2004 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit
2-11-2004 

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P r e c e de n t i al or N on-P r e c e de n t i al : N on-P r e c e de n t i al D ocke t N o . 02-2932

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Thi s de c i sion i s br ou gh t t o you for f r e e a nd ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i l l a no va U nive r sit y S choo l of L a

w Di g it al Re posit or y

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w Di g it al Re posit or y

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w . v i l l a no va . e du/thir dc ir c uit_2004/1010NOT PRE CEDENT IAL IN THE UNITED STATES COURT OF APPEALS

FO R T HE TH IRD CIR CU IT

_____________________________ Nos. 02-2932 and 02-4294

______________________________ IN RE: COLOR TILE INC

__________________________________ OFFICIAL

COMMITTEE OFUNSECURED CREDITORS, Appellant

v. RELI ANCE INSURANCE COMPANY; BL ACKSTONE FAMIL

Y INVESTMENT PARTNERSHI

P; PILGRIM HIGH

YIEL D TRUST; B ANKERS TRU ST CO.; I DS EXTRA I

NCOME FUND, INC.; DAN L

UFKIN; EL

ISE LU FKIN; NORTHERN TRUST COMPANY, as Trustee of a Master Trust for the B enefit of the Allied Signal, Inc .; ALLIED SIGNAL CORP.; PRUDENTIA L HIGH YIEL

D FUND, INC.; THE PRUDENTIAL

INSURANCE COMPANY OF AMERICA, as Investment Manager for the General

Motors Hig

h Yield Ac count; GE

NERAL MOTORS, General Motors High Yield Account; THE PRUDENTI AL SERIES FUND, INC.; RIVERSIDE

CAPIT AL ADVISO RS, INC.; BEARS STERNS & COMPANY, I NC; MORGA N GUA RANTY TRU ST CO. OF NE W YORK ; ATWELL

& CO. ; HOW & COMPANY; KELL Y & CO.; BTC US HIGH YI ELD FUND; NORTH B ROWARD RADIOLO GISTS, P.A. Profit Sharing Plan for the Benefit of Carl C. Peterson, M.D. and Walter F. Ciceric, M.D.; NORTHEAST IN VESTORS TRUST; NORTHSTAR HIGH YIEL D BOND FUND; RI

VERSIDE I

NCOME FUND, LTD; SALOMAN BROTHERS, INC.; STATE STREET RESEARCH STRATEGIC GROWTH & INCOME FUND; STATE STREET RESEARCH INCOME TRUST; STATE STREET RESEARCH EQUITY T RUST; STATE STREET RESEARCH INVESTMENT SERVICES, INC.; STATE STREET GROWTH TRUST;

METROPOLITAN LI

FE INSURANCE COMPANY2 _______________________________________ On A ppeal Fro m the U nited States D istrict Court

For the D istrict of Delaw are (D.C. No. 98-cv- 00358) Distri ct Judge: Honorable Sue L. Robins on

_________________________________________

Argued January

12, 2004 Be for e: S M ITH , CH ER TO FF and BE CK ER , Circuit Judges.

(Fil ed: Februar

y 11, 2004) DAVID F. HEROY, ES QUIRE BRIAN E. MAR TIN, ESQU IRE (Argued) KEVIN Y. PAK, E SQUIRE B ell , B oyd & Ll oyd 70 West Madison, Suit e 3300 Chicago, I lli nois 60602 IAN CONNOR BI FFERATO, ESQUIRE MEGAN N. HARPER, ESQUIRE Bifferato, B iffera to & Ge ntilotti 1308 Delaware Avenue Wilmington, Delaware 19806 Attorn eys for App ellants PAUL A. BRA DLEY , ESQUIRE (A rgued) A. RI CHARD WINCHESTER, ESQUIRE JAMES J . F REEBERY, ESQUIRE McCart er & Eng li sh, LLP 919 N. Market Stree t, Sui te 1800 Wilmington, Delaware 19801-3023 Attorney s for Appellees3 __________________________ OPINI ON OF THE COURT

_____________________________ BE CK ER , Circuit

Judge. This is an appeal by

Plaintiff, The Official Committee of Unsecure d Creditor s of Color T ile, Inc., a debtor in Delaw are Ban kruptcy Cou rt, from an ord er granting sum mary judgment t o defendant St ate Str eet Resear ch Invest ment Servic es, I nc. (and a ffil iate d mutual fund defe ndants) (coll ecti vely , the “SSR defendants”) in an adver sary proceedi ng be fo re th e Di st

ri ct Cou rt whi ch ha d wi th dr awnth e r ef er en ce . F orth e r ea so ns th at fo ll ow, we vacate the judgment and rem and for further proceedings. I. A. The origi nal complai nt all eged inter alia that: (1) i n 1992, Color Ti le is sued 2,200,000 s hares of Cla ss B, Seri es A, Senior Increas ing Rate Pre ferred St ock; (2) from Janu ary 199 4 thro ugh appr oxim ately Janu ary 199 5, Co lor Tile paid a ppro xima tely $10 ,000,0 00 in divide nds to hold ers of its prefe rred sto ck; an d (3) th e divid end p aymen ts consti tuted c onstruc tively fr audulent trans fers, because the payment s were made when Color Til e was insol vent and the payment s left Color Til e with unrea sonably small ca pital

or c aus ed C olo r Tile to in cur deb ts be yond its ab ility to pa y. The Depository

Trust Company ( “DTC”) is an associ ation of more than 2004

brokerage hous es and financial inst itutions which was formed pursuant t o Congressiona l mandate for t

he purpose of owning s hares i n stre et name for t he benefici al int erest

of

cus tom ers. C ede & Co . (“C ede ”) is th e na me use d by D TC to h old sha res th at it o wn s. Among other servi ces not r elevant here, Cede t

ransmit s the di vidends r eceived fr om issuer s to t

he benefici al owners, through “par ticipating” or “deposi tory ” banks act ing as

con dui ts. The origi nal complai nt named Cede as a defendant in the s uit. Cede was the record owner of approximatel y 1, 460,000 shar es of Color Ti le pref erred s tock and

rece ived app rox ima tely $6 ,468 ,811 of th e div iden d pa ymen ts du ring the r elev ant p erio d. After fil ing it s original complai nt, t he Committee di scovered t hat Cede had been mistakenly named as a

defendant beca

use it had acted only as a conduit for the di vidend payments made to the beneficial owners. The Comm ittee subsequentl y agreed to dismiss Cede as a named defendant wit hout prej udice i n exchange for Cede provi ding allthe informat ion it

possesse d concerni ng the ide ntities of t he benefici al owners of t he prefe rred sto ck. W ithout a scribin g blam e (eithe r to the p laintiff for lack of d iligenc e or to the ori ginal de fendants for obfuscati on and non-cooperation) , we simply stat e that

the plaintiff di d not dis cover the identi fy of t he present

defendants untilafter

the st atute of limi tati ons had run. The issue b efore us, arisin g ou t of the plaintiff ’s seco nd am ende d com plaint, center s around the Committee’ s abil ity to have di scovered earli er exact ly who the1 Rule 15(c)(3) provides:

An amendment of a pleading r elat es back to t he date of t

he origi nal pleadi ng when . . . . (3) the amendment changes the part y or the naming of the pa rty against w hom a claim is asserte d if the foreg oing prov ision (2 ) is sati sfied and, within t

he period provided by

Rule 4(m) for s ervice of the summons and complaint , the party to be brought

in by amendment (A) has recei ved such noti ce of the i nsti tuti on of the act ion that the part y wil l not be prejud iced in main taining a defense on th e me rits, and (B ) kne w o r shou ld have known that, but for a mi stake conc erning t he ident ity

of the prope r par ty, the a ction wo uld hav e be en b rou ght aga inst th e pa rty.

5 benefici al owner was of some of thi s prefer red st ock. In l egal t erms, t he appeal t

urns on the rel ation- back provis ions of Fed. R. Civ. P. 15(c)( 3) 1 (a s appl ie d t o the pl ai nt if f’ s t wo amended complaint s) and on whether the Dist rict Court err ed in det ermining t hat the plaintiff’s clai m must failbecause defendant s did not recei ve notic e of the sui t withi n the meaning of Rule 15(c )(3) s o as to avoi d the bar of the st atute of limi tati ons. The fact ual and procedura l his tory , inc luding t he two amended complaint s, i s well known to t he parties, for whom we primarily writ e, hence we w ill l imit ourselves t o the essentials

. B. In sup port o f its con tention that the notice prov ision is sa tisfied, p laintiff c ites to the Dist rict Court’s Febr

uary 9, 2000 opini on which denied t he motions t o dismis s fil ed by al l defendant s. I n so ruling, the Court compared t he firs t amended complai nt to t he origi nal complai nt under Fed. R. Civ. P. 15 (c) and found t hat the firs t amended complaint

relat ed back to t

he fil ing of the origi nal complaint because : (1) it was “i dentic al to the o riginal c om plaint” ; (2) the o riginal c om plaint n ame d C ede w hich h eld leg al title to6

the shares an d wa s the agent fo r entities know n as BT C and Northstar, w ho w ere benefici al owners of Color Tile stock, and (3) BTC and N orthst ar rece ived act ual or constr uctive notice of the Committ ee’s sui t withi n 120 days following t he fil ing of the origi nal complai nt si nce the or iginalcomplaint was served on Cede, whic h acted as Northstar and BTC’s agent, and they thus knew or shoul d have known that, but for t he Co mm ittee’ s m istak e, the y wo uld hav e be en n am ed in stea d of Ce de. ( Vo l. II A 265 -26 6). The C ourt held that “B TC , and N orthstar [received ] constructive no tice of Plaintiff’s suit,” satis fying the n otice req uire me nt u nde r Fe d. R . Civ . P. 1 5 (c ). (V ol. II, A -26 5-2 67)

. The Court stated: As s oph is ti cat ed i nve st or s who cho se to use Cede as an i nt ermedi ary , BT C, Brinson, and Northst ar assumed t he ris k that s uits aris ing out of t heir owners hip of Color Tile preferred shares would name only Cede. These defend ants also assum ed the risk tha t service upo n C ede w ould enab le a later c om plaint to relate bac k. Plaintiff i nvokes the l aw of the case doct rine and argues that the February 9, 2000 opinion cont

rols at the c urrent

stage of t

he proceedi ng, creating cons tructive noti ce and fo re cl os in g s ummary

ju dgm en t. The de fe ndant s d is ag re e, an d t o e xpl ai n our r ul in g, we

ne ed to de sc rib e s om e in ter im hi sto ry. On July 31, 2000, the Committee caus ed subpoenas t o be issue d to the Recor ds Custodian of St ate Str eet Corporation in Massachusett s and Missouri . On August 22, 200 0, La wre nce E astma n, the A ssistant V ice Pre siden t of S tate Stre et Ba nk se nt a letter to the C om mittee in wh ich he identif ied the clients o f State Street B ank a nd th e am oun ts2 Until t his t ime, t

he Committee had as sumed that PHY was the only benefici al owner for which Stat e Street

Bank operated as the participant bank. On or about April6, 1998 the C om mittee r eceiv ed a le tter from M r. M ontal, D TC ’s attorn ey, with tw o spre adsh eets that s howed the part icipant numbers and par ticipant banks at

the DTC which received t he dividend payments . (Vol I II, A501-520). These document s indi cated t hat participant number 997, “SSB Custodian,” act ed as the parti cipant bank to benefi cial owners of the Pre ferr ed S tock that r ece ived $1,7 08,0 95 i n di vid end paym ents . (V ol III , A5 04- 520 ). This cam e as so meth ing o f a su rprise to the C om mittee b ecau se earlie r indica tions led it to beli eve that

PHY had received $920,642 i n dividend payments . Accordingly, the Committee sought

more informat ion from DTC regarding t he reci pients of the di vidend payment s for account

997. Pursuant to t

he Bankruptcy

Court’s Sche duling Order , the Committee i nformed PHY that it belie ved PHY had received $1,708, 094.90, r ather t han $920,642 as it had earlier bel ieved. (A581-582). The Com mittee asked PHY to “[p]lease confirm the stock ow nersh ip and divide nd p aymen ts mad e to the se pa rties as d escrib ed in this letter.” (A 581 -582 ). The Co mm ittee rece ived n o resp onse . The Co mm ittee asse rts that it view ed P HY ’s silenc e as a ta cit con firma tion tha t it had re ceive d $1 .7 million in dividend payments since PHY was under the Bankrupt cy Court ’s Discover y and Sch edulin g O rder to dispu te the a mo unt o f the d ividen d paym ents to th e exte nt that it diffe red fr om the am oun t alleged by the C om mittee a nd to identif y to the C om mittee, if known, other “be nefici al holde rs of such s tock and t he amount of divi dends recei ved by such be neficial holders.” (V ol II, A036 ). 7 they recei ved in divi dend payment s. This lett er expla ined that Stat e Street Bank served as the p art icipating bank f or Pr udent ialHigh Yiel d Fund (“ PHY”) and al so for the SSR defendants . Apparently, this was the fir st t ime the Committ ee lear ned that State St reet Ban k wa s t

he pa rt ic ip an t b an k f

oren ti ti es othe r t

ha n PHY. 2 C. On Novem ber 29, 2000, the Committe e moved for leave to fil e a second amended complaint

adding new defendants and all eging that the SSR defendant s recei ved $579,553 in dividend pay ments duri ng the rel evant per iod. The Court granted t

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

seeking r ecovery

of the di vidend pay

ments, plus prej udgment int erest . The import ant differe nce between the firs t and second amended complaint s is t hat the second added the SS R d efe nda nts. On December 20, 2001, the SSR defendants moved for summary judgment asserting that

the second amended complaint was barred by

the two y ear st atute of limi tati ons under 11 U.S. C. § 108(a) bec ause it was filed more than two y ears aft er the petition date . On April 30, 2002, the Court grant ed the SSR defendants ’ motion ( the “4/30/02 Opini on”). I n the 4/30/ 02 Opinion, t he Court found that (i ) the s ame transa ction requ ireme nt w as m et; and (ii) the C om mittee h ad pr esen ted su fficien t evide nce to indica te that the failure to nam e the S SR defe ndan ts wa s due to a “c ogn izable mistak e und er Ru le 15(c)( 3)(B). ” Officia l Com m. o f the Unsec ured Cre ditors o f Colo r Tile, In c. v. Pilg rim High Yield Trust , ( In re Color Ti le, Inc. ) 278 B.R. 366, 373-74 (D. Del. 2002). The Distri ct Court opined that the “mist ake was underst andable” gi ven that the “pl ainti ff la cke d i nfo rma ti on abou t t he t ru e i den ti ty

of t he b ene fi ci al owne rs of t he s to ck at t

he t ime it filed the origina l com plaint, thro ugh no fault of its ow n” an d that “ [o]n ly Cede and its particip ant S tate Stre et Ba nk p osses sed th e info rmatio n nec essary fo r plaintiff to determi ne who the proper de fendants were . . . s o it was onl y fair that plaintiff be gi ven the opport

unity through di scovery

to dete rmine the identi ties of the true st ock owners.” Id. at 373. The Distric t Cou rt we nt on to ho ld, how ever, th at the C om mittee h ad fa iled to9

provi de suff

ici ent e vide nce t o create a g enui ne is sue of mater ialfact that the SSR defend ants received actual, constructive, or im puted no tice for relation back . The C ourt

reaso ned th at the C om mittee “ failed to ma ke a s uffic ient sho win g that th e SS R d efen dants recei ved notic e under Rule 15( c)(3) (A), as t he nonmoving part

y must do ‘on an esse ntial element of i ts cas e with res pect t o which it ha s the bur den of proof. ’” Id. at 375-76 (quoti ng Celo tex C orp. v . Catre tt , 477 U.S. 317, 322 (1986)). The District Court also found, as a f

actualmatter , that BTC and Northstar were sit uated i n “dist inguis hable” pos ition s co mp ared to th e SS R d efe nda nts. Id. at 375. Without provi ding a rationale for doing so, the Court s tate d that i t found “no need t o revis it i ts earlier decisi on, because the SSR defendants are another s tep removed fr om DTC /Cede.” Id . Thus the Court rul ed that t he fact t hat the February

9, 2000 opini on had held that BTC and Northstar had received n otice for purp oses of relation b ack did n ot apply here and that summ ary judgm ent for SS R defendan ts was therefore in order. D. We disagree wit

h the Dist

rict Court’s “ one step r emoved” conclusi on. The relation ship a mo ng th e acto rs is des cribed by the fo llow ing ch art: DTC N ominee Depositor y Bank Beneficia l Owner Cede First National Bank of Chicago BTC Cede CustodialTrust Company Northstar Cede State St reet Bank SSR defe ndan ts As co unsel for d efenda nts conced ed at oral argu ment be fore us, the S SR d efenda nts are sit uated i n exac tly the same position as the b eneficiaries identified in th e District Cou rt’s10

Feb rua ry 9, 20 00 o pin ion

. Mor eo ve r t

he pl ai nt if

f’ s c ons tr

uc ti ve notic e a rg ume ntis but tr es se d by

two documents in t

he record t

hat were not

focused on by

the Dist rict Court. The first i s the “Rules, By-Laws and Organization Certific ate of t he Depositor

y Trus t Company, ” which provides in Rule 6: Subject to the provi sions of t hese Rules and t

he Procedures , the Corporati on, acti ng in accor dance with dul y aut horized instruc tions from the Participant or Parti cipant s and the Pl edgee or Ple dgees, i f any, having an i nteres t in t he trans acti on, shal l, . . . de liver dividends , dis tributions , ri ghts, securi ties , proxy materi al and other proper ty or documents r eceived by the Corporation with r espect to a Participant’s Deposi ted Securi ties or Pledged Securiti es, exce pt as pr ovided below in this Rule or in the Procedures. (Vol. II, A-17 9). The second is t

he contra ct between State Street Bank and SSR defendant s (the ‘cust odial agree men t”) w hich p rovid es in S ection 2.14: “ The Cu stodian shall tran smit p rom ptly to the Fund allwritt en informat ion . . . rece ived by the Custodi an from iss uers of t he dom estic securities being he ld by the Fund .” (Vol. IV, A -979). II. Defendants cont end that plaintiff’s arguments on notice ar e flawed. Fi rst, they contend that the law of the cas e doctrine does not oper ate t o render t he February

9, 2000 opi nio n, re nde red on a Ru le 12 (b)(6 ) mo tion , app licab le in a sum ma ry judg me nt co ntex t. Second, sei zing on pla inti ff’s conces sion at oral argument that

there i s no evidence in the record t hat Stat e Street

Bank ever recei ved actualnotice of the sui t (i t is also cl ear that the defendants did not r eceive not ice), defendants argue that const ructi ve notic e cannot3 Defendants bel ieve that the February 9, 2000 opini on was incorr ectl y deci ded. 11 surmount a do uble li nkage, i. e., Cede to Stat e Str eet Bank, and the Bank to t he SSR defendants . Plaintiff

rejoi ns that

the law of the case does a pply because whatever di ff er en ce s t he re may be on t he fa ct ua l r ec or d, th e l eg al is su e wi thre sp ec t t o the two motions is the sa me an d that it is the legal issue that matters. M oreover, in plaintiff’s submissi on, the legal reasoni ng of the Dist rict Court’s Febr

uary 9, 2000 opini on was correct , and hence cons tructive noti ce is es tabli shed. 3 Secondly , pla inti ff submits that any lacu na is fille d in b y the DT C reg ulation s and the cu stodial a greem ent. We are sym pathe tic to plain tiff’s po sition. It w ould seem to us u ntow ard tha t a depo sitory ban k that a cts as a cond uit for th e trans missio n of divide nds (w hich p erfor ce it must tr ansmit) and keeps the financi al rec ord of thes e trans missi ons, would not have the obl igati on t o no tify the ben efic iarie s of a cla im to reco ver som e of thes e sa me div iden ds. And there seems t o be no doubt of the obligation of DTC or it s nominee to notify the deposit orybank of the cl aim. On the ot her hand, t

he notion of

double imput ation, i.e . that the agent ’s la ck of knowledge is cured by imputat ion of knowledge t hrough his ( secondlevel) agent, is problematic. Morever, this issue was not adequately bri efed by the parti es. Therefore, rather

than res olve the se iss ues now, we will vac ate the judgment and remand the case to the D istrict Court so that the parties m ay conduct a ro und of discovery direct ed to: ( 1) whether St ate Str eet Bank rece ived act ual noti ce; and ( 2) the s cope of the obligations of DTC or Cede and State Street Bank to pass on not ice i n such a manner that4 The need for expedi tion i n discover y and dec isi on making is under scored by the long delays that have attend ed this case. W e are cons cious that the D istrict Court in Delaw are is heavi ly

burdened with bankruptcy cases ( because of i ts huge bankr uptcy docket and acute shor

tage of bankr

uptcy judges) and complex pate nt cases , which mayexplai n why the District

Court took nearly seventeen months to decide the ori ginal motion to dismiss, and stayed discovery

during that ti me (though such a long delay is troubli ng). The case was also del ayed during the a ppeal becaus e it was uncl ear unti l we decidedOfficial Com mittee of Unsecured Creditors of Cybergenics Corp. v. Chinery , 330 F.3d 548 ( 3d Cir. 2003) , that a cre ditor s’ committ ee could br ing thi s ty pe of acti on. 12 it reach es the b eneficiaries. W e belie ve tha t a dev elope d fac tual rec ord, p articular ly as to whether SSB recei ved actualnotice , as wellas on the cons tructive noti ce iss ues, wil l be help ful in reso lvin g th e leg al iss ues . The Distri ct Court s hould act promptly

to fix a short di scovery

schedule ( e.g. , 60 days ), and t

hen should expedi tious ly reexamine t

he case i n light

of the di scovery

and of this opinion. 4 In the eve nt that the case should be appea led agai n, the Clerk shal l refe r the appeal to this panel. The parties shall bear t heir own costs.