»

In Kusner v. First Pennsylvania Corp., 581 F.2d 1234, 1239 (3rd Cir. 1976), the
Third Circuit rejected a similar argument that construed a “no action” provision to bar
a bondholder from bringing an action under the federal securities laws. That
indenture prohibited suits “for the execution of any trust or power hereof, or for the
enforcement of any other remedy under or upon this Indenture.” Id. The court held
that the provision did not bar a bondholder from pursing an action for fraud because
the right to bring a Rule 10b-5 securities fraud claim did not derive from the indenture,
but from federal law. Id.

Plaintiffs contention that section 7.11 would bar the individual bondholders
from bringing this suit likewise lacks merit where the Indenture does not assign.
Plaintiff the bondholder’s fraud claims. As 7.11 plainly states, this provision applies
only to remedies “with respect to this Indenture, the Bonds or the Facility Lease
Agreement.” As this court has already explained, the instant action for fraud is not a
remedy which falls under the Indenture; indeed, it is for this very reason that Plaintiff
does not have standing to bring the suit. As such, the no-action provision does not
apply to these claims. The individual bondholders would, therefore, have standing to
pursue such claims. See United Bank v. Sun Mesa Corp., 199 F.R.D. 480, 482 (D. Ariz.
1988)(allowing individual bondholders to intervene in a securities fraud action after
finding that the indenture trustee, United Bank, did not have standing to bring the
suit).

CONCLUSION

Because the Indenture does not give Plaintiff the authority to bring a securities

13


technology had already been proven effective and had been used in the Czech Republic.
(Id. J 20-22.) According to Plaintiff, such material misrepresentations hid the
significant risks attached to the Project in order to sell the bonds. (Id. {{ 19, 20.)
Plaintiff now seeks compensatory damages on behalf of the bondholders, punitive
damages, and the reasonable costs and expenses incurred by the bondholders,
including attorney and expert fees. (Id. | 48.)

Defendant challenges Plaintiffs standing to sue. To support its standing to
bring this action on behalfofthe bondholders, Plaintiff points to the following language
of the Indenture:

Section 7.08. Other Remedies. If an Event of Default occurs and is

continuing, the Trustee may pursue any available remedy by proceeding

at law or in equity to collect the principal of, premium, if any, or interest

on the Bonds or to enforce the performance of any provision of the Bonds,
this Indenture, the Facility Lease Agreement or the Guaranty.

eek

Section 8.05. Duties of Trustee. a) If an Event of Default has occurred and

is continuing, the Trustee shall exercise its rights and powers and use the

same degree of care and skill in their exercise as a prudent person would

exercise or use under the circumstances in the conduct of the person’s

own affairs.
(Indenture § 7.08, 8.05, Ex. E to Complaint).

Defendant counters that these provisions allow Plaintiff to pursue an action to
collect the principal of or interest on the bonds, but do not support Plaintiffs standing

to bring any fraud claims on behalf of the bondholders and, as such, this court must

dismiss this action.


but that language refers only to actions designed to “collect the principal of, premium,
if any, or interest on the Bonds” or to enforce the performance of any provision of the
bonds or the Indenture. Section 7.08 does not give Plaintiff power to protect any and
all rights of the bondholders or pursue bondholder’s tort claims, nor does Plaintiff
point to any other section of the Indenture where the bondholders assigned such claims
to it. Without such an assignment in the Indenture, Plaintiff cannot proceed with an
action for fraud.

In contrast to the Indenture in Plaintiffs case, courts allow an indenture trustee
standing to bring tort claims on behalf of the bondholders only when the indenture
carries a broad grant of authority to sue on behalf of the bondholders. For example,
in In re Washington Pub. Power Supply Sys. Sec. Litig. (WPPSS), 623 F. Supp. 1466,
1483 (D. Wash. 1985), aff'd, 823 F.2d 1349 (9th Cir. 1987), the Bond Resolution
authorized the trustee

to institute such suits, actions and proceedings at law or in equity for the

collection of all sums due in connection with the Bonds and to protect and

enforce its rights and the rights of the holders of the Bonds under the

Resolution . . . in the enforcement of any other legal or equitable right as

the Bond Fund Trustee, being advised by counsel, shall deem most

effectual to enforce any of its rights or the rights of the holders of the

Bonds....

Id. (emphasis added). The court found that this language was broad enough that it
granted the trustee authority to bring both suits to collect the sums due in connection

with the bonds and also to bring a tort claim, including a securities fraud claim, on

behalf of the bondholders. Jd. at 1483-84; see also Continental Bank v. Ludlow, 777 F.


see also Continental Bank, N.A. v. Caton DBLKM, Inc., No. 88-1611-C, 1990 WL
129452, at *5 (D. Kan. Aug. 6, 1990) (whether an indenture trustee has the authority
to bring Rule 10b-5 securities fraud claims must be decided from the terms of the trust
indenture). The trust indenture sets forth the rights and powers of the trustee and
those powers cannot be expanded in contradiction of the indenture. Premier Bank v.
Tierney, 114 F. Supp. 2d 877, 881 (W.D. Miss. 2000) (citing Meckel v. Continental
Resources Co., 758 F.2d 811, 816 (2d Cir. 1985))(“Unlike the ordinary trustee, who has
historic common-law duties imposed beyond those in the trust agreement, an indenture
trustee is more like a stakeholder whose duties and obligations are exclusively defined
by the terms of the indenture agreement.”)

Plaintiff asserts that Section 7.08 of the Indenture gives the Trustee the
authority to bring any suit designed to collect the principal and interest from the
bonds, including a fraud claim. As noted, Section 7.08 provides that in the event of a
default, the Trustee “may pursue any available remedy . . . to collect the principal of,
premium, if any, or interest on the Bonds or to enforce the performance of any
provision of the Bonds, this Indenture, the Facility Lease Agreement or the Guaranty.”
In Plaintiff's view, the “any available remedy” language gives the trustee standing to
assert any claims arising from the agreements, state common law, or the federal or
state securities laws, including this fraud action. This court disagrees.

While the Seventh Circuit has not directly addressed this issue, other
jurisdictions have found that language similar to that in Section 7.08 does not provide

the indenture trustee with standing to bring a fraud claim. For example, in

6


DISCUSSION

Dismissal of a claim under Rule 12(b)(6) is proper when no relief can be granted
under any set of facts that can be proved consistent with the allegations of the
complaint. Harris Trust & Sav. Bank v. E-II Holdings, Inc. 926 F.2d 636, 641 (7th Cir.
1991). Written instruments that are attached to and referred to in the complaint may
be considered on a motion to dismiss, see, e.g., Levenstein v. Salafsky, 164 F.3d 345, 347
(7th Cir. 1998) (quoting Wright v. Associated Ins. Cos., Inc., 29 F.3d 1244, 1249 (7th
Cir. 1994)), and both parties here have referred to specific provisions of the Indenture
in support of their positions. The sole issue before this court is whether, under the
terms of the Indenture, Plaintiff has standing to bring the instant suit on behalf of the
bondholders.

A. Language of the Indenture

Plaintiff alleges that under the Indenture, it has the broad power as trustee to
pursue all claims on behalf of the bondholders, including the instant fraud claim.
Because a private action for money damages under Rule 10b-5 must be brought by the
actual purchaser or seller of securities, see Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723, 731-33 (1975), and Plaintiff admits that it neither sold nor purchased the
bonds involved in this action, the right to pursue this claim must have been assigned
by the bondholders in order for Plaintiff to proceed with this suit. To determine if
those rights have been so assigned, the court must turn to the provisions of the
Indenture. See, e.g., Navarro Sav. Ass nv. Lee, 446 U.S. 458, 464-65 (1980)(the powers

of an indenture trustee derive from the instruments creating the trust relationship);

5


lacked standing to bring state law fraud claims where indenture only authorized
trustee to assert claims for default).

Similarly, in Premier Bank v. Tierney, 114 F. Supp. 24 877, 879 (W.D. Miss.
2000), the plaintiff bank, as indenture trustee for the purchasers of industrial revenue
bonds, filed an action for fraud against directors, accountants and attorneys for a group
of companies which guaranteed the bonds. After the companies went bankrupt, the
bank brought suit for fraud, alleging that the indenture gave it authority to pursue all
claims on behalf of the bondholders. Id. at 881. To support its argument, the trustee
pointed to the following language of the indenture:

All rights of action . . . under this Mortgage and Indenture of Trust or

under any of the bonds or coupons may be enforced by the Trustee ... and

any such suit or proceeding instituted by the Trustee shall be brought in

its name as Trustee without the necessity of joining as plaintiffs or

defendants any holders of the Bonds, and any recovery of judgment shall

... be for the equal benefit of the holders of the outstanding Bonds and

coupons.
Id. at 881. (alteration in the original). The court disagreed that this provision gave
plaintiff standing to sue, finding instead that the “any such suit” language “speaks only
to legal actions brought to enforce the Indenture, Mortgage, and bonds or coupons” and,
as such, “[nJo authority is conferred to pursue separate tort actions at all.” Id. Because
the bondholders did not clearly assign such rights to the bank trustee in the indenture,
the bank did not have standing to bring this suit. Id.

As with the indenture trustees in Continental Bank and Premier Bank, Plaintiff

here has been given the power under the Indenture to pursue “any available remedy,”


Mloute Order Form {06/97)

United States District Court, Northern District of Minois

' f Assigned itting Judge if Other
Nameotaimet nies | Rebeoeg  RalImeyer | Stauied suas
wi
CASE NUMBER 01 C 0031 DATE 6/27/2001
CASE Regions Bank vs. Blount Parrish & Co., Inc.
TITLE

of the motion being presented.]

Tin the following box (a) indicate the party filing the motion, e.g. plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION:

DOCKET ENTRY:

(1) o Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due

(3) Oo Answer brief to motion due. . Reply to answer brief due.

(4) ita) Ruling/Hearing on setfor at

(5) oO Status hearing[held/continued to} [set for/re-set for] on__ setfor at

(6) Qa Pretrial conference(held/continued to] [set for/re-set for]on__—_—setfor___—_at__
(7) a Trial[set for/re-set for] on __ at

(8) o [Bench/Jury trial] [Hearing] held/continued to sat .

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) ClGeneral Rule 21. COFRCP4i(a)(1)_ C) FROPA1(a)(2).

(io) ME (Other docket entry] Enter Memorandum Opinion and Order. Defendant’s motion to dismiss (Doc.
No. 5-1) is granted and the complaint is dismissed without prejudice. The court will, however, entertain
a motion to intervene by a party who has standing. Any such motion should be brought within 21 days.

(il) i [For further detail see order attached to the original minute order.]
No notices required, advised in open court.
No notices required. uber of oties
VY | Notices mailed by judge's staff. *
“ UN 28 20
Notified counsel by telephone are doped

Docketing to mail notices

Mail AO 450 form. IN) ; docketing dep inital

Copy to judge/magistrate judge. erg
pick .

1272001

date mailed notice

eourivoom Ol JUN 28 Ali 7:99

TV deputy’s ery

initials
Date/time received in

central Clerk’s Office nailing, deputy initials



exercise or use under the circumstances in the conduct of the person’s
own affairs.

(b) Except during the continuance of an Event of Default,

(1) The Trustee need perform only those duties that are specifically set

forth in the Indenture and no others...

(Indenture § 8.05, Ex. E to Complaint)(emphasis added).

This court is not persuaded by Plaintiff's proposed distinction. Though courts
have recognized that an indenture trustee’s duties change after a default occurs, the
change does not authorize an indenture trustee to take actions not otherwise
contemplated by the indenture. For example, in Beck v. Manufacturers Hanover Trust
Co., 218 A.D.2d 1, *3-4 (N.Y. App. Div. 1995), holders of defaulted bearer bonds
brought suit for breach of fiduciary duty against the successor indenture trustee of the
collateral securing payment of the defaulted bonds. Jd. at *3.4. The court noted that
subsequent to default, “the indenture trustee’s obligations come more closely to
resemble those of an ordinary fiduciary, regardless of any limitations or exculpatory
provisions contained in the indenture.” Td. at *12. Thus, the court found that the
“single relevant inquiry in this case” was not whether the trustee had acted in
accordance with the terms of the trust indentures, but, instead, whether the trustee
had fulfilled its fiduciary responsibilities to the trust which were “in some respects
broader than the obligations specified in the indentures.” Id. at *10. The court
explained, however, that the indenture is not rendered irrelevant by this analysis;
rather “[t]he trustee must in the postdefault context act prudently, but only in the

exercise of those rights and powers granted in the indenture.” Id. at *13 (emphasis

il


Supp. 92, 97-98 (D. Mass. 1991) (trustee has standing to bring contract claim on behalf

of bondholder where Bond Resolution allowed trustee to “take such steps and institute

such suits, actions, or proceedings in its own name, . . ., or in the name of the

Bondholders . . . for the protection and enforcement of the rights of the holder of bonds
22),

Unlike the broad language in the WPPSS indenture, the remedies clause in
Plaintiff's case omits any reference to protecting and enforcing the rights of the
bondholders besides collecting on the bond or enforcing the performance of any
provision of the bonds. Without such language, Plaintiff does not have standing to
bring the instant suit.

B. Distinction between pre- and post-default duties

Plaintiff argues, however, that even if the Indenture limited it from bringing
this suit pre-default, this court should make a distinction between the Trustee’s pre-
and post-default duties and find that such a suit is allowed post-default. In Plaintiffs
view, the duties of the trustee absent a default are typically mechanical and explicitly
dictated by the terms of the indenture, but post-default duties are less administrative
in nature and more like the duties of a common law fiduciary. Under this construction,
atrustee’s duties post-default are flexible and less easily defined. Plaintiff cites section
8.05 of the Indenture as explicitly recognizing the distinction between the Trustee’s
pre- and post-default authority. Section 8.05 provides:

Duties of Trustee. (a) If an Event of Default has occurred and is

continuing, the Trustee shall exercise its rights and powers and use the

same degree of care and skill in their exercise as a prudent person would

10


Continental Bank, N.A. v. Caton DBLKM, Inc., No. 88-1611-C, 1990 WL 129452, at *1-
2 (D. Kan. Aug. 6, 1990), plaintiff, an indenture trustee, brought a fraud claim on
behalf of bondholders against the defendant underwriters of the bond, claiming that
defendant had, among other things, analyzed the viability of the bond program and
discovered it would fail, but never disclosed this information to the trustee or the
bondholders. To support its standing to bring the claim, plaintiff Continental Bank
pointed to the following language of the indenture:

Remedies Vested in Trustee. All rights of action . . ., under this Indenture

or under any of the Bonds may be enforced by Trustee . . . and any such

suit or proceeding instituted by Trustee shall be brought in its name as

Trustee without the necessity of joining as plaintiffs or defendants any

Owner of the Bonds, and any recovery of judgment shall be for the equal

and ratable benefit of all Owners of the outstanding bonds.
Id. at *4 (alteration in original). Though the language “any such suit” might lead one
to believe plaintiff had standing to pursue fraud claims, the court noted that, in fact,
the wording referred only to an action brought “under” the trust indenture or any of
the bonds. Id. at *5. Because the court found that no other provision of the indenture
defined fraud actions as arising “under” the indenture, the indenture trustee did not
have standing to pursue the fraud claim. Id. As the court explained, “Plaintiff cannot
successfully transform its general administrative authority under the Trust Indenture
into a carte blanche assignment of the bondholders’ claims arising from the common
law or the securities law.” Id.; see also United Bank v. Sun Mesa Corp., 119 F.R.D. 430,

431-32 (D. Ariz. 1988)(fraud claims cannot be considered a remedy for default because

such claims could be “asserted regardless of breach” and, therefore, indenture trustee


September 1, starting on March 1, 1999. (Offering Memorandum, Ex. A. to Complaint).

The Project, however, soon failed; Enviro-Stone found itself unable to make the
tile from glass, and, thus, it was soon unable to make its payments to Plaintiff.
(Complaint {| 30, 35.) Enviro-Stone missed its first monthly payment on
September 30, 1999 and missed each payment thereafter, leaving Plaintiff unable to
pay the bondholders the March 1, 2000 interest payment of $496,250. (Ud. J 30, 31.)
As a result of Enviro-Stone’s missed payments and pursuant to the Indenture
agreement, Plaintiff accelerated the payments due under the bonds; Enviro-Stone then
owed $13,439,217 by March 31, 2000. (Id. 4 32.) Enviro-Stone defaulted on that
payment and, therefore, the provisions of the Indenture concerning “Events of Default”
now govern. (Id. | 33.)

On January 3, 2001, Plaintiff brought this two-count complaint on behalf of all
bondholders. Plaintiffs suit is not related to Enviro-Stone’s default, but is, instead, an
action for fraud against Defendant Blount Parrish. According to Plaintiff, in
connection with the sale of the bonds, Defendant wrote an “Offering Memorandum”
which contained numerous misrepresentations and failed to disclose that the
technology to be used in the Project was experimental, untested, and risky. (Id. {{ 18,
19.) Plaintiff alleges that material facts omitted from the Memorandum included,
among other things: (a) the technology was experimental; (b) the technology had never
been used in the United States on a scale similar to the Project; and (c) the technology
might not be successfully employed in the Project. (Id.) Additionally, Plaintiff alleges

that the Memorandum contained several false statements, such as assertions that the

3


fraud or common law fraud claim on behalf of the bondholders, this court concludes
that Plaintiff does not have standing to bring this action. Defendant’s motion to
dismiss (Doc. No. 5-1) is therefore granted and the complaint is dismissed without
prejudice. The court will, however, entertain a motion to intervene by a party who has
standing. Any such motion should be brought within 21 days.

ENTER:

Dated: June 27, 2001 (Rb-ver—Rlakonsy ——

REBECCA R. PALL!
United States District Judge

14


September 1998, the City of Wood River, Illinois (“City”) issued resource recovery
revenue bonds for the construction of a facility that would convert recycled or waste
glass into tile products (“Project”). (Complaint {/{ 1, 11.) The Project was owned and
operated by Enviro-Stone, which agreed to provide the financing for the Plant that
would manufacture the tile. (Id. { 12.) In order to pay for the construction and start-up
of the Project, Environmentally Correct Products, Inc., the owner of Enviro-Stone,
entered into an agreement with Defendant Blount Parrish, an Alabama corporation,
in which Defendant agreed to underwrite approximately $11.5 million in revenue
bonds and to sell the bonds to the public in exchange for a fee. (Id. {| 14.) In
September 1998, Blount Parrish entered into a second agreement with the City in
which it agreed to purchase the bonds from the City for resale. (Id. qq 15, 16.)

The bonds consisted of two series in a total aggregate principal amount of $12.8
million. (Id. | 27.) Pursuant to the terms of an indenture agreement between Plaintiff
Regions Bank and the City of Wood River, approximately $11.5 million received from
the sale of the Series 1998A bonds was deposited into an account called the “1998
Construction Fund” for the payment of eligible costs of the project. (Id. § 28.) As
security for the payment of the bonds, Enviro-Stone entered into a guaranty agreement
with Plaintiff. (Id. { 29.) At the same time, the City and Enviro-Stone entered into a
lease agreement whereby Enviro-Stone was to make monthly payments to Plaintiffin
an amount sufficient to pay the principal and interest on the bonds when due. (Id. {

30.) Interest on the bonds was to be paid semi-annually on each March 1 and


————$———

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

REGIONS BANK, an Indenture Trustee, )

Plaintiff, )
)
v. y No. 01 C 0031
)
BLOUNT PARRISH & COMPANY, INC., ) Judge Rebecca R. Pallmeyer

)

Defendant. ) DOCKETED

MEMORANDUM OPINION AND ORDER JUN 2 8 2001

MEMORANDUM UELNIVN SASS

This action is brought on behalf of all persons who purchased resource recovery
bonds issued by the city of Wood River, Ilinois in order to finance a project to convert
waste glass into tile. After the project failed, Plaintiff Regions Bank, Indenture
Trustee for the bondholders, brought this suit against Defendant Blount Parrish &
Company Inc., the underwriter of the bonds, alleging that Defendant made material
misrepresentations on the offering memorandum in violation of Sections 10(b) and
20(a) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5, and in violation of Illinois common
law. Defendant Blount Parrish now moves to dismiss, arguing that Plaintiff lacks
standing to pursue a fraud claim on behalf of the bondholders. Because the court finds
that the Indenture does not provide Plaintiff with standing to bring this claim,
Defendant’s motion is granted.

FACTUAL BACKGROUND

For purposes of this motion, the court accepts Plaintiffs allegations as true. In


added). In this way, “{t]he scope of the trustee’s obligation . . . is still circumscribed
by the indenture, albeit less narrowly.” Id.

Plaintiff may have a responsibility, post-default, to fulfill broader fiduciary
responsibilities to the trust, but this court is unwilling to find that this duty allows this
court to assign the bondholders’ fraud claims to Plaintiff where the bondholders did
not see fit to so assign those claims under the Indenture. The distinction between pre-
and post-default fiduciary responsibilities does not support the conclusion that Plaintiff
has standing to bring this suit. While the Indenture itself may distinguish between
the obligations of the trustee prior to and after a default, this court declines to find that
the post-default duties of the Trustee include rights of actions not specifically
authorized by the Indenture.

Cc. No Action Clause

Finally, Plaintiff argues that if the Trustee cannot bring the instant case, the
“no action” clause included in section 7.11 of the Indenture would leave the
bondholders powerless to remedy Defendant's alleged fraud and would contradict the
intent of the Indenture. That section states:

Limitation on Suits. An Owner of a Bond may not pursue any remedy with

respect to this Indenture, the Bonds or the Facility Lease agreement, unless

(a) the Owner gives the Trustee notice stating that an Event of Default

is continuing, (b) the Owners of at least a majority in principal amount

of the Outstanding Bonds make a written request to the Trustee to

pursue the remedy, (c) such Owner or Owners offer to the Trustee

indemnity satisfactory to the Trustee against any loss, liability or

expense, and (d) the Trustee does not comply with the request within 60

days after receipt of the request and the offer of indemnity.

(Indenture §7.11, Ex. E to Complaint)(emphasis added).

12