YOUNG, District Judge.
The plaintiff Bondholders (the "Bondholders") in this case are suing U.S. Bank National Association ("U.S. Bank"), their indenture trustee, for its actions during the bond's default, and subsequent sale of the mortgage securing the bonds. Am. Compl. ("Compl."), ECF No. 7. The plaintiffs bring seven claims in contract and tort: breach of contract, breach of the implied covenant of good faith and fair dealings, negligence, negligent misrepresentation, breach of fiduciary duty, and violation of Massachusetts General Laws chapter 93A ("Chapter 93A"), sections 9 and 11.
Unlike its prior motion to dismiss, Def.'s Mot. Dismiss Pl.'s Am. Compl. ("Mot. Dismiss"), ECF No. 10, and order thereon, Order, ECF No. 19, U.S. Bank's legal argument for summary judgment is relatively narrow. U.S. Bank argues that all of the Bondholders' claims are barred by issue preclusion and that the complaint is a "thinly-veiled" collateral attack on the Sale Order.
The Bondholders respond by claiming that they were contractually barred from objecting in the Bankruptcy Court, that they were never provided an opportunity to object, and that they were barred from objecting as matter of law. Pls.' Opp'n Def.'s Mot. Summ. J. 3-4, ECF No. 27.
In order to allow the parties to proceed with discovery, this Court denied the motion for summary judgment on January 4, 2013, Order, ECF No. 35. This memorandum explains that decision.
This case was filed in the Massachusetts Superior Court sitting in and for the County of Suffolk on December 15, 2011, and removed to the District of Massachusetts on January 4, 2012. Notice Removal, ECF No. 1. The case was initially assigned to Magistrate Judge Jennifer C. Boal. Notice Case Assignment, ECF No. 3. The parties stipulated that the Bondholders could amend their complaint to include Chapter 93A claims and that U.S. Bank could extend its time to file a response. Stipulation Regarding Pls.' Request Am. Compl. & Def.'s Request Extend Time Filing Resp., ECF No. 6. The Bondholders filed an amended complaint on January 24, 2012. Compl. The parties declined to proceed before the magistrate judge, Notice, ECF No. 9, and U.S. Bank filed a motion to dismiss the amended complaint on February 8, 2012, Mot. Dismiss, ECF No. 10; Mem. Law Supp. Def.'s Mot. Dismiss Am. Compl. ("Def.'s Mem. Mot. Dismiss"), ECF No. 11.
The case was reassigned to this session of the Court on February 15, 2012, and this Court granted an extension of time to reply to the motion to dismiss. See Pls.', Edith Peterson, et al.'s Assented Mot. Extension Time File Resp. Mot. Dismiss, ECF No. 13.
After oral argument on April 10, 2012, the Court denied the motion to dismiss,
Western Massachusetts Lifecare Corporation (the "Debtor" or "WMLC") was a Massachusetts nonprofit corporation established by Baystate Health, Inc. ("Baystate") and Springfield College (the "College") for the purpose of developing, constructing, and operating a continuing care retirement community ("CCRC") named Reeds Landing on the College's campus. Pls.' Resp. Def., U.S. Bank Nat'l Ass'n's Local Rule 56.1 Statement Undisputed Material Facts & Pls.' Statement Concise Additional Material Facts ("Pls.' Facts") ¶ 1, ECF No. 28. The Debtor built Reeds Landing on 23.2 acres of land that it leased from the College according to the terms of a Ground Lease dated May 22, 1990, and amended over the ensuing years (as amended, the "Ground Lease").
In 2009, the Reeds Landing retirement community included independent living units, assisted living units, a bed nursing care facility, and common facilities for residents. Id. ¶ 3. The independent living units consisted of 110 apartment units and ten semi-detached, cottage-style cluster homes. Id. ¶ 4. Sixteen of the assisted living units were specially designed to care for the needs of memory-impaired adults.
The parties agree that the Ground Lease included a provision that Reeds Landing could not be used for any purpose other than health care or related services without the permission of the College. Id. ¶ 9. U.S. Bank characterizes this provision as restricting the options for sale of Reeds Landing, but the Bondholders insist that
In 2006, in order to refinance earlier bonds and to pay for the construction and development of Reeds Landing, the Massachusetts Development Finance Agency ("MassDevelopment") issued the tax-exempt bonds at issue in this case (the "Bonds") in the aggregate principal amount of $29,115,000. Id. ¶ 10. MassDevelopment is the Commonwealth's finance and development authority. Id. ¶ 10. According to its website, it "works with private- and public-sector clients to stimulate economic growth by eliminating blight, preparing key sites for development, creating jobs, and increasing the state's housing supply." Id. MassDevelopment issued the Bonds in accordance with a Loan and Trust Agreement dated December 1, 2006 (the "Agreement") between the Debtor, MassDevelopment, and U.S. Bank, not individually but as indenture trustee. Id. ¶ 12. MassDevelopment then loaned the proceeds of the Bonds to the Debtor for the purpose of refinancing and improving the Reeds Landing project. Id. ¶ 13. The Agreement makes clear that MassDevelopment was not obligated to repay the Bonds. Id. ¶ 14. Instead, the obligation to repay the Bonds fell solely on the Debtor, which agreed to use the revenues of Reeds Landing to make the required payments to U.S. Bank, as trustee for the bondholders. Id. ¶ 15. In addition, U.S. Bank received a lien (for the benefit of the bondholders) on the Debtor's interest in the leasehold estate created by the Ground Lease. Id. ¶ 16. The Debtor also granted U.S. Bank a lien on the "Gross Revenues" of Reeds Landing, which included all receipts, revenues, payments, and other moneys received by or on behalf of the Debtor from any source, such as entrance fees and monthly service fees, and assigned to U.S. Bank its interests in the agreements it signed with its residents. Id. ¶ 18. The Bondholders also note that the offering statement states that the bondholders have a security interest in the Debtor's personal property, equipment, and fixtures. Id. at 21 ¶ 2.
Essentially all subsequent material facts alleged by U.S. Bank are disputed. For example, the Bondholders agree that at some point Baystate and the College agreed to provide bridge loans to the Debtor in the maximum aggregate principal amount of $1,000,000 (collectively, the "Bridge Loan"), but dispute whether the Bridge Loan was to preserve liquidity and prevent immediate shutdown. Id. ¶ 29. The Bondholders admit that U.S. Bank agreed that the $1,000,000 Bridge Loan would be senior to U.S. Bank's lien, but do not admit that the subordination was at the written direction of the Majority Bondholders. Id. ¶ 30. U.S. Bank also agreed to forebear from exercising any remedies under the Agreement and the Bonds for a limited period of time, again to allow time for an orderly sale of the Debtor's assets.
U.S. Bank disclosed these actions to its bondholders, including the plaintiff Bondholders, but the Bondholders argue that these disclosures were misleading. Id.
Id. ¶ 35. The Bondholders deny the accuracy and completeness of the summary of such notice. Id. The Bondholders claim that this notice failed to advise Bondholders that they could file objections with the Bankruptcy Court if they were dissatisfied. Id. at 28 ¶ 16. Moreover, when their representative, Thomas Bartholomew,
The Debtor filed a Chapter 11 bankruptcy petition on May 4, 2009. Id. ¶ 45. On May 19, 2009, the Bankruptcy Court issued an order that, among other things, established deadlines and related procedures for competing bids for the assets of Reeds Landing and for any objections to the proposed sale. Id. ¶ 46. The Bondholders note that this order was entered after a hearing without any evidence taken, and was not served upon any bondholders. Id. Bankruptcy Judge Boroff made the following findings, among others, in the Sales Procedures Order:
See Sales Procedures Order ¶¶ D, J at 2-3, 4 (emphases added). Again, the Bondholders do not dispute the terms of the order, but note that they did not receive notice. Pls.' Facts ¶ 47. The Bankruptcy Court then set a deadline of July 21, 2009, for "a party wishing to submit a higher and better offer for the Assets," and scheduled an auction and Sale Hearing for
The Bankruptcy Court found that closing Reeds Landing would significantly depress its value and not be in the best interests of the Debtor, its estate, residents, or creditors. Id. ¶ 50. The Bondholders agree that Bankruptcy Judge Boroff made these findings, but note that they were made on representations of counsel without receiving any evidence or alternatives to sale to Loomis
The subsequent notice to bondholders apprised them of the sale, the proposed bid by Loomis, and that the bankruptcy would have an adverse effect on their Bonds. Id. ¶ 51. Bondholders with questions were advised to contact U.S. Bank or its counsel. Id. Another notice from U.S. Bank a few weeks later on June 9, 2009, notified bondholders that the proposed sale was subject to Bankruptcy Court approval and intended to maximize recoveries for all creditors. Id. ¶ 56. The Auction and Sale Hearing took place as scheduled on July 28, 2009. Id. ¶ 59. The sale process resulted in qualified offers from Five Star Quality Care, Inc. ("Five Star") and Loomis. Id. After further bidding by Loomis and Five Star at the auction, Loomis submitted a final offer for the Project that included $3,550,000 in cash consideration, and Five Star submitted a final bid that included $3,301,000 in cash consideration. Id. ¶ 60. U.S. Bank claims that it had written direction from the Majority Bondholders to consent to the final offer submitted by Loomis. Id. ¶ 61. Judge Boroff approved the sale of the assets of Reeds Landing to Loomis on August 3, 2009. Id. ¶ 62.
The Bondholders submit several affidavits and the transcript of the bankruptcy hearings to support their disputed version of the facts.
The Bondholders submitted an affidavit by Alan C. Plush, a Member of the Appraisal Institute ("MAI") and an experienced appraiser of health care and senior housing. Aff. Alan C. Plush, MAI, ECF No. 30. Plush purports to have valued over 1000 CCRCs. Id. ¶ 2. In 2009, he was retained by Peoples Bank, in Massachusetts, to provide an appraisal of the CCRC known as Reeds Landing. Id. ¶ 3. As part of his contract, he agreed to treat his opinion of value and other financial information as confidential, and Peoples Bank has refused to release him from this confidentiality obligation. Id. ¶¶ 4-5.
Although he cannot at this time disclose the valuation provided to Peoples Bank, Plush believes the information necessary properly to prepare an appraisal is in Ziegler's "Sale Book," which was provided to potential purchasers in connection with the auction. Id. ¶¶ 5-6. U.S. Bank has not produced that book despite requests to do so. Id. ¶ 7. Plush states that he cannot
In essence, Plush states that the auction of Reeds Landing was not the best way to realize full market value. Id. ¶ 20. A better plan would have been to bring in competent management and to stabilize and improve operations over time, which would improve the value of Reeds Landing, and correspondingly, the value of the Bonds. Id. ¶¶ 21-22. He claims that another more preferable alternative would have been for U.S. Bank to negotiate with representatives of Reeds Landing residents to recover a larger percentage of any sale. Id. ¶ 25. U.S. Bank had tremendous leverage because it was in a position to foreclose, which would have been disastrous to the residents inasmuch as their claims would have thereby been extinguished. Id. ¶ 26. The residents, therefore, had a strong incentive to negotiate a deal permitting U.S. Bank to recover on behalf of Bondholders a larger portion of any sale. Id.
Based upon the foregoing and a statement summarizing the known assets at Reeds Landing, Plush claims, to a reasonable degree of professional certainty, that had U.S. Bank asserted its liens, it would have recovered significantly more than it had from the auction sale to Loomis. Id. ¶ 28. He even speculates that had U.S. Bank enforced its liens, U.S. Bank would have recovered the Bondholders entire investment, most probably in continuing payments over time in accordance with the prior arrangement with the Debtor. Id. ¶ 29. Plush further alleges that, in his experience, it is unusual for someone in a first lienhold position (like U.S. Bank) to subordinate its obligations to the residents. Id. ¶ 30. Such an odd arrangement would likely deter potential purchasers from bidding in order to avoid entanglement in predictable lawsuits such as this one, which would arise from dissatisfied bondholders. Id.
Thomas J. Bartholomew is an investor who since 1981 has been actively involved in the municipal bond business serving in various capacities, including as an underwriter, fiscal advisor, and retail portfolio manager. Aff. Thomas J. Bartholomew ("Bartholomew Aff.") ¶ 1, ECF No. 29. In 2006, Bartholomew recommended the Reeds Landing Bonds to a number of his clients, including all of the Bondholders in this action. Id. ¶ 2. None of the Bondholders are institutional investors. Id. ¶ 4. Each bondholder is either an individual investor investing his or her own money or a trustee of a private family trust. Id.
Shortly after December 31, 2008, Bartholomew received a notice informing bondholders of the deteriorating financial situation of the Debtor, and advising them to contact U.S. Bank if they wished actively to manage the sales process. Id. ¶¶ 5-6. Bartholomew instructed his attorney, Michael Angelini ("Angelini"), to inquire of U.S. Bank about the role of bondholders interested in joining the Majority Bondholders in managing the sale process. Id. ¶ 7. In reply, U.S. Bank provided Bartholomew a contract for bondholders who wished to participate, which required that the bondholders grant indemnity to U.S. Bank for any claims "`arising out of, or related to the taking, by [U.S. Bank] of action, in accordance with a Direction' from the Bondholders Committee." Id. Bartholomew and Angelini disliked U.S. Bank's terms requiring that the bondholder
In response to the proposed sale, Bartholomew contacted counsel for U.S. Bank and a representative of the Majority Bondholder, Mary Jane Minier of VanKampen Merrit Morgan Stanley, who allegedly owned approximately seventy-two percent of the outstanding bonds. Id. ¶¶ 9, 12. Bartholomew advised Minier and the U.S. Bank attorneys that he had spoken "at great length with other CCRC operators who indicated their reluctance to offer a bid ... in the form required in the offering, because they had never been asked to treat the first lienholder in the fashion outlined." Id. ¶ 14; see also id., Ex. B, Email, Mass DFA Reed's Landing, June 8, 2009, ECF No. 29-2.
Bartholomew also includes an email he procured stating that Springfield College would not offer to another potential client (Covington Investments) the same terms being offered to Loomis. Bartholomew Aff. ¶ 20; see also id., Ex C, Email, FW: Western Massachusetts Lifecare Corporation, d/b/a/ Reeds Landing-Covington Investments, LLC Bld, July 23, 2009, ECF No. 29-3. Bartholomew concluded that Loomis was receiving favored treatment unavailable to other bidders. Id. ¶ 21.
Although Bartholomew knew that bondholders and non-attorneys could not object at the bankruptcy hearing and auction, he attended the hearing to express concerns; he was not permitted to speak. Id. ¶ 22.
The Bondholders also point to the transcript of the bankruptcy court hearing to show that U.S. Bank breached its fiduciary duty.
In a hearing on May 6, 2009, Bankruptcy Judge Boroff heard a number of motions, mostly dealing with keeping Reeds Landing running as it became insolvent. See Ex. 2., Tr. Hr'g, May 6, 2009, ECF No. 32 (listing motions in front of court). Different comments from the hearing alternately support both the idea that the sale was potentially unfair to the bondholders and the claim that Reeds Landing was so insolvent that a hasty resolution was necessary. The most important and contentious motion was for using cash collateral to pay operating expenses and wages. See id. at 16. The Debtor argued that, although all its cash was encumbered by liens to bridge lenders and bondholders, the value of the business would decline rapidly if it were forced to cease operations. Id. The Debtor's attorney acknowledged that bondholders would take "a fairly large hit here" while providing for the residents and argued that this was fair and reasonable under the circumstances. Id. at 20.
In reviewing the order, the Bankruptcy Judge specifically included the terms "based on the representations of counsel" within the final order on the cash collateral, noting that he did not have an opportunity to listen to testimony. Id. at 22. When asked, the U.S. Bank representative pointed out that the bondholders were owed more than $28 million with a senior position on the assets. Id. at 24. U.S. Bank noted that the bondholders had been offered $2,750,000 (less than ten percent), while the residents were owed approximately $10 million to $14 million and would receive the full amount. Id. at 25. As a result, U.S. Bank argued that the Bankruptcy Court ought approve the provision, including an unusually long period of time
The Debtor noted that it would be difficult to provide notice to the individual bondholders, and the court agreed that notice to the indenture trustee (U.S. Bank) would be adequate. Id. at 37. The court required the Debtor to serve notice on all unsecured creditors. Id.
The final hearing approving the sale and the cash collateral order occurred on July 28, 2009. Ex. 3, Tr. Hearing, July 28, 2009, ECF No. 33. The Debtor, two "qualified" bidders (Loomis and Five Star), creditors Springfield College, Baystate Health, and U.S. Bank, and the Committee of Unsecured Creditors were represented before the Bankruptcy Court.
In response, the Unsecured Creditors Committee (i.e., the residents) stated that they preferred the Loomis bid and that the residents had "become very comfortable over the last several months as Loomis has been in and out of the facility on numerous occasions[,] and ... residents have a great deal of confidence in their ability to continue the operations ... at the high level of care that they're used to ... from Reeds Landing." Id. at 26.
In a brief statement, U.S. Bank counsel Bleck stated that it were not "thrilled" with the auction, but supported the Loomis offer. Id. at 27. Bleck noted that U.S. Bank's consent to the sale was "based upon the representations the speed and necessary [sic] to close this transaction, given the current financial nature of the company." Id. In closing, he stated that U.S. Bank "understand[s]" that Loomis had the cash and financing commitment needed to close the sale. Id.
This Court may exercise diversity jurisdiction over the parties because they are "citizens of different states," and the amount in controversy exceeds $75,000. See 28 U.S.C. §§ 1332, 1348. U.S. Bank National Association is a national bank, with its corporate headquarters in Cincinnati, Ohio. Compl. ¶ 27. By statute, national banks
The Bondholders claim damages of not less than $3,628,000, not including treble damages under Massachusetts General Laws chapter 93A.
Summary judgment is appropriate where the "pleadings, depositions, answers to interrogatories, ... admissions on file,... [and] affidavits" show "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). When determining a motion for summary judgment, the Court must view the facts and draw all reasonable inferences in favor of the nonmoving party. Pineda v. Toomey, 533 F.3d 50, 53 (1st Cir.2008). An issue of fact is genuine if there exists a sufficient evidentiary basis on which the trier of fact could find for the non-moving party. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is "material" if it will affect the outcome of the case under the applicable law. Id. Save as to facts admitted by both parties, courts must disregard all evidence — even if unopposed — which the jury is free to reject, i.e., all evidence upon which a party bears the burden of proof. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 151, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000).
U.S. Bank's central argument is that the Bondholder's entire suit is barred
Enica v. Principi, 544 F.3d 328, 337 (1st Cir.2008). The purpose of issue preclusion doctrine is to prevent a party from relitigating an issue where there has been full and fair litigation. In re Kane, 254 F.3d 325, 329 (1st Cir.2001). Even where the core requirements of issue preclusion are met, an exception may apply when a change in the legal context intervenes. Bobby, 556 U.S. at 834, 129 S.Ct. 2145. The party claiming preclusion has the burden of showing that the prior decision "involved actual resolution of the issues." Wade v. Brady, 460 F.Supp.2d 226, 242 (D.Mass.2006) (Gertner, J.) (citing 18 Wright, Miller & Cooper § 4420).
The First Circuit, like most courts, generally follows the approach in the Restatement (Second) of Judgments. See, e.g., Kane, 254 F.3d at 328; Troy v. Bay State Computer Grp., Inc., 141 F.3d 378, 383 (1st Cir.1998) (citing Restatement (Second) Judgments Section 28 as a good guide for the "numerous exceptions to collateral estoppel"). In particular, the Restatement offers a number of reasons why there might be a "clear and convincing need for a new determination" of an issue, such as the potential adverse impact on the public interest, the issue was not sufficiently foreseeable at the time of the initial action, or the precluded party "did not have an adequate opportunity or incentive to obtain a full and fair adjudication in the initial action."
"Defining the issue precluded... [is] one of the most difficult tasks" in issue preclusion. In re Relafen Antitrust Litig., 286 F.Supp.2d 56, 65 (D.Mass.2003). After pointing to the Bankruptcy Court's Sale Order, U.S. Bank identifies the "issue underlying each of the plaintiffs' claims as whether the sale of Reeds Landing was in the plaintiff's best financial interests." U.S. Bank. Mem. Supp. Summ. J. J. 13. For issue preclusion to apply, the issue raised in this suit must be "identical in all respects to that decided in the first proceeding." Enica, 544 F.3d at 337 (quoting Faigin v. Kelly, 184 F.3d 67, 78 (1st Cir. 1999)) (internal quotation mark omitted). The Bondholders have seven claims in contract and tort: breach of contract, breach of implied covenant of good faith and fair dealings, negligence, negligent misrepresentation, breach of fiduciary duty, and Massachusetts General Law chapter 93A, sections 9 and 11. Compl. 2. While the issue of "best financial interests" seems to align with those of breach of implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty, the Court is skeptical that this also precludes actions for breach of contract and Chapter 93A. Taking the facts and inferences in favor of the Bondholders, it is certainly possible that the sale of Reeds Landing was the best deal available, but that U.S. Bank otherwise misled the Bondholders and breached their contract with it. At a minimum, the breach of contract and Chapter 93A claims are not here subject to issue preclusion.
The key factor here is whether the issue was actually litigated. To be "actually litigated," the issue must involve "something more than having an issue `resolved' as a result of some determinative legal doctrine that short-circuits the merits." Kane, 254 F.3d at 329. The issue must have "been properly raised, submitted for determination, and necessarily determined by the earlier decision." Wade, 460 F.Supp.2d at 240. That is not to say that an issue actually litigated must be explicit — the court may determine it was actually litigated if "logically or practically, a necessary component of the decision [was] reached in the prior litigation." Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 31 (1st Cir.1994) (citing Dennis v. R.I. Hosp. Trust Nat'l Bank, 744 F.2d 893, 899 (1st Cir.1984)); accord Stoehr v. Mohamed, 244 F.3d 206, 209 (1st Cir.2001) (holding that the issue of fraud was precluded because the previous jury necessarily considered fraud as the basis for Chapter 93A liability).
An issue has not been "actually litigated" when the matter is admitted without controversy. See Wade, 460 F.Supp.2d at 240-41; Relafen Antitrust
Here, the Bankruptcy Court took no evidence on the fairness of the sale, but relied on the agreement of all parties to the bankruptcy. The Bankruptcy Court explicitly required the parties to note that the cash collateral order was based on the representations of counsel. Ex. 2, Tr. Hr'g 22. The Bondholders did not receive notice of the sale and their representative was not permitted to object at the hearing. See Pls.' Facts ¶¶ 46-47; Bartholomew Aff. ¶ 22. More importantly, U.S. Bank summarily endorsed the Sale Order, with counsel literally speaking just a few sentences. Ex. 3, Tr. Hr'g 27. Although counsel for U.S. Bank briefly mentioned the shortcomings of the sale, id. ("[O]bviously, we're not thrilled with the results of the auction."), it did not dispute any of the facts related to the sale. Counsel stated, "[w]e also understand based upon the representations the speed and necessary [sic] to close this transaction, given the current financial nature of the company." Id. Not only did U.S. Bank consent to the sale without evidence on the record, but it is not clear from the transcript whether its decision was based on the representations of the Debtor's counsel or on actual documentation. See id.
Taking the facts in the light most favorable to the Bondholders, U.S. Bank's consent took place in the context of a sale by a Debtor who had a strong incentive to sell to a nonprofit and apparently had picked a suitable nonprofit for the sale and the obvious (and reasonable) pressures on the Bankruptcy Court to approve a sale that provided for the residents of Reeds Landing, even at the expense of the secured creditors. In theory, the Bondholders' indenture trustee held all the cards — they had a lien on the Debtor's interest in the leasehold estate, Pls.' Facts ¶ 16, a lien on gross revenues, id. ¶ 18, a security interest in personal property and fixtures, id. 21, ¶ 2, and rights to Reeds Landing's revenues, id. ¶ 15.
It may be that U.S. Bank was duly diligent, knew the details of Reeds Landing's financial statements, consulted the auction bidders, and had carefully concluded that the proposed sale was the best alternative to recover for bondholders. Such a conclusion, however, is not required by the undisputed facts or the Bankruptcy Court hearing transcripts.
Although not central to the analysis, it seems unwise to ignore the fact that the Bondholders likely could not have raised their claims in the bankruptcy proceeding.
Massachusetts law governing trusts adds just such an additional wrinkle. In Chamberlain v. James, 294 Mass. 1, 200 N.E. 361 (1936), the Supreme Judicial Court addressed squarely the relationship between bondholders and an indenture trustee holding a mortgage for the bondholders. Id. at 7, 200 N.E. 361. In Chamberlain, the court noted that the bondholders were not mortgagees, and not authorized as agents, or in any other capacity, to act for the trustee. Id. The court concluded that "the bondholders were required to enforce their rights through the intervention of the trustee." Id. In First National Fire Insurance Co. v. Salisbury, 130 Mass. 303 (1880), the Supreme Judicial Court similarly found that bondholders had "no means of enforcing their rights in the mortgaged property, except through the action of the [indenture trustee defendants]." Id. at 311. The court held that where the indenture trustee failed faithfully to perform his fiduciary duties, the plaintiff bondholders were entitled to bring suit. Id.
These cases, although hardly recent, do suggest that the plaintiff Bondholders lacked legal rights to enforce the terms of the mortgage held by the Trustee. The terms of their Agreement seem to reinforce this point, as the Bondholders are precluded from enforcing the Agreement unless, among other things, there is a default and the Trustee has failed to exercise his powers in spite of a request to institute proceedings by a majority of the Bondholders. Ex. A-1, Agreement § 709, ECF No. 12. The Agreement also explicitly gives the Trustee the authority to file proofs of claim in any bankruptcy proceeding, including to vote for the bondholders of all bonds "in the manner designated by the Majority of the Bondholders." Agreement § 714. Further, the July 10, 2009, notice to Bondholders states that "individual Bondholders do not need to file proofs of claim in the Bankruptcy Proceedings to the extent a Bondholder's claims `relate to [payments from the Bonds].'" Def.'s Mem. Supp. Mot. Dismiss, Ex. E, Notice Bondholders Regarding Bar Date File Claims 2, ECF No. 11-8.
To further this inquiry, this Court is persuaded by the reasoning in In re Refco, 505 F.3d 109 (2d Cir.2007). There, the Second Circuit ruled that investors lacked standing to appear before the bankruptcy court because they were not a party in interest within the definition of the Bankruptcy Code. Id. at 119. The court noted that a bankruptcy judge's role is "to determine whether a settlement is in the best interests of the estate, not to ensure that the creditors' representatives are honoring their fiduciary duties." Id. Although Refco was a bankruptcy appeal, the court, in dicta, acknowledged that the bondholder creditors could file a separate suit alleging breach of fiduciary duty if they failed successfully to intervene in the bankruptcy. Id.
While Refco did not involve a trustee-bondholder relationship, but rather indirect interests in equity investments, the Second Circuit's decision appears to hinge on the control exercised by the corporate leadership (instead of investors). Id. at 117. Just as in Refco, the bondholders here entrusted their money to the indenture trustee, U.S. Bank, and it is doubtful whether they could have successfully "assert[ed] a claim" on behalf of the Trust, or be "permitted to negotiate a settlement." Id.; see Chamberlain, 294 Mass. at 7, 200 N.E. 361.
To date, courts in the First Circuit have rarely cited Refco. In Massachusetts, just
U.S. Bank raises the policy argument that by applying Refco's reasoning in Massachusetts, this Court invites a flood of meritless litigation attacking indenture trustees. This imponderable, however, is not enough to reject an otherwise logical and necessary legal conclusion. Notably, U.S. Bank does not identify such a crisis in the Second Circuit where Refco has been good law for several years.
As the Second Circuit cautioned in Refco, the "[b]ankruptcy court is a forum where creditors and debtors can settle their disputes with each other. Any internal dispute between a creditor and that creditor's investors belongs elsewhere." 505 F.3d at 118 (emphasis omitted).
This case presents fascinating legal and normative questions about bankruptcy, fiduciary duties, and bond offerings. Under the Bondholders' version of facts, the indenture trustee U.S. Bank violated its fiduciary duty by favoring unsecured creditors (the residents of Reeds Landing) over its own bondholders. The Bondholders allege they never had a chance to dispute the sale terms, which was a "sweetheart deal" for Loomis, and, indeed, ought never have had to engage in such dispute given U.S. Bank's duty to them. Taking the facts in the light most favorable to the Bondholders, the issues that concern U.S. Bank cannot, upon this record, preclude the Bondholders' claim. The consent of U.S. Bank to the sale and perfunctory manner in which the Debtor's proposed actions were approved meant that the specific issue whether the sale was in the best interest of the Bondholders was not actually litigated. See Wade, 460 F.Supp.2d at 240. Additionally, where the party seeking to dispute the sale had no right to be a party in interest, the issue cannot have been actually litigated on the merits.
Whether or not the Bondholders' allegations are true, the Court DENIED the motion for summary judgment, ECF No. 21, because the issues presented in this complaint were not "actually litigated" in the bankruptcy proceeding, and the parties have presented an abundance of disputed material facts. At trial, the parties will have the opportunity to present evidence, a critical step that the parties omitted in the bankruptcy hearings and that is necessary to determine whether U.S. Bank honored its duties as indenture trustee.
Restatement (Second) of Judgments § 28 cmt. g.
