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March 4, 1975

Morris et al., Plaintiffs,
Cantor et al., Defendants

Ward, District Judge.

The opinion of the court was delivered by: WARD

WARD, District Judge.

Plaintiffs Robert G. Morris, Israel Patents Corporation and Patents Management Corporation, calling themselves the "Protective Committee of 4% Convertible Subordinated Debentures of Interstate Department Stores, Inc.," bring this action on behalf of themselves and all others similarly situated ("the bondholders"). The complaint alleges that the several defendants violated provisions of the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq. ("the Act") and the Securities Act of 1933, 15 U.S.C.§ 77a et seq. ("the Securities Act"), and breached their common law fiduciary obligations to the bondholders, in connection with various loans to defendant Interstate Department Stores, Inc. ("the Company") during 1972.

 The Bankers Trust Company ("the Bank") which is charged with violations of the Trust Indenture Act and breach of fiduciary obligations, moves pursuant to Rule 12(b), Fed. R. Civ. P., to dismiss the complaint against itself for failure to state a claim upon which relief can be granted. For the reasons discussed below, the motion is denied.

 The Company issued $20,000,000 in 4% convertible subordinated debentures under an indenture agreement dated August 1, 1967, in which the Bank was named Trustee. The indenture agreement was duly registered with the Securities and Exchange Commission ("the Commission"), and its terms conformed to the requirements of the Act. The debentures were by their terms unsecured and subordinated to all "senior indebtedness" of the issuer, as that term was defined in the indenture agreement, including any which might be later acquired. The indenture agreement provided that should the indenture trustee be or become a creditor of the issuer, the trustee would be entitled to the benefit of the subordination provisions of the indenture with respect to senior indebtedness to the same extent as any other holder of such indebtedness.

 The complaint alleges that the Bank, while Trustee, acted as lead bank in negotiating the extension of a $900,000,000 line of credit to the Company, which qualified as senior indebtedness with respect to the debentures. The Bank thus became a preferred secured creditor of the Company, with priority over the bondholders, in the event of bankruptcy. Plaintiffs concede that the loan was not consummated until after the Bank resigned as Trustee, and in any event, not even negotiated within four months prior to a default in payment of the principal or interest under the indenture. They contend, however, that the Bank's action constituted "willful misconduct" within the meaning of § 315(d) of the Act, 15 U.S.C. § 77 ooo (d).

 This Court's jurisdiction of the controversy between plaintiffs and the Bank is based exclusively upon the Trust Indenture Act, 15 U.S.C.§ 77vvv, which provides:

"Jurisdiction of offenses and violations under, and jurisdiction and venue of suits and actions brought to enforce any liability created by, this subchapter, or any rules or regulations or orders prescribed under the authority thereof, shall be as provided in section 77v(a) of this title [the Securities Act of 1933]."

 A threshold question therefore is whether the Act by its terms creates any liability for violation of the provisions of indentures qualified thereunder, or more generally for willful misconduct on the part of a trustee appointed according to the Act's provisions. A second question is whether there exists a civil right of action so that the bondholders may enforce such liability. Neither of these questions has yet been decided by the courts. The final question presented to the Court by this motion is whether, assuming it is proven, the conduct alleged constitutes a violation of the Act.

 The unique structure of the Act creates the first question, whether by its terms it imposes any obligations upon the indenture trustee. The Act requires that any indenture agreement under which an issue of over $1,000,000 is offered to the public be registered with the Commission and contain certain terms which the Act carefully specifies. Thus, section after section of the Act begins with the language, "The indenture to be qualified shall provide . . ." or "shall require . . ." or "shall contain provisions requiring . . ." and continues with detailed and often technical terms pertaining to the naming of the trustee, qualifications of eligible trustees, required reports to bondholders or from the obligor to the trustee, duties of the trustee both prior to and in the event of default, or in the event of its acquiring conflicting interests. Other sections are permissive in language, substituting the language ". . . may require . . .". The particular section at issue here reads:

"The indenture to be qualified shall not contain any provisions relieving the indenture trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct . . .."
15 U.S.C.§ 77 ooo (d).

 Once the indenture is registered, the Commission has no power to enforce its provisions. 15 U.S.C. § 77iii(e). While the Act gives the Commission general rule making and investigative authority, it limits that authority to matters involving qualification of the indenture and required reports. 15 U.S.C. § 77sss, ttt, and uuu. The only civil liability expressly imposed is for material misstatement or omission in any report filed with the Commission pursuant to the Act, in connection with the qualification of the indenture or thereafter. 15 U.S.C. § 77www.

 Prior to the Act's passage, indenture agreements, as private contracts, had been governed by the common-law of contracts and fiduciary obligations, articulated primarily in the state courts. *fn1" To the extent that such common law had developed independently in the federal courts in the exercise of diversity jurisdiction, it had recently been declared inapplicable in Erie R.R. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). *fn2" Of the substantial body of law which had evolved defining rights of bondholders and trustees, some addressed the specific question of what constitutes willful misconduct on the part of the indenture trustee. *fn3" But trustees under such indenture agreements had developed a widespread practice of contractually limiting their liability for performance of their trust functions, and courts enforced these terms of limitation in many instances. *fn4"

 Thus, the scheme of the Act is to regulate in a limited fashion by taking a type of private contract, requiring that it contain certain terms and be registered with the Commission, and that the parties disclose certain information, and precluding the Commission from enforcing those terms. The Bank argues that the contract itself remains a private contract, enforceable only in the state courts or under the diversity jurisdiction of this Court, and that the only "liability created by the statute" within the meaning of its jurisdiction granting section, 15 U.S.C. § 77vvv, is for failure to include the requisite terms in the contract, or for failure to register it as required by the Act, or for material misstatements in connection with that registration, or misrepresentation of the effect of registration. Plaintiffs contend that the Act, albeit indirectly, imposes substantive obligations upon the trustee and therefore creates ...

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