Opinion ID: 387913
Heading Depth: 1
Heading Rank: 3

Heading: associated state-law claims

Text: 129 As we understand New York law, every contract governed by the laws of that State necessarily contains an implied-by-law covenant to act fairly and in good faith in the course of performing the contract. E. g., Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 68, 385 N.E.2d 566, 569, 412 N.Y.S.2d 827, 830 (1978); Van Gemert v. Boeing Co., 520 F.2d 1373, 1383-85 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), appeal after remand, 553 F.2d 812, 815 (2d Cir. 1977) (applying New York law). The panel that first heard this case thought the Indenture to be ambiguous on the question of the conversion rights remaining with the holders of Debentures after a merger, and held that the evidence produced by Broad prior to the directed verdict raised a jury question as to whether Broad and the Trust Company had dealt fairly and in good faith with the holders of Debentures in the light of that ambiguity. 614 F.2d at 429-30. Having reached a different conclusion than the panel did on the ambiguity issue, we are compelled to a different result on the good faith and fair dealing issue as well. 130 We note first that this implied covenant of good faith and fair dealing cannot give the holders of Debentures any rights inconsistent with those explicitly set out in the Indenture. (W)here the instrument contains an express covenant in regard to any subject, no covenants are to be implied with respect to the same subject .... Burr v. Stenton, 43 N.Y. 462, 464 (1871). It is ... well established in New York that, where the expressed intention of contracting parties is clear, a contrary intent will not be created by implication. Neuman v. Pike, 591 F.2d 191, 194 (2d Cir. 1979) (citing and applying New York law). The covenant is breached only when one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other. Collard v. Incorporated Village of Flower Hill, 75 A.D.2d 631, 632, 427 N.Y.S.2d 301, 302 (2d Dep't 1980). The mere exercise of one's contractual rights, without more, cannot constitute such a breach. See Mutual Life Insurance Co. v. Tailored Woman, Inc., 309 N.Y. 248, 254, 128 N.E.2d 401, 403 (1955). 131 Broad relies here, as he did in the district court and before the panel, on the Van Gemert case cited above. The issue in that case was whether holders of Boeing debentures received adequate notice of the redemption of the debentures to allow them a meaningful opportunity to exercise the debentures' conversion feature. The Van Gemert I court held that although Boeing had formally complied with the notice provisions in the governing indenture, merely placing those provisions in the indenture was an inadequate means of apprising the holders of debentures of what notice would be given in the event of a redemption call. Absent more specific warning on the face of the debentures or elsewhere that the debentures could be called upon the minimal notice provided in the indenture, the court held that the reasonable expectations of the holders of debentures as to notice would be protected. 520 F.2d at 1383-85. The court stressed that (t)he debenture holder relies on the opportunity to make a proper conversion on due notice. Any loss occurring to him from failure to convert, as here, is not from a risk inherent in his investment but rather from unsatisfactory notice procedures. Id. at 1385. In explaining the basis for its holding in the earlier appeal, the Van Gemert II court described its earlier decision as merely appl(ying) the settled principle, 'that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ....'  553 F.2d at 815 (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933); elipsis inserted by the Second Circuit). 132 We do not find the Van Gemert opinions of particular relevance to the case at bar. 26 The loss, if any, suffered by the holders of Debentures was certainly not the result of unsatisfactory administrative procedures in the Indenture; rather, this case turns on the question of substantive rights that are basic to the nature of the contract. The risk of merger was inherent in the investment made by the holders of Debentures. Rockwell and the Trust Company did nothing that could be described as destroying or injuring the right of the other party to receive the fruits of the contract, because under our holding in part II of this opinion, supra, the benefits that the holders of Debentures received were all the rights to which they were contractually entitled. Indeed, had Rockwell conferred on the holders of Debentures rights significantly greater than those set out in the Indenture, it might have faced claims by its own shareholders for waste and corporate mismanagement. We believe this case to be governed by the other New York cases we have cited above. See also Levine v. Chesapeake & Ohio Railroad Co., 60 A.D.2d 246, 248-50, 400 N.Y.S.2d 76, 78-79 (1st Dep't 1977) (no actionable unfairness in defendants' conduct, which eliminated public market for railroad's common stock, into which plaintiffs' bonds were convertible). As a matter of law, given our interpretation of the Indenture and the testimony concerning the conduct of the defendants (viewed in the light most favorable to Broad), we hold that the defendants did not violate the covenant of good faith and fair dealing that is implied into the Indenture under New York law. Accordingly, we affirm the judgment of the district court with respect to this claim.
133 In part IV-C-1 of its opinion, 614 F.2d at 430-31, the panel held that Rockwell owed the holders of Debentures a fiduciary duty of good faith and fair dealing because it controlled both parties to the 1973 merger. But the panel also held that if, on remand, the jury were to find that Rockwell had fully complied with its obligations under the Indenture, its fiduciary obligations also would have been discharged as a matter of law. 134 We may assume, without deciding, that the panel was correct in its conclusion that Rockwell was charged with a fiduciary duty to the holders of Debentures. But since we have determined in part II of this opinion that Rockwell fully complied with its obligations under the Indenture, there is no need for a jury to hear this claim, even if the panel's analysis is correct: under that analysis, as applied in the light of our holding with respect to the Indenture, Rockwell can have no liability for breach of fiduciary duty. Accordingly, we affirm the judgment of the district court with respect to the breach of fiduciary duty claim against Rockwell. 135 In part IV-C-2 of its opinion, 614 F.2d at 431-32, the panel held that the Trust Indenture Act did not create any fiduciary obligations in addition to those imposed on the Trust Company under state law. For the reasons stated by the panel, we agree, and so hold. Accord, Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1083 (2d Cir. 1977) (finding such a claim frivolous). There remains the question of the Trust Company's liability for breach of fiduciary duty under applicable state law. 136 The panel relied on Dabney v. Chase National Bank, 196 F.2d 668 (2d Cir. 1952), and United States Trust Co. v. First National City Bank, 57 A.D.2d 285, 394 N.Y.S.2d 653 (1st Dep't 1977), aff'd mem., 45 N.Y.2d 869, 382 N.E.2d 1355, 410 N.Y.S.2d 580 (1978), for its conclusion that even in the absence of a default, an indenture trustee is cloaked under New York law with a fiduciary duty to the holders of debentures that may extend beyond its strict obligations under the indenture. Both Dabney and City Bank involved conflicts of interest in which the trustee put itself in a position of advantage over the beneficiaries of the trust. Arguably, the Trust Company faced a similar conflict of interest in the case at bar when Rockwell threatened to bring a lawsuit, to withdraw other business it had with the Trust Company, and to force the Trust Company's resignation as Trustee if it refused to execute the supplemental indenture necessary for the merger. 137 Be that as it may, however, there is no actionable wrong in this case. We assume, without deciding, that the panel was correct in concluding that under New York law, the Trust Company's obligations exceeded the narrow definitions of its duties in the indenture and encompassed fiduciary duties as well. 614 F.2d at 432. And had we agreed with the panel that the Indenture was ambiguous, there would be a real question whether the holders of Debentures had received in the supplemental indenture all that was contractually due them under the Indenture. Were that question answered in the negative, there would have been the further question whether the Trust Company had adequately discharged its duties to the holders of Debentures with the absolute singleness of purpose required by New York law. Dabney, 196 F.2d at 671. The evidence in the record regarding the advice given the Trust Company by its counsel prior to the execution of the supplemental indenture undoubtedly would have been relevant to the Trust Company's defensive claim that it had acted in good faith and on advice of counsel. 138 But the question of whether the holders of Debentures received in the supplemental indenture all that was contractually due to them is conclusively answered by our holding in part II of this opinion, supra. Regardless of the Trust Company's motives, or its prior opinion as to the meaning of the Indenture, there is no question but that the Trust Company's ultimate action executing the supplemental indenture fully protected what we have determined to be the legitimate rights of the holders of Debentures under the Indenture. Broad has cited no New York authority for the proposition that an indenture trustee has a duty, fiduciary or otherwise, to seek for the holders of debentures any benefits that are greater than those contractually due them; indeed, there is support in the New York cases for the opposite conclusion. See Hazzard v. Chase National Bank, 159 Misc. 57, 287 N.Y.S. 541 (Sup.Ct.1936), aff'd mem., 257 A.D. 950, 14 N.Y.S.2d 147 (1st Dep't 1939), aff'd mem., 282 N.Y. 652, 26 N.E.2d 801, cert. denied, 311 U.S. 708, 61 S.Ct. 319, 85 L.Ed. 460 (1940). We hold that the Trust Company had no duty, as a matter of law, to do anything other than that which it in fact did. Thus, there is no question for a jury as to whether there has been a breach of fiduciary duty. Accordingly, we affirm the judgment of the district court with respect to both the state and federal breach of fiduciary duty claims against the Trust Company. 27