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Trafalgar Power, Inc. and Christine Falls Corporation v. U.S. Bank National Association

February 21, 2012


The opinion of the court was delivered by: David N. Hurd United States District Judge



Plaintiffs Trafalgar Power, Inc. ("TPI") and Christine Falls Corporation ("CFC") (collectively "plaintiffs" or "Trafalgar") brought this action against defendant U.S. Bank National Association, formerly known as State Street Bank & Trust Company of Connecticut, ("defendant" or "Bank") claiming breach of fiduciary duty, entitlement to an accounting, negligence, and breach of contract.*fn1 Defendant answered and asserted counterclaims for a declaratory judgment for contractual payment and contractual indemnification.

The Bank moved for summary judgment. Trafalgar opposed and cross-moved for partial summary judgment. Defendant opposed plaintiff's cross-motion. The motions were taken on submission without oral argument.


The following facts are undisputed unless otherwise noted. To the extent that plaintiffs' responsive Statement of Material Facts ("SMF") fails to deny defendant's assertions with a specific citation to facts in the record giving rise to a factual issue, defendant's assertions are deemed admitted. See L.R. 7.1(a)(3).

Trafalgar was a developer of hydroelectric power generating facilities ("power plants"). It obtained initial construction financing for the development of the power plants in upstate New York, but then refinanced the power plant projects with a loan for $22.5 million from Aetna Life Insurance Company ("Aetna") in 1988. Notes were issued and held by Aetna, and Trafalgar put up as collateral essentially all of its interests in the power plants and the revenue from electricity they generated. The Bank was named security trustee for the holder of the notes (Aetna).

The power plants were constructed, and Trafalgar operated and managed them until June 1995. During the period in which Trafalgar acted as operator and manager of the power plants, it missed principal and interest payments on the loan to Aetna, and was in default as to its obligations to Aetna.

Accordingly, Trafalgar and Aetna negotiated a restructuring of the loan. As a condition of the restructured financing, Aetna required that Trafalgar retain an outside operator and manager for the power plants. To that end, Algonquin Power Corporation, Inc. ("APC") began managing the power plants in June 1995. Trafalgar and APC entered into a Management Agreement on January 15, 1996, defining their roles and obligations as owner and operator/manager, respectively. See generally Ostrowski Aff. Ex. 2, Dkt. No. 93-4 ("Management Agreement").*fn2

Also in order to effectuate the loan restructuring, on January 15, 1996, Trafalgar and the Bank entered into an Amended and Restated Collateral Trust Indenture ("Indenture"). See generally Ostrowski Aff. Ex. 1, Dkt. No. 93-3 ("Indenture").*fn3 Aetna purchased two notes for a total of $22.5 million, and forgave the accrued and unpaid interest owed to it by Trafalgar in the amount of approximately $12.5 million. Trafalgar again pledged as collateral virtually all of its interests in the power plants. Although the Indenture and the Management Agreement together set forth the parameters for operation of the power plants and repayment of the notes, the Management Agreement was expressly subordinate to the Indenture. Id. at 15 ¶ 4.31.

Following is a general overview of the parties' agreements regarding the power plant operations and the payment on the loan. Further details regarding the terms of the Indenture and Management Agreement, including specific terms, will be set forth as necessary in the analysis below. After the overview, the facts leading to the filing of this action will be set forth.

APC was responsible for managing all aspects of the operation of the power plants. This included responsibility for personnel, equipment, and compliance with all applicable laws, as well payment of taxes for payroll and its own income. APC prepared and provided an Operations and Maintenance Budget ("budget"), as well as revisions to the budget, which the note holders approved. APC made disbursement requests for payment of operational expenses, which the Bank was authorized to pay so long as the request was consistent with the approved budget. Moreover, Trafalgar agreed not to make any expenditures of revenue generated by the power plants except in accordance with the budget.

Trafalgar was liable to pay, but APC "shall cause to be paid" sales or use tax on capital improvements and any taxes incurred with respect to costs of operation. Trafalgar, and not APC, was responsible for payment of all taxes, assessments, and any levies imposed upon it or its property by the government. Additionally, Trafalgar was required to keep the power plants free from liens.

APC was obliged to prepare and provide certain monthly and annual reports and financial statements to Trafalgar as owner, the Bank as security trustee, and Aetna as note holder. Further, APC was required to provide Trafalgar and the Bank full access to the power plants to inspect and observe the operations. However, neither Trafalgar nor the Bank were permitted to "materially interfere" with APC's lawful activities in the course of such inspections and observations. Id. at 12 ¶ 4.14.

All revenue from the sale of electricity generated by the power plants was deposited directly with the Bank by the purchaser (e.g., National Grid). Those funds were held in trust by the Bank as security for the loan and as well as being disbursed by the Bank to pay operating costs (as delineated by APC in its disbursement requests), management fees to APC, loan payments to Aetna, and other expenses as permitted by the parties' agreements.

From 1996 through 1999 APC submitted thirty-nine disbursement requests, the last of which was paid by the Bank on July 20, 1999. APC also prepared revisions to the budget. Trafalgar received the disbursement requests, as well as the budget and revisions to it.

During the 1997 calendar year affiliates of APC acquired the notes from Aetna, thereby becoming the "note holder(s)" for purposes of the Indenture and Management Agreement. The APC affiliates who became note holders as a result of the acquisition will be referenced as "Algonquin" to differentiate from APC.

Trafalgar filed its corporate income taxes with a group of subsidiaries of Marina Development, Inc. ("Marina"). This group will be referenced as "Trafalgar filing group." The Trafalgar filing group tax return for the 1995 tax year was due on June 15, 1996. James D. Cox ("Cox"), Trafalgar filing group's accountant, cautioned that forgiveness of the approximately $12.5 million debt by Aetna resulted in a federal income tax liability of $283,000. The Trafalgar filing group sought an extension until December 16, 1996, for filing its return. It filed its return on December 16, 1996, reporting only a $35,000 Income tax liability. However, it did not remit the $35,000 income tax.

On July 7, 1997, the United States Internal Revenue Service ("IRS") sent to Trafalgar filing group a Request for Payment of the income tax, penalties, and interest related to the 1995 tax year. The income taxes remained unpaid. Consequently, on August 11, 1997, the IRS sent a Final Notice of Intent to Levy and assigned the 1995 income taxes for enforcement action. Trafalgar did not inform the Bank that its 1995 income taxes were late and remained unpaid.

The Trafalgar filing group 1996 income taxes were due June 15, 1997. Trafalgar filing group again requested and received a six-month extension. It filed its return on December 11, 1997, reporting an income tax liability of over $131,000. However, it did not remit payment for the income taxes due. Again, Trafalgar failed to inform the Bank that its 1996 income taxes were delinquent and unpaid. In July 1997 the IRS sent Trafalgar filing group a Request for Payment of the 1996 income taxes.

On December 4, 1998, the IRS informed Trafalgar filing group that it would conduct an audit for the 1996 tax year. Trafalgar never notified the Bank or APC that the IRS was conducting an audit of its 1996 income tax return. With regard to the audit, the IRS made several requests to Trafalgar filing group for information and documents. On June 22, 1999, Cox sent a letter to the IRS stating, in part, "I simply do not understand based on this information why the [IRS] cannot simply levy the State Street Bank account for the taxes that are due. As you can see from the information, there is a substantial amount of money both received and spent out of this account." Ostrowski Aff. Ex. 18, Dkt. No. 93-5 at 50.

In late June 1999 APC and the note holders became aware of Trafalgar filing group's 1995 and 1996 income tax delinquencies. On July 1, 1999, the IRS issued another Notice of Intent to Levy on Trafalgar, and demanded payment of the $197,092.56 owed (1995 and 1996 income taxes plus penalties and interest) within thirty days. The note holders then sent a letter to Trafalgar notifying it that it would be in default if it failed to cure the income tax deficiencies. When Trafalgar failed to do so, Algonquin, as note holder, notified Trafalgar it was in default on the loan, so notified the Bank, and directed the Bank to take possession of the operating account and remit it to the note holder. It further notified the Bank that it had advised Trafalgar it was accelerating payment on the notes. From the point that the Bank was notified that Trafalgar was in default, it was obligated to act prudently, and exclusively for the benefit of the note holder. Indenture § 9.1(b).

On August 6, 1999, Trafalgar filed suit against Aetna, Algonquin, and APC and other Algonquin affiliates, alleging that Aetna wrongfully sold the notes to Algonquin. Litigation ensued. On November 18, 2010, the United States Court of Appeals for the Second Circuit upheld the grant of summary judgment in favor of the defendants and dismissing Trafalgar's claims. Christine Falls Corp.


Algonquin Power Fund, Inc., Nos. 09-4408-cv, 09-4610-cv, 401 Fed. Appx. 584, 587 (2d Cir. 2010) (finding Aetna permissibly sold the notes to Algonquin) (unpublished summary order).*fn4 The Bank was not a party to that lawsuit and did not in any way participate in it.

In August 27, 2001, Trafalgar filed for bankruptcy protection. The bankruptcy court granted Trafalgar's request to use the note holders' cash collateral account in order to continue operations, and in accordance with the terms and conditions of the Indenture and the approved budget. The bankruptcy court also issued an order permitting Trafalgar to examine the Bank's records.

Trafalgar filed the complaint in this action on December 8, 2005. It filed an amended complaint asserting new claims ...

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