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In re Cendant Corp.

December 21, 2005


The opinion of the court was delivered by: William H. Walls, U.S.D.J.


Presently before the Court are three motions. Plaintiffs Kennilworth Partners L.P., Soundshore Partners L.P. and Soundshore Holdings Ltd. (collectively "Kennilworth") and Reliant Trading and Shephard Trading Ltd. (collectively "Reliant") (Kennilworth and Reliant collectively are "Plaintiffs") have each filed a motion for summary judgment as to their breach of contract claims against defendant Cendant only. As part of its motion, Kennilworth also seeks summary judgment against Cendant on its claims for violation of Rule 10b-5. 17 CFR § 240.10b-5 (2004). Cendant has filed a cross-claim for summary judgment on the breach of contract claims alleging that plaintiffs lack standing. Oral argument was held on September 26, 2005. Plaintiffs' motions for summary judgment and Cendant's cross-motion for summary judgment are denied.


Plaintiffs Kennilworth and Reliant are companies in the business of investment in securities and other financial instruments. Defendant Cendant is a diversified corporation formed from the merger of defendants CUC Corporation ("CUC") and HFS, Inc. ("HFS").

The HFS Notes

In February 1996, HFS registered and issued $210 million in 4 3/4% Convertible Senior Notes due 2003 (the "HFS notes") pursuant to an Indenture dated February 28, 1996 and a Supplemental Indenture No. 1 of the same date (collectively the "Indenture"). Plaintiffs Kennilworth and Reliant purchased a number of the HFS Notes. In total, Kennilworth purchased $11,800,000 par value of HFS Notes and in December 1997, Reliant purchased $18,881,00 par value of HFS Notes. Additionally, in February, 1997, CUC issued 3% convertible notes due 2002 (the "CUC Notes"). Between March 18, 1998 and March 20, 1998, Kennilworth purchased CUC Notes in the open market for approximately $25 million. Under the terms of the Indenture, the holders of these notes received the right to convert them into shares of HFS common stock at a predetermined price.

The Indenture also contained what is commonly known as a "no-action" clause, a provision included in most bond indentures which expressly limits bondholders from bringing suit against the issuer based on any rights guaranteed by the Indenture except in limited circumstances. The "no-action" clause contained in Indenture requires bondholders to notify a Trustee prior to instituting any action with regard to the securities issued.*fn1 The Indenture does provide an exception to the Trustee notification requirement in Section 508 which exempts suits seeking the payment of principal and interest:

Notwithstanding any other provision in this Indenture, the Holder of any security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Fourteen) and in such Security, of the principal of (and premium, if any, on) and (subject to Section 307) interest on, such Security or payment of such coupon on the respective Stated Maturities expressed in such Security or coupon (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

Pearlman Decl. Ex. C § 508. On December 17, 1997, defendant CUC merged with defendant HFS. The resulting entity was named Cendant Corporation. Following the merger, holders of HFS notes had the option to convert them into Cendant common stock at $27.76 per share (the "conversion price"). The conversion was subject to the terms and conditions of the Indenture and gave Cendant the right to redeem the HFS notes for cash at 103.393% of their face value.

This right was triggered only if Cendant's common stock price had exceeded $38.86 per share for twenty days within a period of thirty consecutive trading days before the notice of redemption. In such case, the holders of HFS notes had the option of accepting the cash payment or converting the HFS notes into Cendant stock. On April 3, 1998, with its stock trading at approximately $40 per share, Cendant announced its intention to redeem the HFS notes.

On April 6, 1998, Kennilworth Partners, L.P. converted $6 million principal amount of HFS notes into 216,000 shares of Cendant common stock at the conversion rate of $27.76. On the same day, Reliant Trading converted $9,441,000 principal amount of HFS notes into 340,140 shares of Cendant stock and Shepherd Trading Ltd. converted $9,440,000 principal amount of HFS notes into 340,104 shares of Cendant stock, both at the conversion rate of $27.76. Kennilworth also redeemed for cash approximately $2.9 million of HFS notes purchased on the open market. On April 13, 1996 Soundshore Partners L.P. and Soundshore Holdings Ltd. converted $3 million principal amount of HFS notes into 108,000 shares of Cendant stock at the conversion price of $27.76.

Accounting Irregularities

On April 15, 1998, Cendant announced that it had discovered accounting irregularities in the membership clubs operations unit which had been part of the CUC business. Cendant also announced that it would restate annual and quarterly net income and earnings per share for 1997 and might restate certain other periods. On the following day, Cendant's stock price fell 46 percent. Eventually, Cendant restated earnings for the calendar years ended December 31, 1995, 1996 and 1997 (as well as all quarters in 1996 and 1997) and the first two quarters of 1998. On September 29, 1998, Cendant publicly announced that it had lost $217.2 million in 1997 instead of earning $55.5 million as it had reported earlier. Plaintiffs Kennilworth and Reliant sought rescission of their conversion of HFS Notes into Cendant common stock based on the publicly announced accounting fraud. Cendant refused to rescind the conversions.

On January 25, 1999, the Kennilworth filed an amended complaint in the United States District Court for the Southern District of New York. That complaint, which was transferred to this Court on February 4, 1999, alleged violations of the Securities and Exchange Act against Cendant, HFS, certain HFS Directors, certain CUC Directors and E & Y, and a breach of contract claim against Cendant and HFS. In an August 10, 1999 opinion, this Court granted defendants' motions to dismiss the federal securities claims with prejudice except Kennilworth's Rule 10b-5 claim which were dismissed without prejudice. Kennilworth later filed a Second Amended Complaint on March 9, 2000, realleging its fraud claims.

On December 15, 1999, Reliant filed a First Amended Complaint in District Court, Eastern District of Wisconsin and the matter ...

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