certificate holders undersecured. (Id. at P 25) Second series certificate holders will receive only part of their principal and no interest, and third series certificate holders will receive neither principal nor interest. (Id. at P 27)
Plaintiffs contend that these losses could have been prevented if the trustees had requested a lifting of the stay when bankruptcy first was declared. The trustees' failure to do so, plaintiffs maintain, breached: (1) the prudent man requirement of the TIA, 15 U.S.C. § 77ooo(c) (1994), (2) the prudent man requirement of the agreement, §§ 9.02 and 9A.01 of the Indenture, and (3) fiduciary duties under the Indenture and New York common law. (SAC PP 33-47)
The first of the three prior opinions in this case dismissed plaintiffs' complaint with leave to amend to allege events of default other than Eastern's filing of the bankruptcy petition. That opinion also required plaintiffs to post an undertaking upon the filing of the amended complaint. LNC Investments, Inc. v. First Fidelity Bank, 1994 U.S. Dist. LEXIS 2549, No. 92 Civ. 7584, 1994 WL 73648 (S.D.N.Y. Mar. 3, 1994). In the second opinion I eliminated the requirement that plaintiffs post an undertaking, after determining that plaintiffs owned more than 10% of the outstanding trust certificates and therefore were protected from the undertaking requirement by § 7.11 of the Indenture. LNC Investments, Inc. v. First Fidelity Bank, 1994 U.S. Dist. LEXIS 6880, No. 92 Civ. 7584, 1994 WL 225408 (S.D.N.Y. May 26, 1994). Finally, in the third opinion I denied defendants' Rule 12(b)(6) motion to dismiss the amended complaint, for the reason that a hypothetical determination of a Bankruptcy Court's ruling on a prompt motion to lift the stay could not be made before trial, and that absent such a determination the complaint could not be dismissed. LNC Investments, Inc. v. First Fidelity Bank, 1995 U.S. Dist. LEXIS 5065, No. 92 Civ. 7584, 1995 WL 231322 (S.D.N.Y. Apr. 19, 1995).
In defense of the action, Third Series Trustee NatWest filed a third-party complaint against its successor Third Series Trustee Shawmut for both contribution and indemnification. Shawmut moved to dismiss that complaint pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state a claim upon which relief could be granted. Before that motion was decided, Fleet Financial Group, Shawmut's parent corporation, acquired NatWest. See Saul Hansell, Fleet Buys NatWest Cheap, in a Deal that's Widely Applauded, N.Y. Times, Dec. 20, 1995, at D8. As a result, the third-party action between NatWest and Shawmut was dismissed without prejudice by stipulation of the parties. (4/30/96 Stip. of Dismissal)
On April 19, 1996, First Fidelity filed the present motion to implead Shawmut and Gibson, Dunn.
Rule 14(a) of the Federal Rules of Civil Procedure allows a defending party to implead a party "who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff." Fed. R. Civ. P. 14(a). A defending party may file a third-party complaint without leave of court, within 10 days after serving the answer. Thereafter, however, the third-party plaintiff must obtain leave of court to implead another party. Id. Leave should be granted when, after considering the delay by the movant, the complication of trial, and the merits of the proposed third-party complaint, the court concludes that the benefits of consolidation outweigh the prejudice to plaintiff and third-party defendants. State of New York v. Solvent Chem. Co., 875 F. Supp. 1015, 1021 (S.D.N.Y. 1995).
One factor relevant here is First Fidelity's delay before making this motion. Plaintiffs filed their first complaint against First Fidelity on October 16, 1992. That complaint was amended on April 6, 1994, and amended again on May 25, 1995. First Fidelity did not file this motion for more than three-and-a-half years after the filing of the original complaint, and for almost a year after the filing of the operative complaint.
First Fidelity explains that it did not attempt to implead Shawmut sooner because until recently Shawmut was a part of this case by virtue of NatWest's third-party action against it. First Fidelity suggests that while NatWest's third-party complaint was pending against Shawmut, it too could seek contribution and indemnification from Shawmut. That argument fundamentally mischaracterizes the nature of a litigation. Shawmut was in this case only to respond to NatWest's specific claims against it; Shawmut was not in the case to respond to all claims made by all parties. Any outcome of Shawmut's motion to dismiss NatWest's third-party complaint would have been irrelevant to First Fidelity's motion to implead and does not justify First Fidelity's two-year delay. That unreasonable delay is not dispositive, but must be considered along with the merits of the motion.
With respect to Gibson, Dunn, First Fidelity argues that it could not have moved earlier to implead because it was not aware of Gibson, Dunn's important role in the transactions at issue. That argument too is flawed, because it is contrary to the facts of this case, as well as First Fidelity's own assertions. Gibson, Dunn has been involved in the transactions giving rise to this action since 1988, when it was retained as counsel to Third Series Trustee NatWest. Thereafter, Gibson, Dunn served as counsel to Third Series Trustee Shawmut, and represented both Third Series Trustees in the Eastern Bankruptcy proceeding. First Fidelity itself asserts that "First Fidelity's representatives were engaged in a 'face-to-face' relationship with members of [Gibson, Dunn] in relation to the transactions at issue." (5/3/96 Taube Ltr. at 3) Indeed, First Fidelity claims that its relationship with Gibson, Dunn approached privity, infra p. 41, a claim that belies First Fidelity's assertion that it was not aware until recently of Gibson, Dunn's role.
Moreover, to allow impleader of Gibson, Dunn at this stage of the litigation would unduly prejudice plaintiffs and proposed third-party defendants. Discovery is near completion and the case, which has been pending for over four years, finally is heading towards trial. The addition of a party that has barely participated in discovery would delay resolution of the underlying issues by extending discovery and generating additional pre-trial motions. Because First Fidelity has proffered no good reason for delay, the prejudice caused by delay weighs against granting the motion.
Rule 14 provides only the procedural mechanism for impleader; the substantive merit of the action depends on the federal or state theory of contribution, indemnity or subrogation, or any other theory asserted in the third-party complaint. Kim v. Fujikawa, 871 F.2d 1427, 1434 (9th Cir. 1989); Stratton Group, Ltd. v. Sprayregen, 466 F. Supp. 1180, 1186 (S.D.N.Y. 1979). That the third-party defendant may be liable to the original plaintiff is not enough to sustain impleader, which is available only when the third-party's liability is "dependent on the outcome of the main claim" or derivative of the main claim, or when the third party potentially is secondarily liable to the defendant. Kenneth Leventhal & Co. v. Joyner Wholesale Co., 736 F.2d 29, 31-32 (2d Cir. 1984); Unilease Computer Corp. v. Major Computer Inc., 126 F.R.D. 490, 492-93 (S.D.N.Y. 1989); Index Fund, Inc. v. Hagopian, 417 F. Supp. 738, 743-46 (S.D.N.Y. 1976).
First Fidelity seeks to implead Shawmut for contribution for its alleged breach of § 315(c) of the TIA, which imposes the "prudent man" requirement. That section states:
The indenture trustee shall exercise in case of default (as such term is defined in such indenture) such of the rights and powers vested in it by such indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
15 U.S.C. § 77ooo(c) (1994).
The threshold issue is whether the TIA creates a private right of action. Although the parties have not disputed this issue, the answer cannot be taken for granted, and an affirmative answer is necessary to support jurisdiction. Because the "prudent man" section of the TIA does not include language to the effect that aggrieved persons may sue, the statute does not create an express right of action. The court may infer, however, that the right exists. Zeffiro v. First Pennsylvania Banking, 623 F.2d 290, 295-99 (3d Cir. 1980) (applying the test of Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975), and concluding that a right of action may be inferred under § 315(c) of the TIA), cert. denied, 456 U.S. 1005 (1982); In Re Equity Funding Copr. of America Sec. Litig., 416 F. Supp. 161, 203 (C.D.Cal. 1976) (adopting the approach of Morris v. Cantor, infra), aff'd, 603 F.2d 1353 (9th Cir. 1979); Morris v. Cantor, 390 F. Supp. 817, 822 (S.D.N.Y. 1975) (deriving right to sue from jurisdictional section of TIA); see also Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 426 n.17, 32 L. Ed. 2d 195, 92 S. Ct. 1678 (1972) (suggesting that the TIA creates a private right of action, but declining to decide the issue). In Zeffiro, the Third Circuit set forth a full and persuasive analysis of why the right to sue should be inferred. Zeffiro, 623 F.2d at 295-99. The Second Circuit recently has cited Zeffiro with approval, and acknowledged that it "established a private cause of action under the [TIA]." Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 85 F.3d 970, 974 (2d Cir. 1996).
Both text and legislative history support the inference that Congress intended to permit debenture holders to sue in federal court. Section 302(a) of the TIA declares that the purpose of the Act is to serve the "national public interest and the interest of investors in notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein." 15 U.S.C. § 77bbb(a) (1994). A private right of action for investors helps to achieve that purpose.
Moreover, § 315(d) of the TIA, 15 U.S.C. § 77ooo(d), part of the same section as the prudent man requirement, states that "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," except under specified circumstances. That section reflects Congress' awareness that the trustee may be sued for negligence or willful misconduct by those injured by that conduct. See Morris N. Simkin, The Central Bank Case: A Warning Light for Indenture Trustees, N.Y. L.J., Oct. 21, 1993, at 1 (citing § 315(d) to support the proposition that "the TIA was amended in the Trust Indenture Reform Act of 1990 to clarify that there is a private cause of action for its violation."). Section 315(d), however, does not change the source of the § 315(c) right of action; it is implied, not express.
Section 315(e) of the TIA, also part of the same section as the prudent man requirement, explains the circumstances under which a court may require one of the parties to "any suit against the trustee for any action taken or omitted by it as trustee," to post an undertaking and explicitly refers to suits instituted by "any indenture security holder, or group of indenture security holders." 15 U.S.C. § 77ooo(e) (1994). The quoted language does not appear to refer to the sole express private cause of action under the TIA, § 323, 15 U.S.C. § 77www(a) (1994), because that section imposes liability only for material misstatements or omissions in a report filed with the SEC. A reference to § 323 more likely and more precisely would refer to material misstatements or omissions, rather than to actions taken or omitted. If the quoted language does not refer to § 323, that language is over-broad unless indenture security holders -- that is, private parties -- may sue the trustee for actions taken or omitted.
It is significant also that once an indenture has been registered with the SEC, that agency is unable to enforce the TIA. Section 309 of the Act states that SEC is not empowered "to conduct an investigation or other proceeding for the purpose of determining whether the provisions of an indenture which has been qualified under this subchapter are being complied with, or to enforce such provisions." 15 U.S.C. § 77iii(e) (1994). The SEC's only affirmative powers lie in qualifying indentures and receiving the required reports. 15 U.S.C. §§ 77sss-77uuu (1994). That Congress intended the SEC to have only a minimal enforcement role is confirmed by the legislative history, which recites that
the Commission will have no powers with respect to enforcement of the provisions of the indenture. After the indenture has been executed it will be enforceable only by the parties like any other contract.