114 F.Supp.2d 877 (W.D.Mo. 2000), 95-1003-CV-W-6, Premier Bank v. Tierney

Docket Nº95-1003-CV-W-6.
Citation114 F.Supp.2d 877
Party NamePREMIER BANK, et al., Plaintiffs, v. Thomas W. TIERNEY, et al., Defendants.
Case DateSeptember 27, 2000
CourtUnited States District Courts, 8th Circuit, Western District of Missouri

Page 877

114 F.Supp.2d 877 (W.D.Mo. 2000)

PREMIER BANK, et al., Plaintiffs,

v.

Thomas W. TIERNEY, et al., Defendants.

No. 95-1003-CV-W-6.

United States District Court, W.D. Missouri, Western Division.

Sept. 27, 2000

Page 878

[Copyrighted Material Omitted]

Page 879

Michael P. Healy, The Healy Law Firm, LLC, Kansas City, MO, for Premier Bank.

L.J. Buckner, Jr., Lathrop & Gage, Kansas City, MO, for Thomas W Tierney.

W. Perry Brandt, Kurt D. Williams, Berkowitz, Feldmiller, Stanton, Brandt, Williams, & Stueve, LLP, Kansas City, MO, George E. Feldmiller, Berkowitz, Feldmiller, Stanton, Brandt, Williams & Stueve, Kansas City, MO, for KMPG Peat Marwick.

Brian L. Warr, Welch, Martin, Albano & Manners, P.C., Independence, MO, for Wright, Herfordt & Sanders.

Craig T. Kenworthy, Swanson Midgley, LLC, Kansas City, MO, Robert R. Barton, Evans & Dixon, L.L.C., Kansas City, MO, for Harold E. Card, Carl E. Wright, Raymond Jallow.

Donald E. Howell, Jr., Florissant, MO, for Ira W Palmer.

Dale A. Kimball, Robert S. Clark, Kimball, Parr, Waddoups, Brown & Gee, Salt Lake City, UT, for John P Redd.

Benjamin F. Mann, Blackwell Sanders Peper Martin, LLP, Kansas City, MO, for National Union Fire Insurance Company of Pittsburgh, PA.

MEMORANDUM AND ORDER

SACHS, District Judge.

Premier Bank, as trustee for the purchasers of industrial revenue bonds issued in 1983 for the construction of four ethanol plants in New Iberia Parish, Louisiana, filed suit against directors, accountants, and attorneys for a group of companies known as the Midwestern Companies. The ethanol plants did not generate sufficient revenues to pay the bonds, and Midwestern went into bankruptcy in 1984. Except for two defaulting individual defendants, the post-bankruptcy litigation was dismissed as untimely, a ruling that was affirmed on appeal. See Premier Bank v. Tierney, 155 F.3d 1045 (8th Cir. 1998). One of the defaulters settled; the other, Dr. Raymond Jallow, is still the target of litigation.

The Bank seeks a default judgment for over $11 million, plus interest. A two-day hearing was scheduled, but complications arose as to the issues to be heard. Attempts to narrow the issues have been made by motion, briefs and argument; meanwhile, Dr. Jallow seeks summary judgment on two legal grounds allegedly not barred by the default: (1) the Bank has no standing to pursue a negligence claim against him, as a former director, and any attempt to substitute the bondholders would allow him to successfully raise the issue of the statute of limitations; and (2) Dr. Jallow joined the board of directors almost contemporaneously with the bond sales, and subsequent to any misrepresentations regarding the financial condition of the companies, so any claim against him is necessarily based on a novel theory that a presumably knowledgeable director has a legal duty in Missouri to become a "whistle-blower" on behalf of creditors. Since the bond receipts had not been distributed, the Bank contends that they could have been recovered if prior misrepresentations regarding Midwestern's financial condition had been disclosed by a company "insider." 1

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I have concluded that both defenses survive the default under the particular circumstances of this case and are well taken. Therefore, Dr. Jallow will join the other co-defendants in escaping major recovery by the Bank and the bondholder-creditors. It is possible, however, that Dr. Jallow remains subject to sanctions for his more recent misconduct in falsely denying he was served with process, and the court will retain jurisdiction to resolve that question. 2

I. STANDING

Generally, a default by a defendant is fatal to claims of nonliability, but there are a fair number of well-settled exceptions, one being where the pleadings "disclose on their face a fact that would defeat the (plaintiff's) claim." Nishimatsu Constr. Co. v. Houston National Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). In Nishimatsu, a note attached to the third-party complaint showed, contrary to the allegations, that the individual third-party defendant was not individually liable, but had signed as agent. See id. at 1206-07. Also fatal to a claim is where a necessary allegation is "contrary to uncontroverted material in the file of the case." Trans World Airlines, Inc. v. Hughes, 308 F.Supp. 679, 683 (S.D.N.Y.1969), modified on other grounds, 449 F.2d 51 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d 577 (1973). More fundamentally, although the default leaves Jallow unable to controvert any "well pleaded allegations" against him, see Hughes, 449 F.2d at 73-74, it neither admits any legal arguments made in the pleadings nor requires the court to award a judgment for legally unsound claims. See Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994); Aldabe v. Aldabe, 616 F.2d 1089, 1092-93 (9th Cir. 1980); 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure, Civil 3d § 2688, at 63 (1998) ("Even after default, however, it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law.").

A. The Claims Brought on the Bondholders' Behalf

The claims against Dr. Jallow lack merit because the Bank has no standing to bring them--an issue of law that survives the default. 3 A trustee's powers derive from the instruments creating the trust relationship. See, e.g., Navarro Savings Ass'n v. Lee, 446 U.S. 458, 464-65, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980); Continental Bank v. Caton, No. 88-1611-C, 1990 WL 129452, at *6 (D.Kan. Aug.6, 1990); Citibank v. Miller & Schroeder Fin., Inc., 168 Ariz. 178, 812 P.2d 996, 1000 (App.1990) ("To determine whether United Bank has standing and whether this case represents a justiciable controversy, we

Page 881

turn to the indenture agreement."). "Unlike the ordinary trustee, who has historic common-law duties imposed beyond those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agreement." Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir. 1985), quoted in Continental, 1990 WL 129452, at *6. In the present case, the Bank alleged (1) that by reason of its Leasehold Mortgage and Indenture of Trust, it had authority "to pursue all claims on behalf of the bondholders, including the claims herein alleged," and (2) that holders of the bonds and coupons had assigned to the Bank the right to institute any suit to enforce the Mortgage or Indenture, including the present claims. Amended Complaint, ¶ ¶ 5, 50.

The Indenture and Mortgage simply do not bear the weight placed upon them. 4 Specifically, they permit the Bank to pursue the bondholders' claims to enforce the bonds themselves, or to enforce the mortgage lien on the ethanol projects, but they nowhere permit the trustee to pursue the bondholders' freestanding tort claims against Midwestern's directors.

--Section 909 of the Indenture (Plaintiff's Ex. 38), "Remedies Vested in Trustee" provides:

All rights of action ... under this Mortgage and Indenture of Trust or under any of the bonds or coupons may be enforced by the Trustee without the possession of any of the Bonds or coupons or the production thereof in any trial or other proceedings relating thereto[,] and any such suit or proceeding instituted by the Trustee shall be brought in its name as Trustee without the necessity of joining as plaintiffs or defendants any holders of the Bonds, and any recovery of judgment shall ... be for the equal benefit of the holders of the outstanding Bonds and coupons.

(emphases added). The language speaks only of legal actions brought to enforce the Indenture, Mortgage, and bonds or coupons. No authority is conferred to pursue separate tort actions at all, much less against a party such as Dr. Jallow--a party distinct from the obligor under the bonds. See Continental, 1990 WL 129452, at *4-*7 (so construing similar trust indenture language and holding that trustee lacked standing to assert claims under the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5).

--Section 904 of the Indenture, "Other Remedies," provides that

No remedy by the terms of this Leasehold Mortgage and Indenture of Trust conferred upon or reserved to the Trustee (or to the bondholders) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the bondholders hereunder or now or hereafter existing at law or in equity or by statute.

In other words, no remedy conferred by the documents excludes any other remedy that might arise from the documents or elsewhere under the law. The Indenture does not state, however, that the trustee shall have remedies other than those already given to it by the documents and the law. The trustee's power to assert such claims must arise from the documents creating the trust relationship, as explained above. See National City Bank v. Coopers & Lybrand, 409 N.W.2d 862, 866 (Minn.Ct.App.1987). The law presumes that the bondholders' claims rest with the bondholders. The Indenture overcomes this presumption, but only as to those rights of the bondholders that arise from the bonds, the Indenture, or the Mortgage. The non-exclusion of other remedies already belonging to the trustee does not create an assignment of additional remedies

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belonging to the bondholders. A right declared non-exclusive is not thereby made...

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10 practice notes
  • United States v. New-Form Manufacturing Company, Ltd., 063003 uscit, 01-00034
    • United States
    • June 30, 2003
    ...arguments made in the pleadings, nor requires the entry of judgment on a legally unsound claim. See, e.g., Premier Bank v. Tierney, 114 F.Supp. 2d 877, 880 (W.D. Mo. 2000); In re Indus. Diamonds Antitrust Litig., 119 F.Supp. 2d 418 (S.D.N.Y. 2000). Thus, even after default, it must be deter......
  • 146 S.W.3d 610 (Tenn.App. 2004), M2002-02771-COA-R3, Sears v. Gregory
    • United States
    • Tennessee Court of Appeals of Tennessee
    • January 23, 2004
    ...(Second) of Torts § 551 (1977)). [3] In re Agribiotech, Inc., 291 F.Supp.2d 1186, 1190 (D.Nev.2003); Premier Bank v. Tierney, 114 F.Supp.2d 877, 886 (W.D.Mo.2000); Weisblatt v. Minnesota Mut. Life Ins. Co., 4 F.Supp.2d 371, 380 (E.D.Pa.1998); Masso v. United Parcel Serv. of America, Inc., 8......
  • 277 F.Supp.2d 1313 (CIT. 2003), 01-00034, United States v. New-Form Mfg. Co., Ltd.
    • United States
    • Federal Cases Court of International Trade
    • June 30, 2003
    ...arguments made in the pleadings, nor requires the entry of judgment on a legally unsound claim. See, e.g., Premier Bank v. Tierney, 114 F.Supp.2d 877, 880 (W.D.Mo.2000); In re Indus. Diamonds Antitrust Litig., 119 F.Supp.2d 418 (S.D.N.Y.2000). Thus, even after default, it must be determined......
  • 181 S.W.3d 99 (Mo.App. E.D. 2005), ED 84884, Drummond Co. v. St. Louis Coke & Foundry Supply Co.
    • United States
    • Missouri Court of Appeals of Missouri
    • October 18, 2005
    ...274 S.W. 478, 480 (Mo.App.1925) (quoting Utley v. Hill, 155 Mo. 232, 55 S.W. 1091, 1098 (1900). See also Premier Bank v. Tierney, 114 F.Supp.2d 877, 886-87 (W.D.Mo.2000) (applying Missouri law); Stone v. Rottman, 183 Mo. 552, 82 S.W. 76, 81-82 (1904); Union National Bank v. Hill, 148 Mo. 38......
  • Request a trial to view additional results
10 cases
  • United States v. New-Form Manufacturing Company, Ltd., 063003 uscit, 01-00034
    • United States
    • June 30, 2003
    ...arguments made in the pleadings, nor requires the entry of judgment on a legally unsound claim. See, e.g., Premier Bank v. Tierney, 114 F.Supp. 2d 877, 880 (W.D. Mo. 2000); In re Indus. Diamonds Antitrust Litig., 119 F.Supp. 2d 418 (S.D.N.Y. 2000). Thus, even after default, it must be deter......
  • 146 S.W.3d 610 (Tenn.App. 2004), M2002-02771-COA-R3, Sears v. Gregory
    • United States
    • Tennessee Court of Appeals of Tennessee
    • January 23, 2004
    ...(Second) of Torts § 551 (1977)). [3] In re Agribiotech, Inc., 291 F.Supp.2d 1186, 1190 (D.Nev.2003); Premier Bank v. Tierney, 114 F.Supp.2d 877, 886 (W.D.Mo.2000); Weisblatt v. Minnesota Mut. Life Ins. Co., 4 F.Supp.2d 371, 380 (E.D.Pa.1998); Masso v. United Parcel Serv. of America, Inc., 8......
  • 277 F.Supp.2d 1313 (CIT. 2003), 01-00034, United States v. New-Form Mfg. Co., Ltd.
    • United States
    • Federal Cases Court of International Trade
    • June 30, 2003
    ...arguments made in the pleadings, nor requires the entry of judgment on a legally unsound claim. See, e.g., Premier Bank v. Tierney, 114 F.Supp.2d 877, 880 (W.D.Mo.2000); In re Indus. Diamonds Antitrust Litig., 119 F.Supp.2d 418 (S.D.N.Y.2000). Thus, even after default, it must be determined......
  • 181 S.W.3d 99 (Mo.App. E.D. 2005), ED 84884, Drummond Co. v. St. Louis Coke & Foundry Supply Co.
    • United States
    • Missouri Court of Appeals of Missouri
    • October 18, 2005
    ...274 S.W. 478, 480 (Mo.App.1925) (quoting Utley v. Hill, 155 Mo. 232, 55 S.W. 1091, 1098 (1900). See also Premier Bank v. Tierney, 114 F.Supp.2d 877, 886-87 (W.D.Mo.2000) (applying Missouri law); Stone v. Rottman, 183 Mo. 552, 82 S.W. 76, 81-82 (1904); Union National Bank v. Hill, 148 Mo. 38......
  • Request a trial to view additional results