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Emmet & Co., Inc. v. Catholic Health East

Supreme Court, New York County

September 25, 2012

Emmet & Co., Inc. and FIRST MANHATTAN CO., Plaintiffs,
Catholic Health East and MERRILL LYNCH PIERCE, FENNER & SMITH INC.,, Defendants.

For plaintiffs, Kasowitz, Benson & Torres, LLP, by Aaron H. Marks, Gavin D. Schryver and Anthony Macdonald Caputo.

For defendant Catholic Health East, Shearman & Sterling LLP, by Richard F. Schwed.

For defendant Merrill Lynch, Pierce, Fenner & Smith Inc., Winston & Strawn LLP, by Luke A. Connelly.

Shirley Werner Kornreich, J.

Motion Sequences 002 and 003 are hereby consolidated for disposition. This is an action for breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious interference with contract. Defendants Catholic Health East (CHE) and Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill) each move separately to dismiss the complaint. Plaintiffs oppose both motions and cross-move for partial summary judgment on the issue of breach of contract. Defendants oppose. The complaint is dismissed for lack of standing.

I. Background

This case involves three sets of tax-exempt municipal bonds (collectively, the Bonds) issued between 1993 and 1996 to finance certain hospital systems in Florida, Georgia, and Pennsylvania (second amended complaint [SAC] ¶¶ 18-21). The Bonds were issued by a governmental or quasi-governmental authority and paid interest at rates between 5.125% and 5.625% (id.). Each Bond was governed by a bond indenture (the Indentures) (id. at ¶ 23). The Indentures appointed a trustee and vested it with certain powers and obligations related to the Bonds and their management (id.). At the time of the events in question, the trustee was The Bank of New York Mellon Trust Company, N.A. (the Trustee).

The Indentures gave a Bond's issuer the right to redeem, or "call, " the Bond prior to its stated maturity date (id. at ¶ 24). They also provided that in the event of a partial redemption, i.e., in the event the issuer decided to call less than all of the Bonds, then the Trustee would select the Bonds to be redeemed "by lot, " that is, randomly (SAC, ¶ 24). On February 19, 1998, CHE, a not-for-profit health care system, entered into escrow agreements (the Escrow Agreements) to defease each of the Bonds, pursuant to which CHE irrevocably deposited securities backed by the United States Treasury into an escrow account in an amount sufficient to cover all payments of principal and interest up to and including the respective maturity dates for each of the Bonds (id. at ¶ 25). The Escrow Agreements conferred upon CHE the right to call the Bonds, subject to the other provisions of the Indentures, including the restriction on partial redemptions (id.). Each Indenture is governed by the law of the state of the issuer, i.e., Florida, Georgia or Pennsylvania (Schwed affirmation, exhibit A [Florida Indenture], ¶ 11.06(a); exhibit B [Georgia Indenture], ¶ 130; exhibit C [Pennsylvania Indenture], ¶ 13.6).

On March 29, 2011, acting on the advice of Merrill, CHE sent letters to all holders of the Bonds, stating that it would purchase any Bonds tendered to it by April 26, 2011 for 101% of par value, plus accrued interest (id. at ¶ 28; joint statement of material facts, ¶ 5). In the same letter, CHE announced that any Bonds not tendered to it by April 26 would be redeemed on May 18, 2011, at 100% of par value, plus interest (SAC, ¶¶ 29-30; joint statement, ¶ 9). CHE subsequently extended the tender offer period to May 3 (SAC, ¶ 32). The Trustee consummated the tender transactions; on May 18, approximately 34.3% of the Bonds (including those owned by plaintiffs) were redeemed (id. at ¶ 33-34; joint statement, ¶ 14).

Plaintiff Emmet & Co., Inc. (Emmet) and the clients of plaintiff First Manhattan Co. (First Manhattan) held some of the Bonds (SAC, ¶¶ 9-11, 18). Emmet and First Manhattan objected to the transaction, conveying their displeasure in letters to the Trustee dated April 29 and May 3, respectively (Emmet affidavit, exhibit 19; Josephson affidavit, exhibits 1-3). Emmet then attempted to stop the transactions from going forward by seeking injunctive relief from this court on May 13, 2011, claiming that the transaction violated the Indentures as the call constituted a partial redemption but the redeemed Bonds had not been selected by lot (see complaint). CHE removed the case to federal court, where Emmet's application was denied (Emmet & Co, Inc. v Catholic Health East, SDNY, May 18, 2011, Berman, J., index no. 11 Civ. 3272-RMB). After the redemption, Emmet amended its complaint to include First Manhattan Co. as a plaintiff; plaintiffs then amended the complaint a second time to include Merrill as a defendant, alleging that Merrill had tortiously induced CHE to breach the Indentures. The joinders of First Manhattan and Merrill destroyed diversity and deprived the federal court of subject-matter jurisdiction; the case, therefore, was remanded to this court (Emmet & Co, Inc. v Catholic Health East, SDNY, Sept. 28, 2011, Berman, J., index no. 11 Civ. 3272-RMB).

II. Discussion

On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts (Amaro v Gani Realty Corp., 60 N.Y.3d 491 [2009]; Skillgames, L.L.C. v Brody, 1 A.D.3d 247, 250 [1st Dept 2003] [citing McGill v Parker, 179 A.D.2d 98, 105 (1992)]; see also Cron v Harago Fabrics, 91 N.Y.2d 362, 366 [1998]). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action (Skillgames, id. [citing Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 (1977)]).


Each of the Indentures contains a "no-action" clause, which bars any bondholder from bringing suit to enforce the Indenture unless certain conditions are met (Florida Indenture, ¶ 7.09(a); Georgia Indenture, ¶ 805; Pennsylvania Indenture, ¶ 8.5). To have the right to institute suit, the Trustee must have had notice of an event of default, the holders of at least 25% of outstanding principal must have demanded, in writing, that the Trustee institute a suit in its own name, offering to indemnify it for taking such action, and the Trustee ...

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