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LNC INVS. v. FIRST FID. BANK

August 1, 1996

LNC INVESTMENTS, INC. and CHARTER NATIONAL LIFE INSURANCE COMPANY, Plaintiffs, against FIRST FIDELITY BANK, NATIONAL ASSOCIATION, NEW JERSEY, UNITED JERSEY BANK, NATIONAL WESTMINSTER BANK, N.J., RIKER, DANZIG, SCHERER, HYLAND & PERRETTI and CLAPP & EISENBERG, Defendants.


The opinion of the court was delivered by: MUKASEY

 MICHAEL B. MUKASEY, U.S.D.J.

 Plaintiffs LNC Investments, Inc. and Charter National Life Insurance Company invested in an equipment trust (the "Trust") established by defendant First Fidelity with Eastern Airlines in 1986. Plaintiffs have sued several trustees for violation of the Trust Indenture Act's ("TIA") prudent person requirement, breach of the Indenture's prudent person requirement, and breach of fiduciary duties under the Indenture and New York common law. Plaintiffs have sued also the law firms Riker, Danzig, Scherer, Hyland & Perretti ("Riker, Danzig"), and Clapp & Eisenberg for malpractice, alleging that those firms negligently advised their clients.

 First Fidelity, the collateral trustee, moves to implead Shawmut Bank Connecticut, N.A. and Shawmut's attorneys, Gibson, Dunn and Crutcher ("Gibson, Dunn"), as third-party defendants on the following theories: (1) contribution under the TIA, (2) contribution under New York law, and (3) indemnification under New York law. For the reasons that follow, First Fidelity's motion is granted only to the extent that First Fidelity seeks contribution from Shawmut under New York law, and is denied in all other respects.

 I.

 The subject matter of the underlying case has been the focus of three prior opinions, familiarity with which is assumed for current purposes. 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); 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); 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). I will restate the facts only briefly here.

 First Fidelity and Eastern established the Trust in 1986 pursuant to a Secured Equipment Indenture and Lease Agreement. The Trust sold certificates to investors, used the proceeds to buy airplanes from Eastern, and then leased those planes back to the airline. (Second Amended Compl. ("SAC") PP 10, 11, 14) Eastern's lease payments enabled the trust to repay principal and interest to certificate holders. The terms of the Trust, and the responsibilities of the various parties, were defined by the "Secured Equipment Indenture and Lease Agreement," dated November 15, 1986, and a "Second Supplemental Indenture," dated February 18, 1987 (together, the "Indenture").

 The Trust issued three series of trust certificates, with declining rights of priority to payment, graduated interest rates and increasingly distant maturity dates. (Id. at PP 11, 12) A different trustee was appointed to protect the rights of the investors in each series. Midlantic Bank served as First Series Trustee, United Jersey Bank ("UJB") as Second Series Trustee, and National Westminster Bank, N.J. ("NatWest"), as Third Series Trustee from the date of the Second Supplemental Indenture until August 31, 1990, when it resigned and was succeeded by Shawmut. (Id. at P 15) Shawmut served as Third Series Trustee for the remainder of the life of the trust. The Indenture appointed First Fidelity as the "Collateral Trustee," and First Fidelity so served for the duration of the trust. (SAC PP 15, 16) Riker, Danzig served as counsel to First Fidelity, Clapp & Eisenberg represented UJB, and Gibson, Dunn advised both Shawmut and Natwest at all times relevant to this action.

 On March 9, 1989, Eastern filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. 11 U.S.C. §§ 1-1330 (1994). The filing resulted in an automatic stay of all actions or claims against Eastern, 11 U.S.C. § 362(a) (1994), and prevented the Trust from recovering the airplanes -- the trust collateral. Just before Eastern filed for bankruptcy, an independent appraiser valued the airplanes at approximately $ 682 million and cautioned that their value would decline rapidly in the near future. (SAC PP 19, 20) A year-and-a-half later, on November 14, 1990, the trustees moved to lift the stay. (Id. at P 29) By the time the stay was lifted on January 18, 1991, the value of the collateral aircraft had plummeted, leaving the 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.

 II.

 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.

 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.

 III.

 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.

 Finally, it is important to note that the jurisdictional section of the Act, § 322(b), authorizes federal jurisdiction for "actions brought to enforce any liability or duty created by" the Act. 15 U.S.C. § 77vvv(b) (1994). The generality of that section suggests that its application is not limited to the single section of the Act, § 323(a), that expressly grants a private right of action. 15 U.S.C. § 77www(a) (1994) (imposing civil liability for material misstatements and omissions in a report filed with the SEC); see 9 Louis Loss & Joel Seligman, Securities Regulation 4455 (3d ed. 1990) (stating that a private right of action under the TIA was created first by implication, "then in 1990 by amendment of § 322(b) to create a private cause of action for enforcement of mandatory indenture terms."). If Congress created jurisdiction to enforce that duty only, the words "any liability or duty" in § 322 would be misleading. Again, I refuse to interpret the words of Congress in a way that does not cohere with the rest of the statute, or with common sense. By phrasing the jurisdictional grant so generally, and by isolating that grant in its own section rather than including it in § 323, Congress indicated that other duties imposed by the statute also may be enforced by private parties.

 IV.

 Next, it is necessary to determine whether a defendant sued under § 315(c) of the TIA may seek contribution from a third party. Just as § 315 of the TIA does not expressly create a private right of action, so too that section does not expressly create a right of contribution. When a federal statute condemns an act as unlawful, the extent and nature of a defendant's liability are federal questions to be determined in accordance with the statute and the federal policy it promotes. Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 176, 87 L. Ed. 165, 63 S. Ct. 172 (1942). Although this does not mean that state law is inapplicable in every case, see, e.g., Burks v. Lasker, 441 U.S. 471, 480, 60 L. Ed. 2d 404, 99 S. Ct. 1831 (1979) (applying state law limits on the powers of corporate directors under federal statutes), many courts have held that the existence, scope and limitations of a right of contribution under a federal statute are governed by federal law. See Northwest Airlines v. Transport Workers Union, 451 U.S. 77, 90-91, 67 L. Ed. 2d 750, 101 S. Ct. 1571 (1981) (Title VII and Equal Pay Act); Fleming v. Lind-Waldock & Co., 922 F.2d 20, 27 (1st Cir. 1990) (Commodity Exchange Act); Donovan v. Robbins, 752 F.2d 1170, 1179 (7th Cir. 1985) (ERISA). A departure from that principle would be unjustified when applying the TIA, whose express purpose is to achieve nationwide uniformity of at least minimally acceptable conduct for indenture trustees. S. Rep. No. 248, 76th Cong., 1st Sess. 3-4 (1939) ("To the extent that the types of trust indenture now in common use are inadequate, it is clear that such inadequacy presents a national problem which cannot be dealt with effectively by the States.") Federal law, therefore, controls whether there is a right of contribution under the TIA and, if so, the dimensions of that right. See also Bluebird Partners, 85 F.3d at 973-74 (holding that federal law governs the assignability of TIA claims).

 The Supreme Court's trilogy of implied right of contribution cases, Northwest Airlines v. Transport Workers Union, 451 U.S. 77, 67 L. Ed. 2d 750, 101 S. Ct. 1571 (1981), Texas Industries, Inc. v. Radcliff Materials, 451 U.S. 630, 68 L. Ed. 2d 500, 101 S. Ct. 2061 (1981), and Musick, Peeler & Garrett v. Employers Ins. of Wasau, 508 U.S. 286, 113 S. Ct. 2085, 2091, 124 L. Ed. 2d 194 (1993), governs the analysis here.

 In Texas Industries, the Court declined to find an implied right of contribution under the federal antitrust statutes, § 1 of the Sherman Act, 15 U.S.C. § 1, and § 4 of the Clayton Act, 15 U.S.C. § 15. There, the Court again found no Congressional intent to create a right of contribution. The Court observed that the parties seeking contribution -- concrete manufacturers allegedly involved in a conspiracy to restrain trade -- were not within the class of persons the statute intended to benefit, and that the Act's imposition of treble damages revealed "an intent to punish past and to deter future, unlawful conduct," rather than an intent "to ameliorate the liability of wrongdoers." 451 U.S. at 639. Moreover, the legislative history was devoid of evidence that Congress was concerned with "softening the blow on joint wrongdoers." Id. As in Northwest Airlines, the absence of any indicia of Congressional intent precluded the court from recognizing an implied right of contribution under the antitrust statutes.

 In Musick, Peeler the Court reached the opposite conclusion and recognized an implied statutory right to contribution under § 10(b) of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder. At the outset, the Court noted a fundamental difference between Musick, Peeler and its predecessors: Northwest Airlines and Texas Industries involved rights of contribution in defense of an express cause of action while Musick, Peeler concerned a right of contribution in defense of an implied cause of action. The 10b-5 right of action, the Court explained, had been created by the judiciary "on the theory courts should recognize private remedies to supplement federal statutory duties, not on the theory Congress had given an unequivocal direction to the courts to do so." Musick, Peeler, 113 S. Ct. at 2088. Because of that pedigree, a narrow inquiry into Congressional intent would be futile.

 The Musick, Peeler Court explained that its task was "not to assess the relative merits of the competing rules, but . . . to attempt to infer how the 1934 Congress would have addressed the issue had the 10b-5 action been included as an express provision in the 1934 Act." 113 S. Ct. at 2090. Finding no guidance from § 10(b) itself, the Court looked to other similarly structured sections of the act -- §§ 9 and 18, 15 U.S.C. §§ 78i(e) and 78r(b). Like Rule 10b-5, those sections imposed direct liability on those who violate the securities laws with scienter. Those sections explicitly allowed defendants to seek contribution from ...


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