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Excelsior Fund, Inc. v. JP Morgan Chase Bank

March 28, 2007

EXCELSIOR FUND, INC., AND EXCELSIOR FUNDS TRUST, PLAINTIFFS,
v.
JP MORGAN CHASE BANK, N.A., DEFENDANT.



The opinion of the court was delivered by: John G. Koeltl, District Judge

OPINION AND ORDER

The plaintiffs Excelsior Fund, Inc. ("EFI") and Excelsior Funds Trust ("EFT") are two mutual funds that purchased Notes issued by Frontier Corporation under an Indenture Agreement for which the defendant JP Morgan Chase Bank, N.A. ("JPMC") served as Indenture Trustee. The plaintiffs purchased these Notes at various times before and after Frontier's successor company, Global Crossing North America, Inc. ("Frontier/GCNA") filed for bankruptcy on January 28, 2002. The plaintiffs allege that in a variety of ways JPMC breached its obligations as the Indenture Trustee and also as the Collateral Trustee under two sets of subsequent trust and pledge agreements entered into for the benefit of the Frontier Noteholders among others. In essence, the plaintiffs allege that after Frontier merged with GCF Acquisition in 1999 and became Frontier/GCNA, JPMC failed to take steps to protect the Noteholders during a series of loan and sales transactions that divested Frontier/GCNA of substantially all of the assets and operations that it could have used to pay off the plaintiffs' Notes.

The plaintiffs assert claims against JPMC for (1) breach of the Indenture Agreement (first cause of action); (2) breach of the first and second Collateral Trust and Pledge Agreements (second and third causes of action); (3) breach of the implied covenant of good fair and fair dealing (fourth cause of action); and (4) breach of fiduciary duty (fifth cause of action).

The plaintiffs originally filed this action in the New York State Supreme Court, New York County, and JPMC removed it to this Court. The Court previously denied a motion to remand to state court. Excelsior Funds, Inc. v. JP Morgan Chase Bank, N.A., 06 Civ. 5246, 2006 WL 3420625 (S.D.N.Y. Nov. 27, 2006). Before the Court now is JPMC's motion to dismiss the first, fourth, and fifth causes of action.*fn1 The plaintiffs have cross-moved to amend their Complaint by adding a new legal basis for the breach of contract claim based on the Indenture Agreement.

For the reasons explained below, JPMC's motion is granted with respect to the fourth cause of action, for breach of the implied covenant of good faith and fair dealing, but the motion is denied with respect to the remaining claims. The plaintiffs' cross-motion is granted and the plaintiffs may file an Amended Complaint.

I.

A.

For the limited purposes of deciding the motion to dismiss, the relevant facts are as follows.

The former telecommunications company Frontier Corp. issued 7.25% Notes pursuant to an Indenture Agreement dated May 21, 1997. Frontier then issued 6% Notes pursuant to a First Supplement to the Indenture dated December 8, 1997. JPMC served as the Indenture Trustee under the Indenture Agreement. (Compl. ¶¶ 6, 8--10.) Frontier was acquired by Global Crossing Ltd. ("GCL") in September 1999 and became its subsidiary under the new name Global Crossing North America ("Frontier/GCNA"). (Id. ¶ 17.)

Various Global Crossing entities, including Frontier/GCNA, filed chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of New York on January 28, 2002. (Id. ¶ 45.) Shortly before the filing, JPMC resigned its position as Indenture Trustee and selected Wilmington Trust Co. as its successor. (Id. ¶ 46.)

The plaintiff EFI purchased 6% Notes of Frontier/GCNA in the principal amount of $55,644,000 between March 2, 2001 and June 24, 2002. EFI sold $17,500,000 in principal amount of these Notes at a loss, but it continued to hold $15,144,000 in principal amount of the 6% Notes through the period of GCL's bankruptcy, when the Notes were in default. Pursuant to GCL's bankruptcy plan, EFI received a distribution consisting of $35,062 in cash and stock, and EFI sold the stock for $1,269,065. (Id. ¶ 8.)

EFI also purchased 7.25% Notes of Frontier/GCNA in the principal amount $45,530,000 between October 24, 2001 and June 24, 2002. EFI later sold $26,450,000 principal amount of those Notes at a loss. (Id. ¶ 9.) The plaintiff EFT purchased 7.25% Notes of Frontier/GCNA between December 13, 2001 and January 11, 2002 in the principal amount of $11,000,000. EFT later sold $3,850,000 in principal amount of those Notes at a loss. (Id. ¶ 10.)

Both EFI and EFT made additional sales of Notes they held on September 18, 2003. Because the plaintiffs assigned their rights and claims in connection with these sales, those Notes do not form a basis for any of the claims in the Complaint. (See id. ¶¶ 8--10.) At the time this action was brought, EFT no longer held any Notes, and EFI continued to hold only $15,144,000 principal amount of 6% Notes at that time.

The Indenture Agreement pursuant to which the Notes issued provides that it is to be governed by and construed in accordance with the laws of New York and, to the extent applicable, provisions of the Trust Indenture Act of 1939 ("TIA), 15 U.S.C. § 77aaa et seq. (Compl. ¶ 11; Indenture Agreement § 112, Ex. 2 to Decl. of Sarah L. Reid, July 18, 2006.) Both the 7.25% and the 6% Notes provide that they are "governed and construed in accordance with the law of the state of New York." (Exs. A & B to Decl. of Arthur M. Handler, Jan. 11, 2007.)

During JPMC's tenure as Indenture Trustee, the plaintiffs allege that it failed to protect the interests of the Noteholders and, rather, assisted in transactions that resulted in substantial remuneration for JPMC itself.

When Frontier was acquired by GCL, it became a co-borrower under a pre-existing $3 billion credit facility between JPMC, GCL, and Global Crossings Holdings Ltd. ("GCHL") that dated from July 2, 1999. (Compl. ΒΆ 21.) JPMC served as administrative agent for a syndicate of lenders in this financing transaction and was itself one of the lenders under the July 2, 1999 ...


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