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UNITED STATES TRUST CO. v. ALPERT

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


March 30, 1998

UNITED STATES TRUST COMPANY OF NEW YORK, THE BANK OF NEW YORK, and THE CHASE MANHATTAN BANK, N.A., as trustees of certain unit investment trusts, Plaintiffs, against STEVEN L. ALPERT, ET AL., -and- ISAAC T. AVERY, JR. ET AL., -and- DALE D. ACKERMAN, ET AL., Defendants. INVESTORS FIDUCIARY TRUST COMPANY, as Trustee of the Kemper Tax-Exempt Income Trust, Plaintiff, -against- JANET C. JENNER, et al., -and- THOMAS B. BACHHUBER, ET AL., -and- HOWARD R. STEVENS, ET AL., Defendants.

The opinion of the court was delivered by: WOOD

In a Report and Recommendation dated December 17, 1997 (the "Report"), Magistrate Judge Sharon E. Grubin recommended, in each of the two interpleader actions, that I deny the summary judgment motion of the Former Holders and grant the summary judgment motions of the Current Holders and the Continuous Holders and award them the interpleaded settlement proceeds (the "interpleaded Fund"), to be distributed according to their pro rata shares as determined under the Indentures. Magistrate Judge Grubin further recommended that I grant plaintiff U.S. Trust's motion for summary judgment on the Current Holders' counterclaims for breach of contract and fiduciary duty. Defendants Former Holders and Current Holders in Action One have filed timely objections to portions of the Report, to which plaintiffs and defendants Continuous Holders and Current Holders have responded. Pursuant to Rule 72(b) of the Federal Rules of Civil Procedure, I review de novo those portions of the Report to which defendants object. For the reasons stated below, I adopt the Report, attached hereto, in all respects.

 I. Discussion

 The facts of the case are thoroughly discussed in Magistrate Judge Grubin's Report and Recommendation, familiarity with which is assumed. Defendant Former Holders in each of the actions and Defendant Current Holders in the U.S. Trust action have all filed separate objections, which I consider in turn.

 A. The Report and the Former Holders' Objections

 In Magistrate Judge Grubin's careful and comprehensive Report, she concludes that, under the terms of the trust indentures involved in both actions, "the interpleaded Fund must be distributed to members of the Current Holder and Continuous Holder classes, who were the owners of record of units in the Trusts on the applicable Record Dates when the Trusts came into possession of the distributions from the settlement funds." (See Report at 17.)

 Defendant Former Holders in Action One "generally object" to the Report, repeating the arguments made in their motion papers (see FH1 Objs. at 4-5); they reiterate their position that principles of equity, the "provenance" of the interpleaded Funds, language in some of the indentures, and Second Circuit law concerning the non-assignability of fraud claims, all militate in favor of awarding the interpleaded Fund to the Former Holders. Similarly, the objections of defendant Former Holders in the Investors Fiduciary action were raised in their motion papers. They now place particular emphasis on "significant language" in the Trust documents and Second Circuit law, which they contend establishes that proceeds from the settlement of the securities fraud claims belong to the Former Holders, "who acquired ownership rights in the trusts and bonds deposited in the Trust Funds." (See FH2 Objs. at 6-7; 8-19.) These defendant Former Holders also reassert that the principles of res judicata and equity weigh in favor of their summary judgment motion, referring the Court to their motion papers for elaboration of their positions. (See FH2 Objs. at 19-23.)

 After a thorough review of all of the Former Holders' objections to this recommendation, I find that the Former Holders have merely repeated the arguments made in their briefings of the underlying motions, all of which were fully considered and rejected by Magistrate Judge Grubin. *fn1" (See Report at 17-35.) Because I agree with the reasoning and conclusions of Magistrate Judge Grubin's Report, I hereby adopt her recommendation that I deny the summary judgment motions of the Former Holders, and grant the summary judgment motions of the Current Holders and Continuous Holders, awarding them the interpleaded Fund, to be distributed according to their pro rata shares as determined under the indentures.

 B. The Report and the Action One Current Holders' Objections

 Magistrate Judge Grubin further recommended that I grant the summary judgment motion of plaintiffs as to defendant Current Holders' counterclaims for breach of contract and fiduciary duty in the U.S. Trust action, on the basis of her determination that the counterclaims "fail as a matter of law." Magistrate Judge Grubin found that because the plaintiff Trustees acted within the rights granted to them by law in bringing their interpleader action, no cause of action arises from their commencement of this action. (Report at 38-39, 44.) She further indicates -- in dicta -- that even if the Current Holders were deemed to have stated a claim, they have "neither raised any genuine issue of material fact nor shown how further discovery could do so at all." Therefore, she concludes, summary judgment should be granted to plaintiffs as to defendant's counterclaims in any event.

 In their objections to Magistrate Judge Grubin's recommendation, defendant Current Holders maintain that material issues of fact preclude summary judgment on their counterclaims. Although essentially repeating arguments made in their moving papers, defendant Current Holders do include in their objections a more focused discussion of their bases for concluding that a cause of action does arise under the circumstances of the instant case. They emphasize that interpleader actions may be commenced only where trustees face a "real and reasonable fear of double liability" and indicate that the terms of the indentures, the Investment Company Act of 1940 (the "1940 Act"), and the "limited discovery" they have obtained do not support such a fear. (See CH Objs. at 14, 17.) In addition, defendant Current Holders contend that the Report failed to address "a mixed question of law and fact . . . as to "whether the Trustee's 'right' to commence a statutory interpleader supersedes the statutory mandate of Section 26(a) of the . . . 1940 Act." (See CH Objs. at 1-2.)

 After a full consideration of defendant Current Holders' objections, I find that they have no merit and conclude that Magistrate Judge Grubin correctly determined that plaintiff Trustees' motion for summary judgment as to defendant Current Holders' counterclaims should be granted. In reaching this conclusion, I note in particular that defendant Current Holders have failed to establish that material questions of fact remain in dispute as to whether plaintiffs Trustees had a "real and reasonable fear of double liability or vexatious, conflicting claims." Washington Elec. Coop., Inc. v. Paterson, Walke, & Pratt, 985 F.2d 677, 679 (2d Cir. 1993). Under Rule 22 of the Federal Rules of Civil Procedure, an interpleader is available when a stakeholder "is or may be exposed to double or multiple liability." Fed. R. Civ. P. 22; the stakeholder who "legitimately fears multiple [liability] directed against a single fund" may properly bring an interpleader action "regardless of the merits of the competing claims." 6247 Atlas Corp. v. Marine Ins. Co., Ltd., 155 F.R.D. 454, 461 (S.D.N.Y. 1994) (quoting John V. Sotheby's, 141 F.R.D. 29, 33 (S.D.N.Y. 1992)). The evidence proffered by defendant Current Holders does not provide any reason for departing from Magistrate Judge Grubin's sound conclusion that plaintiff Trustees were well within their rights in bringing this interpleader action. Moreover, I would add that defendant Current Holders have offered no authority in support of the proposition that the right to commence a federal interpleader action is somehow qualified by "other contractual duties or applicable statutory provisions," (see CH Objs. at 18.), nor have I found any such authorities in my own research.

 Finally, I note that defendant Current Holders have not sufficiently demonstrated that an additional period of discovery is warranted at this stage of the proceedings; *fn2" their submissions do not satisfy the requirements under Rule 56(f) of the Federal Rules of Civil Procedure. See Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir. 1994). The Second Circuit Court of Appeals requires a party proceeding under Rule 56(f) to submit an affidavit, the sufficiency of which is determined by applying a four-prong test. The affidavit must (1) include the nature of the uncompleted discovery; (2) show how the facts sought are reasonably expected to create a genuine issue of material fact; (3) indicate what efforts the affiant has made to obtain those facts; and (4) explain why those efforts were unsuccessful. Id. After reviewing defendant Current Holders' submissions, I find that they fail to meet this test and are particularly deficient as to the fourth prong of this test.

 Accordingly, I conclude, for the reasons stated by Magistrate Judge Grubin in her Report, that plaintiff Trustees' motion for summary judgment as to defendant Current Holders' counterclaims should be granted.

 As a final note, I consider defendant Current Holders' request that, in the event the Court grants plaintiff Trustees' motion for summary judgment as to their counterclaims, the Court strike pages 40-47 from the Report, "on the grounds that it is dicta which is inaccurate and unwarranted, and which unnecessarily obfuscates the issues related to the counterclaims and the Trustees' motions for summary judgment with respect thereto." Because I do not find Magistrate Judge Grubin's discussion in this portion of the Report to be inaccurate, unwarranted or obfuscatory in any way, I deny defendant Current Holders' request.

 II. Conclusion

 For the reasons set forth above, the Court adopts Magistrate Judge Grubin's Report in all respects. The summary judgment motions of the Former Holders in both actions are hereby denied and the summary judgment motions of the Current Holders and Continuous Holders in both actions are hereby granted. The interpleaded Fund is to be distributed to the Current Holders and Continuous Holders in both actions according to their pro rata shares as determined under the Indentures. The Court also grants plaintiff Trustees' motion for summary judgment on defendant Current Holders' counterclaims in the U.S. Trust action. The Clerk of Court is directed to close this case. All pending motions are hereby moot.

 SO ORDERED.

 DATED: New York, New York

 March 30, 1998

 Kimba M. Wood

 United States District Judge


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