Opinion ID: 3020094
Heading Depth: 3
Heading Rank: 1

Heading: Claim Against U.S. Bank

Text: It is hornbook law that a trustee owes a strict fiduciary duty of undivided loyalty to the beneficiaries of the trust. See, e.g., Matter of Heller, 849 N.E.2d 649 (N.Y. 2006) 6 (citing Restatement (Second) of Trusts § 170(1)). An Indenture Trustee, such as U.S. Bank, however, is a different legal animal. “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.” Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir. 1985) (citing Hazzard v. Chase Nat’l Bank, 287 N.Y.S. 541 (N.Y. Sup. Ct. 1936)). New York common law imposes two duties on an Indenture Trustee in addition to those specified in the Indenture: (1) a duty to avoid conflicts of interest with the beneficiaries, AMBAC Indem. Corp. v. Bankers Trust Co., 573 N.Y.S.2d 204, 207 (N.Y. Sup. Ct. 1991), and (2) a duty to “perform basic non-discretionary ministerial tasks.” Semi-Tech Litig., LLC v. Bankers Trust Co., 353 F. Supp. 2d 460, 472 (S.D.N.Y. 2005) (citing N.Y. State Med. Care Facilities Fin. Agency v. Bank of Tokyo Trust Co., 621 N.Y.S.2d 466, 468 (N.Y. Sup. Ct. 1994)). It is only after an “event of default” occurs, as that term is defined in the Indenture, that an Indenture Trustee’s duty to noteholders becomes more like that of a traditional trustee. In that case, the Indenture Trustee must “use the same degree of care and skill in [its] exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs” while exercising its rights and powers under the Indenture.4 4 Indeed, the Indenture echoes this rule in section 6.1(a), where it states that “[i]f an Event of Default has occurred and is continuing, the Indenture Trustee shall exercise the rights and powers vested in it by this Indenture 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 7 Beck v. Manufacturers Hanover Trust Co., 632 N.Y.S.2d 520, 527-28 (N.Y. App. Div. 1995) (quotations omitted). While not required to act outside of its rights and powers under the Indenture, the trustee still must, “as prudence dictates, exercise those singularly conferred prerogatives in order to secure the basic purpose of any trust indenture, the repayment of the underlying obligation.” Id. at 528. In light of the above, our first order of business must be to decide whether an event of default occurred under the terms of the Indenture in order to determine what legal duties, if any, U.S. Bank owed to Peak. 1. Whether U.S. Bank Committed an “Event of Default” Section 5.1(b) of the Indenture states that an “event of default” occurs if U.S. Bank “default[s] in the payment of the principal of or any installment of the principal of any Note when the same becomes due and payable, and continuance of such default for a period of five (5) days, and default in payment of remaining Note Balance at the Final Maturity Date.” (App. 205.) Peak argues that U.S. Bank’s pre-payments of principal to noteholders were events of default because those payments had yet to become “due and payable.” Peak points out that section 3.1 of the Indenture states that the “indenture Trustee shall, . . . distribute all amounts . . . on each Distribution Date,” which is designated as “the 25th day of each month.” (App. 195, 245 (emphases added)). If the Indenture does not require U.S. Bank conduct of such person’s own affairs.” (App. 215.) 8 to pay principal only on the distribution date, Peak contends, it would lead to the absurd result that the Indenture Trustee would be “free to distribute principal at any rate and at any time” it so pleased. The District Court disagreed, and held that no event of default occurred because the pre-payments “did not jeopardize future payments of principal.” (App. 2154.) We agree. Perhaps U.S. Bank did, at least technically, violate section 3.1 of the Indenture by making principal pre-payments before the “Distribution Date.” However, under the plain language of section 5.1(b),5 an “event of default” only occurs if U.S. Bank cannot pay principal by the distribution date, and continues to fail to pay for five days thereafter.6 The “event of default” can only occur if there is a “default”7 on the date the payment is “due and payable.” Thus, it cannot be, as Peak contends, that an event of default took place here upon the early payment of principal. Even if we were to assume that an early payment could later become a “default” once the “due and payable” date arrived, that default must continue for five days thereafter. Under Peak’s proposed interpretation of “default,” U.S. Bank would have been required to take back its early payments of 5 In New York, a court interpreting a contract must look to the intentions of the parties for guidance. “If that intent is discernible from the plain meaning of the language of the contract, there is no need to look further. This may be so even if the contract is silent on the disputed issue.” Evans v. Famous Music Corp., 807 N.E.2d 869, 872 (N.Y. 2004). 6 In addition, an “event of default” under section 5.1(b) requires a “default in payment of remaining Note Balance at the Final Maturity Date,” which Peak does not allege. 7 The Indenture’s definition of the word “default” is unhelpful. It defines the term as “any occurrence that is . . . an Event of Default,” and an “Event of Default” is only defined has having the “meaning specified in Section 5.1.” (App. 1492-93.) 9 principal from the noteholders before the fifth day after the “due and payable” date to avoid committing an event of default. This surely cannot be what the parties to the Indenture intended. Not only does Peak’s interpretation contravene the plain meaning of section 5.1(b), but it also is at odds with the normal usage of the word “default.” A “default” is defined as the “failure to perform a task or fulfill an obligation, especially failure to meet a financial obligation: in default on a loan.” The American Heritage Dictionary of the English Language (4th ed. 2000). By paying principal early, U.S. Bank did not fail to fulfill its financial obligation under the Indenture. As the District Court pointed out, the events of default in an Indenture agreement are generally “designed to ‘reflect a high probability that future payments of principal and interest will be jeopardized.’” (App. 2153-54 (quoting Efrat Lev, The Indenture Trustee: Does it Really Protect Bondholders?, 8 U. Miami Bus. L. Rev. 47, 102 (1999)). A “default is considered to be the primary concern of bondholders, as their investment is at stake.” Lev, supra at 102 (emphasis added). Therefore, it is only the threat of losing this investment that triggers the Indenture Trustee’s duty “as prudence dictates” to use its powers “in order to secure the basic purpose of any trust indenture, the repayment of the underlying obligation.” See Beck, 632 N.Y.S.2d at 528. In sum, U.S. Bank’s early payment of principal to bondholders was not an “event of default” under section 5.1(b) of the Indenture and, thus, its only duties to Peak were those defined in the Indenture, together with those pre-default duties imposed by New 10 York common law: the performance of ministerial tasks, and the avoidance of conflicts of interest. 2. Whether U.S. Bank Owed a Pre-Default Duty to Peak
Peak alleges U.S. Bank breached two pre-default duties. The first, in an argument it makes for the first time on appeal, is a duty allegedly found in the Indenture. Regardless of the occurrence of an event of default, under section 6.1(c) of the Indenture, U.S. Bank “may not be relieved from liability for its own negligent action, [or] its own negligent failure to act . . . except that . . . [it] shall not be liable for any error of judgment made in good faith . . . unless it is proved that [it] was negligent in ascertaining the pertinent facts.” (App. 215.) Limiting this duty, however, is section 6.2(a), which grants U.S. Bank the right to “rely on any document believed by it to be genuine,” without the need to “investigate any fact or matter stated in the document.” 8 (App. 216.) Similarly, section 6.1(b)(ii) provides that U.S. Bank can in good faith conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon the certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture; however, the Indenture Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. 8 Under New York rules of contract interpretation, where a contract “employs contradictory language, specific provisions control over general provisions” and it “should be interpreted in a way which reconciles all its provisions if possible.” Green Harbour Homeowners’ Ass’n v. G.H. Dev. & Constr., Inc., 789 N.Y.S.2d 319, 321 (N.Y. App. Div. 2005). 11 (App. 215.) Peak contends that U.S. Bank had a duty under section 6.1(b)(ii) to “examine” the form of Republic’s Servicer Certificate before relying on its erroneous information by comparing it to an example certificate attached as an exhibit to the SSA. Because that exhibit was never produced by U.S. Bank, and because U.S. Bank never demonstrated that it satisfied this alleged duty, Peak believes that summary judgment was inappropriate. Peak asserts that U.S. Bank’s contractual right to rely on the Servicer Certificate was contingent on its “examin[ing]” the certificate, and absent that right, it was “negligent in ascertaining the pertinent facts,” in violation of section 6.1(c). Peak waived this argument by failing to raise it before the District Court. See, e.g., Gass v. Virgin Islands Tel. Corp., 311 F.3d 237, 246 (3d Cir. 2002) (“It is well established that failure to raise an issue in the district court constitutes a waiver of the argument.”). Not only did Peak not argue before the District Court that U.S. Bank breached a duty grounded in section 6.1(b)(ii) of the Indenture, but it conceded at oral argument that “under the [Indenture] agreement, [U.S. Bank] could rely on the servicer certificate.” (App. 2106.) Peak only contended, first, that under the Indenture, “U.S. Bank cannot be relieved from the liability for its own negligent action.” (App. 2028.) Even if construed as a general duty not to be negligent, that duty is limited, as explained above, by U.S. Bank’s right to “rely on any document believed by it to be genuine,” which Peak conceded includes the Servicer Certificate. Second, in an argument we 12 address further below, Peak maintained that U.S. Bank had an implied duty to perform the allegedly ministerial task of independently verifying how much money was in the collection account. As a result, it was uncontested before the District Court that U.S. Bank was not negligent in its reliance on Republic’s Servicer Certificate.9 Peak cannot now claim that summary judgment was in error because U.S. Bank failed to demonstrate that it “examine[d]” the Servicer Certificates, and failed to produce the example certificate attached to the SSA. The waiver rule “applies with added force where the timely raising of the issue would have permitted the parties to develop a factual record.” Gass, 311 F.3d at 246. We will not penalize U.S. Bank for not offering evidence in anticipation of an argument not yet raised.
The second pre-default duty Peak alleges U.S. Bank owed, and breached, is one grounded in the common law. As stated earlier, New York law imposes two pre-default duties on an Indenture Trustee, only one of which is at issue in this case: a duty to “perform basic non-discretionary ministerial tasks.” See Semi-Tech Litig., LLC, 353 F. Supp. 2d at 472 (citing Bank of Tokyo Trust Co., 621 N.Y.S. at 468). Peak maintains that U.S. Bank violated this duty by “blindly bas[ing] its distribution calculation upon the 9 Beyond that, U.S. Bank provided the testimony of numerous deponents to the effect that U.S. Bank was permitted to rely on the face of Republic’s Servicer Certificate. Peak did not challenge this evidence before the District Court, nor does it now. 13 undefined ‘net interest’ figure reported by Republic” and by failing to reconcile that amount “and the amount that was actually available for distribution.” (Appellant’s Br. 48-49.) In Bank of Tokyo Trust, the Supreme Court of New York found that a trustee could be held liable for “failing to perform its basic administrative obligations” if its Indenture exposed it to negligence claims, as U.S. Bank’s Indenture here does. 621 N.Y.S. at 468. This implied duty, however, can be limited by the provisions of the Indenture. See id. In holding the trustee in that case liable for failing to notifying the plaintiff of an early bond redemption call, the Court explained that “the obligation to fulfill th[is] task[] is inherent in the very nature of an indenture trustee’s service and, absent a clear and unequivocal statement in the indenture . . . relieving the trustee of this duty, . . . a trustee will be liable for negligence” for failing to fulfill that duty. Id. (emphasis added).10 The District Court found that reconciling the collection account balance was “not ministerial” because it “requires the Indenture Trustee to look beyond the numbers, and make numerous calculations.” (App. 2158.) But the District Court need not have gone that far. As it correctly observed, “[i]n essence, Plaintiff is attempting to impose a duty on U.S. Bank that would nullify its right to rely on the Servicer Certificate.” Id. Thus, 10 The Bank of Tokyo Trust Court followed, in part, a Second Circuit case (applying New York law) that upheld the dismissal of a debenture holder’s claim against its trustee for waiving a 50-day notice of redemption from the issuer. The Second Circuit stressed that the Indenture “specifically allow[ed] the trustee discretion to accept shorter notice.” Elliott Assocs. v. Schroder Bank & Trust Co., 838 F.2d 66, 70 (2d Cir. 1988). 14 wholly aside from whether this task is “ministerial” or “inherent in the very nature of an indenture trustee’s service,” the Indenture unequivocally “reliev[es] the trustee of this duty,” see Bank of Tokyo Trust Co., 621 N.Y.S. at 468, a point that Peak has conceded. In sum, Peak has failed to demonstrate that U.S. Bank owed it a pre-default duty, much less that it breached such a duty. The District Court correctly granted U.S. Bank’s motion for summary judgment.