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BLUEBIRD PTNRS., L.P. v. FIRST FID. BANK

August 9, 1995

BLUEBIRD PARTNERS, L.P., Plaintiff, against FIRST FIDELITY BANK, et al., Defendants. BLUEBIRD PARTNERS, L.P., Plaintiff, -against- UNITED JERSEY BANK, et al., Defendants.


The opinion of the court was delivered by: MICHAEL B. MUKASEY

 MICHAEL B. MUKASEY, U.S.D.J.

 Plaintiff Bluebird Partners, L.P., a secondary purchaser of interests in an equipment trust created to facilitate secured financing for Continental Airlines, Inc., sues the indenture trustees for violations of the Trust Indenture Act ("TIA"), 15 U.S.C. § 77aaa et seq., and state law. Plaintiff alleges that defendant trustees First Fidelity Bank, N.A., New Jersey ("First Fidelity"), Midlantic National Bank ("Midlantic"), United Jersey Bank ("UJB"), NationsBank of Tennessee, N.A. ("NationsBank"), Constellation Bank, and CoreStates New Jersey National Bank ("CoreStates"), breached the prudent person standard imposed by TIA § 315(c), 15 U.S.C. § 77ooo(c), by failing to act in a timely, reasonable and prudent manner to protect the interests of the certificate holders. Plaintiff charges defendant law firms Riker, Danzig, Scherer, Hyland & Perretti, Crummy, Del Deo, Dolan, Griffinger & Vecchione, P.C., Wolff & Samson, P.A., Kelley, Drye & Warren, and Wilentz, Goldman & Spitzer with malpractice and negligence for allegedly failing to advise their trustee clients to take steps necessary to protect plaintiff's interests.

 Defendants move to dismiss plaintiff's two related complaints pursuant to Fed. R. Civ. P. 12(b)(1), because plaintiff lacks standing to pursue its claim under the TIA, and pursuant to Fed. R. Civ. P. 12(b)(6), on the ground that plaintiff's TIA and state law claims are meritless. Because under federal law, TIA actions do not run with the affected security, plaintiff, as a subsequent purchaser of the equipment certificates, lacks standing to assert its federal claims, and accordingly, the complaints are dismissed.

 I.

 In 1987, Continental Airlines entered into a Secured Equipment Indenture and Lease Agreement (the "indenture") with First Fidelity, Midlantic, UJB, and The First Jersey National Bank ("First Jersey"). Pursuant to the indenture, Continental issued three series of bonds (the "certificates") with declining rights of priority to payment, secured by aircraft, jet engines, and related equipment. (Bluebird I Compl. PP 9-10) *fn1" Trustees were appointed to protect the specific interests of the investors in each series: defendants Midlantic and UJB served as first and second series trustees, respectively, and First Jersey served as third series trustee. (Id. at P 9) Defendant First Fidelity, as "Collateral Trustee," obtained title to the collateral and leased it back to Continental, which made lease payments to satisfy the principal and interest owed to the certificate holders. (Id. at P 10) Defendant NationsBank succeeded First Fidelity as collateral trustee. Defendant Constellation Bank, which was acquired by defendant CoreStates, succeeded Midlantic as first series trustee. (Bluebird II Compl. PP 3-5) All trustees retained counsel to help them represent the interests of the certificate holders. (Bluebird I Compl. PP 20-21; Bluebird II Compl. PP 26, 37, 42)

 Plaintiff purchased first series certificates with a face amount in excess of $ 60 million on January 27, 1994, and second series certificates with a face amount in excess of $ 20 million between January 27 and February 24, 1994. (Bluebird I Compl. P 11; Wolinsky Decl. Ex. B) These purchases were made in the secondary market "from a number of related and other entities that had purchased these Certificates at varying amounts at various times." (Bluebird I Compl. P 11) Plaintiff commenced the first of these consolidated actions on February 2, 1994, less than one week after it bought the first series certificates. (Pl. Mem. Opp'n at 18)

 Continental filed for bankruptcy on December 3, 1990. (Bluebird I Compl. P 15) At that time, the value of the collateral was either less than or approximately equal to the amount of outstanding principal and interest owed to the certificate holders, but the value plummeted in the ensuing months. (Id. at P 18) Plaintiff alleges that defendant trustees and their counsel knew or should have known that the value of the collateral was declining, but nevertheless did not act expeditiously to protect the interests of the certificate holders. (Id. at PP 16, 19)

 On February 21, 1991, First Fidelity joined an omnibus motion filed by other secured parties seeking what is called adequate protection under § 363(e) of the Bankruptcy Code (the "Code"). Adequate protection compensates the secured creditor for the diminution in value of the collateral during the period in which the automatic stay prevents the creditor from repossessing the collateral. See 11 U.S.C. § 361. The motion did not request relief from the automatic stay. (Id. at 23; Wolinsky Decl. Ex. E) First Fidelity subsequently withdrew from the omnibus motion and filed an independent motion on June 28, 1991 with the three series trustees, seeking adequate protection pursuant to § 362(d)(1) and § 363(e). (Bluebird I Compl. P 24) Although the trustees invoked § 362(d) as a statutory basis for relief, once again, they did not seek to lift the automatic stay in order to take possession of the collateral. (Id.; Wolinsky Decl. Ex. H at 7) In opposition to this motion, Continental argued that adequate protection was unavailable because defendants failed to file a simultaneous motion to lift the automatic stay. (Bluebird I Compl. P 25)

 Following a hearing, Bankruptcy Judge Helen S. Balick ruled on August 27, 1992 that adequate protection was available only from the date on which movants sought relief, and only to the extent of the decline in collateral from that time. In re Continental Airlines, Inc., 146 Bankr. 536, 539 (Bankr. D. Del. 1992) (hereinafter "Continental I"). Because the Court found there was no decrease in the value of the collateral after defendants filed their motion, they were not entitled to adequate protection. Id. at 542. The Bankruptcy Court concluded further that contrary to Continental's position, adequate protection may be sought independent of a motion to lift the automatic stay. Id. at 540.

 Plaintiff claims that because the collateral deteriorated at some point during the post-petition period, the certificate holders would have been entitled to adequate protection if defendants had filed a timely motion to lift the automatic stay. (Bluebird I. Compl. P 33) Even if the motion had been denied, plaintiffs argue, they would have benefitted from the effort because the denial would have entitled them to a superpriority claim under § 507(b) of the Code. (Pl. Mem. Opp'n at 3) Instead, plaintiff received a bankruptcy distribution insufficient to satisfy the full amount due on the first series certificates, and any of the debt owed on the second series certificates. (Bluebird I Compl. P 37)

 Plaintiff asserts six claims against defendants, all arising from their alleged failure to act timely on behalf of the certificate holders: first, plaintiff contends defendant trustees violated TIA § 315(c), 15 U.S.C. § 77ooo(c), which required them to exercise the rights and powers of the certificate holders with the same degree of prudence they would use in handling their own affairs (Id. at PP 39-43); second, they allege defendant trustees breached the fiduciary duty owed to the certificate holders under the indenture agreement (Id. at PP 44-47); third, plaintiff asserts defendant trustees breached provisions in the indenture agreement imposing the same prudent person standard required under the TIA (Id. at PP 48-50); fourth, plaintiff asserts trustee defendants acted negligently (Id. at PP 51-53); and finally, the fifth and sixth claims charge defendant law firms with malpractice and negligence for failing to provide adequate legal advice. (Id. at PP 54-68)

 All defendants respond with a motion to dismiss both complaints pursuant to Rule 12(b)(1) on the ground that plaintiff, as a secondary purchaser of the certificates, has no standing to prosecute its TIA claim because plaintiff did not own the certificates at the time the alleged wrong occurred, and because claims under federal securities laws do not automatically travel with the security upon sale. (Defs. Mem. Supp. at 2) Defendants move also to dismiss the complaints pursuant to Rule 12(b)(6), arguing they cannot be held liable on the basis of Bankruptcy Judge Balick's allegedly erroneous ruling in Continental II, which required a secured creditor to file a lift stay motion as a prerequisite to obtaining adequate protection. Defendants argue they should not have been expected to anticipate or act in accordance with a "requirement" that finds no support in the Bankruptcy Code. (Id. at 3) However, Bankruptcy Judge Balick's ruling and the potential responsibilities this ...


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