2004 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-11-2004

In Re: Color Tile

Precedential or Non-Precedential: Non-Precedential

Docket No. 02-2932

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Recommended Citation

"In Re: Color Tile " (2004). 2004 Decisions. Paper 1010.

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NOT PRECEDENTIAL

IN THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________________________

Nos. 02-2932 and 02-4294

______________________________

IN RE: COLOR TILE INC

__________________________________

OFFICIAL COMMITTEE OF UNSECURED CREDITORS,

 Appellant

 v.

RELIANCE INSURANCE COMPANY; BLACKSTONE FAMILY INVESTMENT

PARTNERSHIP;

PILGRIM HIGH YIELD TRUST; BANKERS TRUST CO.; IDS EXTRA INCOME

FUND, INC.; DAN LUFKIN; ELISE LUFKIN; NORTHERN TRUST COMPANY,

as Trustee of a Master Trust for the Benefit of the Allied Signal, Inc.;

ALLIED SIGNAL CORP.; PRUDENTIAL HIGH YIELD FUND, INC.;

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, as Investment Manager

for the General Motors High Yield Account; GENERAL MOTORS,

General Motors High Yield Account; THE PRUDENTIAL SERIES FUND, INC.;

RIVERSIDE CAPITAL ADVISORS, INC.; BEARS STERNS & COMPANY, INC;

MORGAN GUARANTY TRUST CO. OF NEW YORK; ATWELL & CO.; HOW &

COMPANY;

KELLY & CO.; BTC US HIGH YIELD FUND; NORTH BROWARD RADIOLOGISTS, P.A.

Profit Sharing Plan for the Benefit of Carl C. Peterson, M.D. and

Walter F. Ciceric, M.D.; NORTHEAST INVESTORS TRUST; NORTHSTAR HIGH

YIELD BOND FUND; RIVERSIDE INCOME FUND, LTD; SALOMAN BROTHERS, INC.;

STATE STREET RESEARCH STRATEGIC GROWTH & INCOME FUND; STATE STREET

RESEARCH

INCOME TRUST; STATE STREET RESEARCH EQUITY TRUST; STATE STREET

RESEARCH

INVESTMENT SERVICES, INC.; STATE STREET GROWTH TRUST;

METROPOLITAN LIFE INSURANCE COMPANY
2

_______________________________________

On Appeal From the United States District Court

For the District of Delaware

(D.C. No. 98-cv-00358)

District Judge: Honorable Sue L. Robinson

_________________________________________

Argued January 12, 2004

Before: SMITH, CHERTOFF and BECKER, Circuit Judges.

(Filed: February 11, 2004)

DAVID F. HEROY, ESQUIRE

BRIAN E. MARTIN, ESQUIRE (Argued)

KEVIN Y. PAK, ESQUIRE

Bell, Boyd & Lloyd

70 West Madison, Suite 3300

Chicago, Illinois 60602

IAN CONNOR BIFFERATO, ESQUIRE

MEGAN N. HARPER, ESQUIRE

Bifferato, Bifferato & Gentilotti

1308 Delaware Avenue

Wilmington, Delaware 19806

Attorneys for Appellants

PAUL A. BRADLEY, ESQUIRE (Argued)

A. RICHARD WINCHESTER, ESQUIRE

JAMES J. FREEBERY, ESQUIRE

McCarter & English, LLP

919 N. Market Street, Suite 1800

Wilmington, Delaware 19801-3023

Attorneys for Appellees
3

__________________________

OPINION OF THE COURT

_____________________________

BECKER, Circuit Judge.

This is an appeal by Plaintiff, The Official Committee of Unsecured Creditors of

Color Tile, Inc., a debtor in Delaware Bankruptcy Court, from an order granting summary

judgment to defendant State Street Research Investment Services, Inc. (and affiliated

mutual fund defendants) (collectively, the “SSR defendants”) in an adversary proceeding

before the District Court which had withdrawn the reference. For the reasons that follow,

we vacate the judgment and remand for further proceedings.

I.

A.

The original complaint alleged inter alia that: (1) in 1992, Color Tile issued

2,200,000 shares of Class B, Series A, Senior Increasing Rate Preferred Stock; (2) from

January 1994 through approximately January 1995, Color Tile paid approximately

$10,000,000 in dividends to holders of its preferred stock; and (3) the dividend payments

constituted constructively fraudulent transfers, because the payments were made when

Color Tile was insolvent and the payments left Color Tile with unreasonably small capital

or caused Color Tile to incur debts beyond its ability to pay. 

The Depository Trust Company (“DTC”) is an association of more than 200
4

brokerage houses and financial institutions which was formed pursuant to Congressional

mandate for the purpose of owning shares in street name for the beneficial interest of

customers. Cede & Co. (“Cede”) is the name used by DTC to hold shares that it owns. 

Among other services not relevant here, Cede transmits the dividends received from

issuers to the beneficial owners, through “participating” or “depository” banks acting as

conduits. 

The original complaint named Cede as a defendant in the suit. Cede was the

record owner of approximately 1,460,000 shares of Color Tile preferred stock and

received approximately $6,468,811 of the dividend payments during the relevant period. 

After filing its original complaint, the Committee discovered that Cede had been

mistakenly named as a defendant because it had acted only as a conduit for the dividend

payments made to the beneficial owners. The Committee subsequently agreed to dismiss

Cede as a named defendant without prejudice in exchange for Cede providing all the

information it possessed concerning the identities of the beneficial owners of the

preferred stock. Without ascribing blame (either to the plaintiff for lack of diligence or to

the original defendants for obfuscation and non-cooperation), we simply state that the

plaintiff did not discover the identify of the present defendants until after the statute of

limitations had run.

The issue before us, arising out of the plaintiff’s second amended complaint,

centers around the Committee’s ability to have discovered earlier exactly who the
 

1Rule 15(c)(3) provides:

An amendment of a pleading relates back to the date of the original

pleading when . . . . (3) the amendment changes the party or the naming of

the party against whom a claim is asserted if the foregoing provision (2) is

satisfied and, within the period provided by Rule 4(m) for service of the

summons and complaint, the party to be brought in by amendment (A) has

received such notice of the institution of the action that the party will not be

prejudiced in maintaining a defense on the merits, and (B) knew or should

have known that, but for a mistake concerning the identity of the proper

party, the action would have been brought against the party. 

5

beneficial owner was of some of this preferred stock. In legal terms, the appeal turns on

the relation-back provisions of Fed. R. Civ. P. 15(c)(3)1 (as applied to the plaintiff’s two

amended complaints) and on whether the District Court erred in determining that the

plaintiff’s claim must fail because defendants did not receive notice of the suit within the

meaning of Rule 15(c)(3) so as to avoid the bar of the statute of limitations. The factual

and procedural history, including the two amended complaints, is well known to the

parties, for whom we primarily write, hence we will limit ourselves to the essentials.

B.

In support of its contention that the notice provision is satisfied, plaintiff cites to

the District Court’s February 9, 2000 opinion which denied the motions to dismiss filed

by all defendants. In so ruling, the Court compared the first amended complaint to the

original complaint under Fed. R. Civ. P. 15 (c) and found that the first amended

complaint related back to the filing of the original complaint because: (1) it was “identical

to the original complaint”; (2) the original complaint named Cede which held legal title to
6

the shares and was the agent for entities known as BTC and Northstar, who were

beneficial owners of Color Tile stock, and (3) BTC and Northstar received actual or

constructive notice of the Committee’s suit within 120 days following the filing of the

original complaint since the original complaint was served on Cede, which acted as

Northstar and BTC’s agent, and they thus knew or should have known that, but for the

Committee’s mistake, they would have been named instead of Cede. (Vol. II A265-266). 

The Court held that “BTC, and Northstar [received] constructive notice of Plaintiff’s

suit,” satisfying the notice requirement under Fed. R. Civ. P. 15 (c). (Vol. II, A-265-267). 

The Court stated:

As sophisticated investors who chose to use Cede as an intermediary, BTC,

Brinson, and Northstar assumed the risk that suits arising out of their ownership of

Color Tile preferred shares would name only Cede. These defendants also

assumed the risk that service upon Cede would enable a later complaint to relate

back. 

Plaintiff invokes the law of the case doctrine and argues that the February 9, 2000

opinion controls at the current stage of the proceeding, creating constructive notice and

foreclosing summary judgment. The defendants disagree, and to explain our ruling, we

need to describe some interim history.

On July 31, 2000, the Committee caused subpoenas to be issued to the Records

Custodian of State Street Corporation in Massachusetts and Missouri. On August 22,

2000, Lawrence Eastman, the Assistant Vice President of State Street Bank sent a letter to

the Committee in which he identified the clients of State Street Bank and the amounts
 

2

 Until this time, the Committee had assumed that PHY was the only beneficial owner

for which State Street Bank operated as the participant bank. On or about April 6, 1998

the Committee received a letter from Mr. Montal, DTC’s attorney, with two spreadsheets

that showed the participant numbers and participant banks at the DTC which received the

dividend payments. (Vol III, A501-520). These documents indicated that participant

number 997, “SSB Custodian,” acted as the participant bank to beneficial owners of the

Preferred Stock that received $1,708,095 in dividend payments. (Vol III, A504-520). 

This came as something of a surprise to the Committee because earlier indications led it

to believe that PHY had received $920,642 in dividend payments. Accordingly, the

Committee sought more information from DTC regarding the recipients of the dividend

payments for account 997. Pursuant to the Bankruptcy Court’s Scheduling Order, the

Committee informed PHY that it believed PHY had received $1,708,094.90, rather than

$920,642 as it had earlier believed. (A581-582). The Committee asked PHY to “[p]lease

confirm the stock ownership and dividend payments made to these parties as described in

this letter.” (A581-582). The Committee received no response. The Committee asserts

that it viewed PHY’s silence as a tacit confirmation that it had received $1.7 million in

dividend payments since PHY was under the Bankruptcy Court’s Discovery and

Scheduling Order to dispute the amount of the dividend payments to the extent that it

differed from the amount alleged by the Committee and to identify to the Committee, if

known, other “beneficial holders of such stock and the amount of dividends received by

such beneficial holders.” (Vol II, A036).

7

they received in dividend payments. This letter explained that State Street Bank served as

the participating bank for Prudential High Yield Fund (“PHY”) and also for the SSR

defendants. Apparently, this was the first time the Committee learned that State Street

Bank was the participant bank for entities other than PHY.2

C.

On November 29, 2000, the Committee moved for leave to file a second amended

complaint adding new defendants and alleging that the SSR defendants received

$579,553 in dividend payments during the relevant period. The Court granted the

Committee’s motion on March 7, 2001, and the second amended complaint was filed,
8

seeking recovery of the dividend payments, plus prejudgment interest. The important

difference between the first and second amended complaints is that the second added the

SSR defendants. 

On December 20, 2001, the SSR defendants moved for summary judgment

asserting that the second amended complaint was barred by the two year statute of

limitations under 11 U.S.C. § 108(a) because it was filed more than two years after the

petition date. On April 30, 2002, the Court granted the SSR defendants’ motion (the

“4/30/02 Opinion”). In the 4/30/02 Opinion, the Court found that (i) the same transaction

requirement was met; and (ii) the Committee had presented sufficient evidence to indicate

that the failure to name the SSR defendants was due to a “cognizable mistake under Rule

15(c)(3)(B).” Official Comm. of the Unsecured Creditors of Color Tile, Inc. v. Pilgrim

High Yield Trust, (In re Color Tile, Inc.) 278 B.R. 366, 373-74 (D. Del. 2002). The

District Court opined that the “mistake was understandable” given that the “plaintiff

lacked information about the true identity of the beneficial owners of the stock at the time

it filed the original complaint, through no fault of its own” and that “[o]nly Cede and its

participant State Street Bank possessed the information necessary for plaintiff to

determine who the proper defendants were . . . so it was only fair that plaintiff be given

the opportunity through discovery to determine the identities of the true stock owners.” 

Id. at 373.

The District Court went on to hold, however, that the Committee had failed to
9

provide sufficient evidence to create a genuine issue of material fact that the SSR

defendants received actual, constructive, or imputed notice for relation back. The Court

reasoned that the Committee “failed to make a sufficient showing that the SSR defendants

received notice under Rule 15(c)(3)(A), as the nonmoving party must do ‘on an essential

element of its case with respect to which it has the burden of proof.’” Id. at 375-76

(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). The District Court also

found, as a factual matter, that BTC and Northstar were situated in “distinguishable”

positions compared to the SSR defendants. Id. at 375. Without providing a rationale for

doing so, the Court stated that it found “no need to revisit its earlier decision, because the

SSR defendants are another step removed from DTC/Cede.” Id. Thus the Court ruled

that the fact that the February 9, 2000 opinion had held that BTC and Northstar had

received notice for purposes of relation back did not apply here and that summary

judgment for SSR defendants was therefore in order.

D.

We disagree with the District Court’s “one step removed” conclusion. The

relationship among the actors is described by the following chart:

DTC Nominee Depository Bank Beneficial Owner

Cede First National Bank of Chicago BTC

Cede Custodial Trust Company Northstar

Cede State Street Bank SSR defendants

As counsel for defendants conceded at oral argument before us, the SSR defendants are

situated in exactly the same position as the beneficiaries identified in the District Court’s
10

February 9, 2000 opinion. 

Moreover the plaintiff’s constructive notice argument is buttressed by two

documents in the record that were not focused on by the District Court. The first is the

“Rules, By-Laws and Organization Certificate of the Depository Trust Company,” which

provides in Rule 6:

Subject to the provisions of these Rules and the Procedures, the Corporation,

acting in accordance with duly authorized instructions from the Participant or

Participants and the Pledgee or Pledgees, if any, having an interest in the

transaction, shall, . . . deliver dividends, distributions, rights, securities, proxy

material and other property or documents received by the Corporation with respect

to a Participant’s Deposited Securities or Pledged Securities, except as provided

below in this Rule or in the Procedures.

(Vol. II, A-179).

The second is the contract between State Street Bank and SSR defendants (the ‘custodial

agreement”) which provides in Section 2.14: “The Custodian shall transmit promptly to

the Fund all written information . . . received by the Custodian from issuers of the

domestic securities being held by the Fund.” (Vol. IV, A-979).

II.

Defendants contend that plaintiff’s arguments on notice are flawed. First, they

contend that the law of the case doctrine does not operate to render the February 9, 2000

opinion, rendered on a Rule 12(b)(6) motion, applicable in a summary judgment context. 

Second, seizing on plaintiff’s concession at oral argument that there is no evidence in the

record that State Street Bank ever received actual notice of the suit (it is also clear that the

defendants did not receive notice), defendants argue that constructive notice cannot
 

3Defendants believe that the February 9, 2000 opinion was incorrectly decided.

11

surmount a double linkage, i.e., Cede to State Street Bank, and the Bank to the SSR

defendants. Plaintiff rejoins that the law of the case does apply because whatever

differences there may be on the factual record, the legal issue with respect to the two

motions is the same and that it is the legal issue that matters. Moreover, in plaintiff’s

submission, the legal reasoning of the District Court’s February 9, 2000 opinion was

correct, and hence constructive notice is established.3 Secondly, plaintiff submits that

any lacuna is filled in by the DTC regulations and the custodial agreement.

We are sympathetic to plaintiff’s position. It would seem to us untoward that a

depository bank that acts as a conduit for the transmission of dividends (which perforce it

must transmit) and keeps the financial record of these transmissions, would not have the

obligation to notify the beneficiaries of a claim to recover some of these same dividends. 

And there seems to be no doubt of the obligation of DTC or its nominee to notify the

depository bank of the claim. On the other hand, the notion of double imputation, i.e. that

the agent’s lack of knowledge is cured by imputation of knowledge through his (secondlevel) agent, is problematic. Morever, this issue was not adequately briefed by the parties.

Therefore, rather than resolve these issues now, we will vacate the judgment and

remand the case to the District Court so that the parties may conduct a round of discovery

directed to: (1) whether State Street Bank received actual notice; and (2) the scope of the

obligations of DTC or Cede and State Street Bank to pass on notice in such a manner that
 

4The need for expedition in discovery and decision making is underscored by the long

delays that have attended this case. We are conscious that the District Court in Delaware

is heavily burdened with bankruptcy cases (because of its huge bankruptcy docket and

acute shortage of bankruptcy judges) and complex patent cases, which may explain why

the District Court took nearly seventeen months to decide the original motion to dismiss,

and stayed discovery during that time (though such a long delay is troubling). The case

was also delayed during the appeal because it was unclear until we decided Official

Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d

Cir. 2003), that a creditors’ committee could bring this type of action.

12

it reaches the beneficiaries. We believe that a developed factual record, particularly as to

whether SSB received actual notice, as well as on the constructive notice issues, will be

helpful in resolving the legal issues. 

The District Court should act promptly to fix a short discovery schedule (e.g., 60

days), and then should expeditiously reexamine the case in light of the discovery and of

this opinion.4 In the event that the case should be appealed again, the Clerk shall refer the

appeal to this panel. The parties shall bear their own costs.