Filed: Feb. 11, 2004
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 2-11-2004 In Re: Color Tile Precedential or Non-Precedential: Non-Precedential Docket No. 02-2932 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "In Re: Color Tile " (2004). 2004 Decisions. Paper 1010. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/1010 This decision is brought to you for free and open access by the Opinions of the Un
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 2-11-2004 In Re: Color Tile Precedential or Non-Precedential: Non-Precedential Docket No. 02-2932 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "In Re: Color Tile " (2004). 2004 Decisions. Paper 1010. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/1010 This decision is brought to you for free and open access by the Opinions of the Uni..
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Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
2-11-2004
In Re: Color Tile
Precedential or Non-Precedential: Non-Precedential
Docket No. 02-2932
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"In Re: Color Tile " (2004). 2004 Decisions. Paper 1010.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/1010
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________________________
Nos. 02-2932 and 02-4294
______________________________
IN RE: COLOR TILE INC
__________________________________
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Appellant
v.
RELIANCE INSURANCE COMPANY; BLACKSTONE FAMILY INVESTMENT
PARTNERSHIP;
PILGRIM HIGH YIELD TRUST; BANKERS TRUST CO.; IDS EXTRA INCOME
FUND, INC.; DAN LUFKIN; ELISE LUFKIN; NORTHERN TRUST COMPANY,
as Trustee of a Master Trust for the Benefit of the Allied Signal, Inc.;
ALLIED SIGNAL CORP.; PRUDENTIAL HIGH YIELD FUND, INC.;
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, as Investment Manager
for the General Motors High Yield Account; GENERAL MOTORS,
General Motors High Yield Account; THE PRUDENTIAL SERIES FUND, INC.;
RIVERSIDE CAPITAL ADVISORS, INC.; BEARS STERNS & COMPANY, INC;
MORGAN GUARANTY TRUST CO. OF NEW YORK; ATWELL & CO.; HOW &
COMPANY;
KELLY & CO.; BTC US HIGH YIELD FUND; NORTH BROWARD RADIOLOGISTS, P.A.
Profit Sharing Plan for the Benefit of Carl C. Peterson, M.D. and
Walter F. Ciceric, M.D.; NORTHEAST INVESTORS TRUST; NORTHSTAR HIGH
YIELD BOND FUND; RIVERSIDE INCOME FUND, LTD; SALOMAN BROTHERS, INC.;
STATE STREET RESEARCH STRATEGIC GROWTH & INCOME FUND; STATE STREET
RESEARCH
INCOME TRUST; STATE STREET RESEARCH EQUITY TRUST; STATE STREET
RESEARCH
INVESTMENT SERVICES, INC.; STATE STREET GROWTH TRUST;
METROPOLITAN LIFE INSURANCE COMPANY
_______________________________________
On Appeal From the United States District Court
For the District of Delaware
(D.C. No. 98-cv-00358)
District Judge: Honorable Sue L. Robinson
_________________________________________
Argued January 12, 2004
Before: SMITH, CHERTOFF and BECKER, Circuit Judges.
(Filed: February 11, 2004)
DAVID F. HEROY, ESQUIRE
BRIAN E. MARTIN, ESQUIRE (Argued)
KEVIN Y. PAK, ESQUIRE
Bell, Boyd & Lloyd
70 West Madison, Suite 3300
Chicago, Illinois 60602
IAN CONNOR BIFFERATO, ESQUIRE
MEGAN N. HARPER, ESQUIRE
Bifferato, Bifferato & Gentilotti
1308 Delaware Avenue
Wilmington, Delaware 19806
Attorneys for Appellants
PAUL A. BRADLEY, ESQUIRE (Argued)
A. RICHARD WINCHESTER, ESQUIRE
JAMES J. FREEBERY, ESQUIRE
McCarter & English, LLP
919 N. Market Street, Suite 1800
Wilmington, Delaware 19801-3023
Attorneys for Appellees
2
__________________________
OPINION OF THE COURT
_____________________________
BECKER, Circuit Judge.
This is an appeal by Plaintiff, The Official Committee of Unsecured Creditors of
Color Tile, Inc., a debtor in Delaware Bankruptcy Court, from an order granting summary
judgment to defendant State Street Research Investment Services, Inc. (and affiliated
mutual fund defendants) (collectively, the “SSR defendants”) in an adversary proceeding
before the District Court which had withdrawn the reference. For the reasons that follow,
we vacate the judgment and remand for further proceedings.
I.
A.
The original complaint alleged inter alia that: (1) in 1992, Color Tile issued
2,200,000 shares of Class B, Series A, Senior Increasing Rate Preferred Stock; (2) from
January 1994 through approximately January 1995, Color Tile paid approximately
$10,000,000 in dividends to holders of its preferred stock; and (3) the dividend payments
constituted constructively fraudulent transfers, because the payments were made when
Color Tile was insolvent and the payments left Color Tile with unreasonably small capital
or caused Color Tile to incur debts beyond its ability to pay.
The Depository Trust Company (“DTC”) is an association of more than 200
3
brokerage houses and financial institutions which was formed pursuant to Congressional
mandate for the purpose of owning shares in street name for the beneficial interest of
customers. Cede & Co. (“Cede”) is the name used by DTC to hold shares that it owns.
Among other services not relevant here, Cede transmits the dividends received from
issuers to the beneficial owners, through “participating” or “depository” banks acting as
conduits.
The original complaint named Cede as a defendant in the suit. Cede was the
record owner of approximately 1,460,000 shares of Color Tile preferred stock and
received approximately $6,468,811 of the dividend payments during the relevant period.
After filing its original complaint, the Committee discovered that Cede had been
mistakenly named as a defendant because it had acted only as a conduit for the dividend
payments made to the beneficial owners. The Committee subsequently agreed to dismiss
Cede as a named defendant without prejudice in exchange for Cede providing all the
information it possessed concerning the identities of the beneficial owners of the
preferred stock. Without ascribing blame (either to the plaintiff for lack of diligence or to
the original defendants for obfuscation and non-cooperation), we simply state that the
plaintiff did not discover the identify of the present defendants until after the statute of
limitations had run.
The issue before us, arising out of the plaintiff’s second amended complaint,
centers around the Committee’s ability to have discovered earlier exactly who the
4
beneficial owner was of some of this preferred stock. In legal terms, the appeal turns on
the relation-back provisions of Fed. R. Civ. P. 15(c)(3)1 (as applied to the plaintiff’s two
amended complaints) and on whether the District Court erred in determining that the
plaintiff’s claim must fail because defendants did not receive notice of the suit within the
meaning of Rule 15(c)(3) so as to avoid the bar of the statute of limitations. The factual
and procedural history, including the two amended complaints, is well known to the
parties, for whom we primarily write, hence we will limit ourselves to the essentials.
B.
In support of its contention that the notice provision is satisfied, plaintiff cites to
the District Court’s February 9, 2000 opinion which denied the motions to dismiss filed
by all defendants. In so ruling, the Court compared the first amended complaint to the
original complaint under Fed. R. Civ. P. 15 (c) and found that the first amended
complaint related back to the filing of the original complaint because: (1) it was “identical
to the original complaint”; (2) the original complaint named Cede which held legal title to
1
Rule 15(c)(3) provides:
An amendment of a pleading relates back to the date of the original
pleading when . . . . (3) the amendment changes the party or the naming of
the party against whom a claim is asserted if the foregoing provision (2) is
satisfied and, within the period provided by Rule 4(m) for service of the
summons and complaint, the party to be brought in by amendment (A) has
received such notice of the institution of the action that the party will not be
prejudiced in maintaining a defense on the merits, and (B) knew or should
have known that, but for a mistake concerning the identity of the proper
party, the action would have been brought against the party.
5
the shares and was the agent for entities known as BTC and Northstar, who were
beneficial owners of Color Tile stock, and (3) BTC and Northstar received actual or
constructive notice of the Committee’s suit within 120 days following the filing of the
original complaint since the original complaint was served on Cede, which acted as
Northstar and BTC’s agent, and they thus knew or should have known that, but for the
Committee’s mistake, they would have been named instead of Cede. (Vol. II A265-266).
The Court held that “BTC, and Northstar [received] constructive notice of Plaintiff’s
suit,” satisfying the notice requirement under Fed. R. Civ. P. 15 (c). (Vol. II, A-265-267).
The Court stated:
As sophisticated investors who chose to use Cede as an intermediary, BTC,
Brinson, and Northstar assumed the risk that suits arising out of their ownership of
Color Tile preferred shares would name only Cede. These defendants also
assumed the risk that service upon Cede would enable a later complaint to relate
back.
Plaintiff invokes the law of the case doctrine and argues that the February 9, 2000
opinion controls at the current stage of the proceeding, creating constructive notice and
foreclosing summary judgment. The defendants disagree, and to explain our ruling, we
need to describe some interim history.
On July 31, 2000, the Committee caused subpoenas to be issued to the Records
Custodian of State Street Corporation in Massachusetts and Missouri. On August 22,
2000, Lawrence Eastman, the Assistant Vice President of State Street Bank sent a letter to
the Committee in which he identified the clients of State Street Bank and the amounts
6
they received in dividend payments. This letter explained that State Street Bank served as
the participating bank for Prudential High Yield Fund (“PHY”) and also for the SSR
defendants. Apparently, this was the first time the Committee learned that State Street
Bank was the participant bank for entities other than PHY.2
C.
On November 29, 2000, the Committee moved for leave to file a second amended
complaint adding new defendants and alleging that the SSR defendants received
$579,553 in dividend payments during the relevant period. The Court granted the
Committee’s motion on March 7, 2001, and the second amended complaint was filed,
2
Until this time, the Committee had assumed that PHY was the only beneficial owner
for which State Street Bank operated as the participant bank. On or about April 6, 1998
the Committee received a letter from Mr. Montal, DTC’s attorney, with two spreadsheets
that showed the participant numbers and participant banks at the DTC which received the
dividend payments. (Vol III, A501-520). These documents indicated that participant
number 997, “SSB Custodian,” acted as the participant bank to beneficial owners of the
Preferred Stock that received $1,708,095 in dividend payments. (Vol III, A504-520).
This came as something of a surprise to the Committee because earlier indications led it
to believe that PHY had received $920,642 in dividend payments. Accordingly, the
Committee sought more information from DTC regarding the recipients of the dividend
payments for account 997. Pursuant to the Bankruptcy Court’s Scheduling Order, the
Committee informed PHY that it believed PHY had received $1,708,094.90, rather than
$920,642 as it had earlier believed. (A581-582). The Committee asked PHY to “[p]lease
confirm the stock ownership and dividend payments made to these parties as described in
this letter.” (A581-582). The Committee received no response. The Committee asserts
that it viewed PHY’s silence as a tacit confirmation that it had received $1.7 million in
dividend payments since PHY was under the Bankruptcy Court’s Discovery and
Scheduling Order to dispute the amount of the dividend payments to the extent that it
differed from the amount alleged by the Committee and to identify to the Committee, if
known, other “beneficial holders of such stock and the amount of dividends received by
such beneficial holders.” (Vol II, A036).
7
seeking recovery of the dividend payments, plus prejudgment interest. The important
difference between the first and second amended complaints is that the second added the
SSR defendants.
On December 20, 2001, the SSR defendants moved for summary judgment
asserting that the second amended complaint was barred by the two year statute of
limitations under 11 U.S.C. § 108(a) because it was filed more than two years after the
petition date. On April 30, 2002, the Court granted the SSR defendants’ motion (the
“4/30/02 Opinion”). In the 4/30/02 Opinion, the Court found that (i) the same transaction
requirement was met; and (ii) the Committee had presented sufficient evidence to indicate
that the failure to name the SSR defendants was due to a “cognizable mistake under Rule
15(c)(3)(B).” Official Comm. of the Unsecured Creditors of Color Tile, Inc. v. Pilgrim
High Yield Trust, (In re Color Tile, Inc.) 278 B.R. 366, 373-74 (D. Del. 2002). The
District Court opined that the “mistake was understandable” given that the “plaintiff
lacked information about the true identity of the beneficial owners of the stock at the time
it filed the original complaint, through no fault of its own” and that “[o]nly Cede and its
participant State Street Bank possessed the information necessary for plaintiff to
determine who the proper defendants were . . . so it was only fair that plaintiff be given
the opportunity through discovery to determine the identities of the true stock owners.”
Id. at 373.
The District Court went on to hold, however, that the Committee had failed to
8
provide sufficient evidence to create a genuine issue of material fact that the SSR
defendants received actual, constructive, or imputed notice for relation back. The Court
reasoned that the Committee “failed to make a sufficient showing that the SSR defendants
received notice under Rule 15(c)(3)(A), as the nonmoving party must do ‘on an essential
element of its case with respect to which it has the burden of proof.’” Id. at 375-76
(quoting Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986)). The District Court also
found, as a factual matter, that BTC and Northstar were situated in “distinguishable”
positions compared to the SSR defendants.
Id. at 375. Without providing a rationale for
doing so, the Court stated that it found “no need to revisit its earlier decision, because the
SSR defendants are another step removed from DTC/Cede.”
Id. Thus the Court ruled
that the fact that the February 9, 2000 opinion had held that BTC and Northstar had
received notice for purposes of relation back did not apply here and that summary
judgment for SSR defendants was therefore in order.
D.
We disagree with the District Court’s “one step removed” conclusion. The
relationship among the actors is described by the following chart:
DTC Nominee Depository Bank Beneficial Owner
Cede First National Bank of Chicago BTC
Cede Custodial Trust Company Northstar
Cede State Street Bank SSR defendants
As counsel for defendants conceded at oral argument before us, the SSR defendants are
situated in exactly the same position as the beneficiaries identified in the District Court’s
9
February 9, 2000 opinion.
Moreover the plaintiff’s constructive notice argument is buttressed by two
documents in the record that were not focused on by the District Court. The first is the
“Rules, By-Laws and Organization Certificate of the Depository Trust Company,” which
provides in Rule 6:
Subject to the provisions of these Rules and the Procedures, the Corporation,
acting in accordance with duly authorized instructions from the Participant or
Participants and the Pledgee or Pledgees, if any, having an interest in the
transaction, shall, . . . deliver dividends, distributions, rights, securities, proxy
material and other property or documents received by the Corporation with respect
to a Participant’s Deposited Securities or Pledged Securities, except as provided
below in this Rule or in the Procedures.
(Vol. II, A-179).
The second is the contract between State Street Bank and SSR defendants (the ‘custodial
agreement”) which provides in Section 2.14: “The Custodian shall transmit promptly to
the Fund all written information . . . received by the Custodian from issuers of the
domestic securities being held by the Fund.” (Vol. IV, A-979).
II.
Defendants contend that plaintiff’s arguments on notice are flawed. First, they
contend that the law of the case doctrine does not operate to render the February 9, 2000
opinion, rendered on a Rule 12(b)(6) motion, applicable in a summary judgment context.
Second, seizing on plaintiff’s concession at oral argument that there is no evidence in the
record that State Street Bank ever received actual notice of the suit (it is also clear that the
defendants did not receive notice), defendants argue that constructive notice cannot
10
surmount a double linkage, i.e., Cede to State Street Bank, and the Bank to the SSR
defendants. Plaintiff rejoins that the law of the case does apply because whatever
differences there may be on the factual record, the legal issue with respect to the two
motions is the same and that it is the legal issue that matters. Moreover, in plaintiff’s
submission, the legal reasoning of the District Court’s February 9, 2000 opinion was
correct, and hence constructive notice is established.3 Secondly, plaintiff submits that
any lacuna is filled in by the DTC regulations and the custodial agreement.
We are sympathetic to plaintiff’s position. It would seem to us untoward that a
depository bank that acts as a conduit for the transmission of dividends (which perforce it
must transmit) and keeps the financial record of these transmissions, would not have the
obligation to notify the beneficiaries of a claim to recover some of these same dividends.
And there seems to be no doubt of the obligation of DTC or its nominee to notify the
depository bank of the claim. On the other hand, the notion of double imputation, i.e. that
the agent’s lack of knowledge is cured by imputation of knowledge through his (second-
level) agent, is problematic. Morever, this issue was not adequately briefed by the parties.
Therefore, rather than resolve these issues now, we will vacate the judgment and
remand the case to the District Court so that the parties may conduct a round of discovery
directed to: (1) whether State Street Bank received actual notice; and (2) the scope of the
obligations of DTC or Cede and State Street Bank to pass on notice in such a manner that
3
Defendants believe that the February 9, 2000 opinion was incorrectly decided.
11
it reaches the beneficiaries. We believe that a developed factual record, particularly as to
whether SSB received actual notice, as well as on the constructive notice issues, will be
helpful in resolving the legal issues.
The District Court should act promptly to fix a short discovery schedule (e.g., 60
days), and then should expeditiously reexamine the case in light of the discovery and of
this opinion.4 In the event that the case should be appealed again, the Clerk shall refer the
appeal to this panel. The parties shall bear their own costs.
4
The need for expedition in discovery and decision making is underscored by the long
delays that have attended this case. We are conscious that the District Court in Delaware
is heavily burdened with bankruptcy cases (because of its huge bankruptcy docket and
acute shortage of bankruptcy judges) and complex patent cases, which may explain why
the District Court took nearly seventeen months to decide the original motion to dismiss,
and stayed discovery during that time (though such a long delay is troubling). The case
was also delayed during the appeal because it was unclear until we decided Official
Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d
Cir. 2003), that a creditors’ committee could bring this type of action.
12
