SecProbe.io

CORRESP
1
filename1.htm

125 High Street – Suite 1802

Boston, MA 02110

Phone 800-225-6704    Fax 617-742-5666

September 29, 2023

Chad Eskildsen

Staff Accountant

U.S. Securities and Exchange Commission

Division of Investment Management, Disclosure Review and Accounting

100 F Street N.E.

Washington, D.C. 20549

Dear Mr. Eskildsen:

The following are responses to the comments
and questions by the Staff of the U.S. Securities and Exchange Commission (“SEC”) raised during a conference call held
on August 16, 2023, regarding the Annual Report of Northeast Investors Trust (“the Trust”) as of September 30, 2022.

Comment/Question

Describe the analysis and factors considered
to evaluate the need for disclosure under ASC 450 for the semi-annual financial statements as of March 31, 2020.

Response

In its analysis of the need for disclosure
of the matter, the Trust considered the following factors, which reasonably led to the conclusion that the possibility of a loss
to the Trust was remote during the period prior the September 2021 financial statements: legal uncertainties in the plaintiffs’
case against the Trust; legal uncertainties in the plaintiffs’ case against the trustees; and legal uncertainties surrounding
the likelihood of indemnification of the trustees.

Uncertainties Regarding the Case against the Trust

Contrary Precedent

In November 2011, a similar situation had
occurred. Specifically, the Trust reduced a retired Trustee’s payments through legal reliance on Section 11 (the “Shareholder
Interest Exception”) of the 1989 agreement by and among the then current trustees regarding allocation of the trustees’
management fee (the “1989 Agreement”). The legal reliance on Section 11 in 2011 was advanced and approved by, among
others, Robert Minturn, who was the Trust’s Chief Legal Officer, a Trustee, and signatory to the original Agreement. The
2011 matter was resolved by settlement amongst the trustees with no indemnification and no loss to the Trust.

As it had previously done under Mr. Minturn’s
advice in the 2011 situation, the Trust relied on the Shareholder Interest Exception when reducing his payments. Mr. Minturn, who
had allowed the Trust as its Chief Legal Officer to abrogate the ex-trustee’s payments under Shareholder Interest Exception
now alleged in his lawsuit that the Sharehold Interest Exception meant the opposite. The Trust understood its experience in 2011,
in which the Shareholder Interest Exception provided legally valid authority for reducing a former trustee’s payments, together
with the deliberations that had preceded execution of the 1989 Agreement to stand for the proposition that this exception provided
a clear legal basis for suspension or abrogation of payments under applicable circumstances.

Indeed, events between 2011 and 2020 made
it even more likely in the Trust’s view that the Shareholder Interest Exception would be found to allow reduction or cancellation
of payments to Mr. Minturn. Because the management fee decreased during the intervening period, the need to redirect portions of
the fee from past trustee payments toward investment management efforts on behalf of the shareholders appeared to have, if anything,
grown stronger since the prior period when Mr. Minturn had allowed the Trust to reduce another former trustee’s payments
under the Agreement.

The Trust understood that the prior course
of conduct by signatories to the 1989 Agreement dictated that the Shareholder Interest Exception applied to Mr. Minturn’s
payments. Put simply, when Mr. Minturn filed his lawsuit, the Trust understood that the legal position to which he had not objected
in 2011 was right and that his contrary 2020 legal position regarding his own payments was therefore necessarily wrong.

Legal and Regulatory Framework for Interpreting Shareholder
Interest Exception

The Trust understood Mr. Minturn’s
legal position to be undermined not just by his prior conflicting position, but also by the legal and regulatory framework surrounding
the Agreement. The Trust understood that contemporaneous communications leading up to the Agreement’s execution demonstrated
that the intent of the 1989 signatories, including Mr. Minturn, favored the Trust’s interpretation of the Shareholder Interest
Exception, not Mr. Minturn’s. The Trust also understood that any ambiguity in the exceptions’s wording would be resolved
in favor of the obligation under the Trust’s Deed of Trust to cover “all research and statistical services” with
the management fee. Further, the Trust understood that any ambiguity in the wording of the Shareholder Interest Exception would
be resolved in favor the trustees’ statutory duties under the Investment Company Act of 1940 (the “Act”) to allocate
investment management compensation as necessary to investment management functions, not in favor of a former trustee’s contractual
demands for remuneration after his service to the Trust had ended.

Inapplicability of ERISA

The Trust further understood Mr. Minturn’s
claims under the Employee Retirement Income Security Act of 1974 (“ERISA”) would fail because the 1989 Agreement did
not create an employee benefit plan on the part of the trustees for the benefit of Mr. Minturn.

Absence of Contractual Privity

The Trust further understood Mr. Minturn’s
breach of contract claims against the Trust would fail because the Trust was not a party to the contract allegedly breached.

    2

Overreach in Amounts Claimed

Mr. Minturn sued in early 2020 for $1 million,
the entire amount allegedly due through the end of 2023. Because obligations that have yet to come due cannot generally be breached,
the Trust understood all of Mr. Minturn’s claims for payments he expected after filing his lawsuit to be without merit. Accordingly,
during the semiannual financials as of March 31, 2020, the Trust understood Mr. Minturn’s claims not only to be impaired
by the legal uncertainties described above, but to amount at most to approximately $300,000 even in the slight chance that he prevailed.
The amount actually owed was important. Among other things, it was considerably less than the amount in dispute in the 2011 matter,
which, as indicated above, settled without loss to the Trust. These circumstances surrounding the excessive amounts claimed made
the likelihood of a material loss to the Trust even more remote.

Remoteness Determination

Due to all the legal uncertainties explained
above, the Trust concluded during preparation its semiannual financials as of March 31, 2020, and continued to believe over the
next year or so that there was a slight chance that Mr. Minturn would prevail in his legal action against the Trust he had previously
served. Therefore, the Trust made the accounting determination that the best category for the risk posed by the lawsuit that the
Trust would lose to Mr. Minturn was remote.

Uncertainties Regarding the Case against the Trustees

During preparation of its semiannual financials
as of March 31, 2020 and for the next year or so, the Trust understood that all the legal uncertainties described above, other
than the absence of contractual privity, undermined the legal validity of Mr. Minturn’s claims against the individual trustees
just as it undermined the legal validity of his claims against the Trust. Therefore, during this period the Trust viewed the risk
of a loss by the individual trustees to be only slightly less remote than the remote risk of a loss by the Trust.

Uncertainties Regarding Trustee Indemnification

Apparent Obstacles

During this 2020-early 2021 period, the
topic of indemnification arose rarely, if at all. This was due in part to the legal uncertainties regarding Mr. Minturn’s
case against the trustees explained above. Additionally, it was not clear whether or how many trustees might seek indemnification
in the chance, which appeared slight at the time, that they would lose to Mr. Minturn. Finally, there were significant legal questions
as to whether the Trust would be obligated to indemnify the trustees in the chance that they lost.

Prudently, the Trust decided at the time
to wait until the facts of the case became clearer, including through any discovery that might ensue, before attempting to untangle
all the complex and countervailing fiduciary and regulatory questions involving the availability of indemnification in the array
of potential outcomes. This was necessary because the obligation of indemnification under the Trust’s Deed of Trust and the
availability of indemnification under the Act would turn on a complicated analysis of the totality of the facts and circumstances
at such time, if ever, that the trustees lost and potentially requested indemnification. The Trust determined to postpone any such
analysis unless and until the possibility that the trustees might lose became less remote.

    3

Remoteness Determination

As discussed above, many then apparent weaknesses
in Mr. Minturn’s case against the Trust applied to his case against the trustees, including the prior contrary precedent
and course of dealing, the contemporaneous evidence of signatory intent, the conflicting statutory and regulatory scheme, and the
inapplicability of ERISA. These weaknesses and the legal questions described above regarding the applicability of the Trust’s
indemnification obligation to this particular and highly unusual set of facts and circumstances all combined to weigh in favor
of the Trust’s determination during preparation of its semiannual financials as of March 31, 2020, and continued belief over
the next year or so that the chance that the Trust would be required to indemnify any trustees was slight.

Although the remote chance that the Trust
would lose never came to pass, the remote chance that the trustees would lose and then ultimately be entitled to indemnification
did come to pass. The difference between a slight chance and non-extant chance is that slight chances sometimes come to pass. The
fact that a particular combination of developments whereby the trustees both lost the case and were entitled to indemnification
ultimately occurred (in an unusual case arising under an unusual fund management structure and fee arrangement) does not necessarily
imply that the chance of such a combination’s occurrence was somehow greater than slight all along.

Comment/Question

Describe the analysis and factors considered
to evaluate the need for disclosure under ASC 450 for the audited annual financial statements as of September 30, 2020.

Response

In June 2020, the Trust filed a Motion to
Dismiss. In October 2020, as the audited financial statements were in the final stages of preparation, the Court dismissed the
Trust from the lawsuit. The dismissal of all Mr. Minturn’s claims against the Trust reinforced the Trust’s original
view that the risk that the Trust would lose the case was remote. Further, the fact that the court ruled that Mr. Minturn’s
case against the individual trustees survived dismissal and would proceed to discovery did not materially alter the Trust’s
prior views of the uncertainties surrounding the interpretation of the Shareholder Interest Exception or the availability of indemnification.

Comment/Question

Describe the analysis and factors considered
to evaluate the need for disclosure under ASC 450 for the semi-annual financial statements as of March 31, 2021.

Response

The Trust’s reasonable bases for deeming
the risks of loss to the Trust posed by Mr. Minturn’s litigation persisted during the preparation of the semi-annual financial
statements as of March 31, 2021.

Comment/Question

Describe the analysis and factors considered
to evaluate the need for disclosure under ASC 450 for the annual financial statements as of September 30, 2021.

    4

Response

Case Evolution

During the summer of 2021, a number of key
developments transpired. Depositions occurred, bringing facts into sharper focus. The plaintiff filed for summary judgment in July
2021, and the defendants responded to the summary judgment motion. The Trust reviewed the plaintiff’s summary judgment motion,
in which the plaintiff’s counsel articulated fully for the first time the theory that the Shareholder Interest Exception
was merely precatory. (This would become the theory that ultimately won summary judgment for Mr. Minturn on his breach of contract
claims.) This raised the possibility that the Court might not consider the prior interpretations of the Shareholder Interest Exception
or the statutory framework when deciding whether to apply the Shareholder Interest Exception to Mr. Minturn’s payments. Accordingly,
in this period, the Trust began to reconsider whether the possibility that the trustees would lose and seek indemnification should
still be deemed remote.

Reasonable Possibility Determination

The Trust concluded in view of these mid-2021
developments that, while the question was not free from doubt, the likelihood of such a finding had become greater than remote.
This, in turn, prompted the Trust to explore further the questions surrounding the availability of indemnification. When the auditors
raised questions during the preparation of the financials during the fall of 2021 as to indemnification, the Trust discussed indemnification
with counsel. The Trust concluded that it remained unclear whether indemnification would be permissible. The Trust would need to
wait to evaluate permissibility until the entirety of facts and circumstances surrounding any judicial findings of fact and application
of law were fully known.

The Trust decided as a result of the reassessment
during the fall of 2021 to treat the risk associated with future indemnification claims as no longer remote, thereby erring on
the side of disclosure. Based on the factors above and for the purposes of the audited financial statements as of September 30,
2021, the Trust determined that a loss had become reasonably possible, but that the amount was inestimable. Among other things,
the summary judgment outcome, the extent to which one or more trustees might seek indemnification by the Trust, the number of trustees
who might seek any such indemnification, and the extent to which any such indemnification would be permissible for each trustee
seeking it were all variables that were not yet sufficiently clear for the Trust to estimate loss during preparation of these financial
statements. Accordingly, after discussions with the independent auditors and outside counsel, the Trust decided it was advisable
to disclose the lawsuit in Note K of the financial statements and to indicate that the amount of the potential loss was unpredictable
at that time. As can happen in litigation, the dynamics of the case changed over time, and the Trust revisited its prior account
determinations as a result.

Comment/Question

Describe the analysis and factors considered
to evaluate the need for disclosure under ASC 450 for the semi-annual financial statements as of March 31, 2022.

Response

The Trust booked a contingent liability
to the March 31, 2022, semi-annual financial statements in the amount of $650,000.

ASC 450-20-30-1 states, “If some amount
within a range of loss appears at the time to be a better estimate than any other amount within the range, that amount shall be
accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall
be accrued. Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined,
it is not likely that the ultimate loss will be less than the minimum amount.”

    5

Multiple methodologies arrived at the best
estimate, all of which converged around $650,000.

On February 22, 2022, the plaintiff was
awarded $794,500 by summary judgment. With this development, the potential loss ranged from $0 (win on appeal) to $794,500 (lose
on appeal). By March 31, defendants had begun seeking a settlement with the plaintiff with a g