consolidated Net Tangible Assets."^[2] (NYSCEF 47, Indenture § 1008.)

The Indenture defines the terms "Lien" and "Property" as follows:

"'Lien' means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement or zoning restriction, encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction.

* * *

"'Property' means any asset or property of a Person, whether now owned or hereafter acquired, or any interest therein or any income or profits therefrom, including capital stock and indebtedness of Subsidiaries."^[3] (Id., § 101.)

Under the Indenture, whether a subsidiary of Embarq is a "Restricted Subsidiary" depends on whether "such Subsidiary has substantially all of its Property in the United States" and whether its value exceeds the specified threshold at the end of a fiscal quarter. (See id.) At all times relevant to this dispute, Embarq allegedly had only one Restricted Subsidiary, Brightspeed of Eastern North Carolina, LLC (f/k/a Carolina Telephone and Telegraph Company LLC). (See NYSCEF 107, tr 11;^[4] NYSCEF 71, Affidavit of Russ Mincey in Support of Embarq, L.L.C.'s Motion for Summary Judgment, ¶5.)

The Indenture defines "Permitted Lien" as, among other things, "(iv) Liens on Property of any entity, or on the stock, indebtedness or other obligations of such entity, existing at the time (a) such entity becomes a Restricted Subsidiary." (NYSCEF 47, Indenture § 101.)

In connection with the issuance of the Embarq Notes, Embarq filed a prospectus, dated May 12, 2006 (the Prospectus), with the United States Securities and Exchange Commission. (NYSCEF 46, JS ¶ 6.) The cover page of the Prospectus advises that "the notes will effectively rank junior to all indebtedness and other liabilities of [Embarq's] subsidiaries." (NYSCEF 49, Prospectus, at 2.) The Prospectus also discloses the following "Risk Factors Relating to the Notes":

"We may be unable to pay interest on or repay the notes. We will be a holding company and our subsidiaries will have no obligations to the holders of the notes. The debt of our subsidiaries will be effectively senior to the notes.

. . Following the spin-off, we will conduct substantially all of our business through our subsidiaries. Our cash flow and, consequently, our ability to pay interest in cash and to service our debt, including the notes, will be dependent upon the cash flow of our subsidiaries and the payment of funds to us by those subsidiaries in the form of loans, dividends or otherwise. . . . Our subsidiaries will be separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on the notes or to make cash available for that purpose. These subsidiaries may use the earnings they generate, as well as their existing assets, to fulfill their own direct debt service requirements. . . . Our subsidiaries may incur additional debt. The debt of our subsidiaries will be effectively senior to the notes.

"There are limited restrictive covenants in the indenture governing the notes relating to our ability to incur future indebtedness, pay dividends or engage in other activities, which could adversely affect our ability to pay our obligations under the notes.

"The indenture governing the notes does not contain any financial covenants and contains only limited restrictive covenants. The indenture will not limit our or our subsidiaries' ability to incur additional indebtedness, issue or repurchase securities, pay dividends or engage in transactions with affiliates. We, therefore, may pay dividends and incur additional debt, including secured indebtedness in certain circumstances or indebtedness by, or other obligations of, our subsidiaries to which the notes would be structurally subordinate. Our ability to incur additional indebtedness and use our funds for numerous purposes may limit the funds available to pay our obligations under the notes." (Id. at 24-25/166.)^[5]

On August 3, 2021, Connect Holding LLC (Connect Holding), an affiliate of funds managed Apollo Global Management, Inc., entered into a purchase agreement with Lumen Technologies, Inc. (Lumen) for the purchase of certain Lumen subsidiaries, including Embarq. (See NYSCEF 46, JS ¶¶ 11, 12.) The sale was structured as a leveraged buyout (LBO). (Id. ¶18.) Ultimately, Connect Holding's subsidiary, Connect

Holdings II LLC (d/b/a Brightspeed) (Brightspeed) acquired Lumen's assets. (Id. ¶¶ 11, 12.) A September 16, 2022 press release described the transaction, in pertinent part, as follows:

"Brightspeed expects the debt financing to be comprised of approximately $5,465 billion of secured debt, including a $600 million revolving credit facility, which is expected to be (i) guaranteed by all of Brightspeed's subsidiaries, including Embarq Corporation ('Embarq') and its transferred subsidiaries, and (ii) secured by substantially all of the assets of Brightspeed and its subsidiary guarantors, other than the assets of Embarq and certain subsidiaries of Embarq that are 'restricted subsidiaries' under the indenture governing Embarq's 7.995% senior notes due 2036 (the 'Embarq Notes').

"In connection with the Acquisition, Embarq will be acquired by Brightspeed and the Embarq Notes are expected to remain outstanding as obligations of Embarq. The Embarq Notes are not expected to be guaranteed by any of Embarq's subsidiaries (or by Brightspeed or other subsidiaries of Brightspeed) or secured by any assets of Embarq or its subsidiaries (or assets of Brightspeed or other subsidiaries of Brightspeed)." (Id., ¶¶ 13, 14; see also NYSCEF 50, September 16, 2022 Press Release at 2.)

On September 21,2022, the Noteholders' counsel sent a letter to Embarq, addressing the proposed LBO. (NYSCEF 46, JS ¶ 15; NYSCEF 51, September 21, 2022 Letter.) The letter informed Embarq, in pertinent part, that:

"In exchange for the Embarq Noteholders loaning to the Company approximately $1,485,000,000, with a 30-year tenor the Company

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