LNC Investments, Inc. v. First Fidelity Bank, N.A. New Jersey

• Decision Date: 26 March 1999
• Docket Number: No. 98-7617,98-7617
• Citation: 173 F.3d 454
• Parties: LNC INVESTMENTS, INC. and Charter National Life Insurance Company, Plaintiffs-Appellants, v. FIRST FIDELITY BANK, N.A. NEW JERSEY, United Jersey Bank and National Westminster Bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 454

173 F.3d 454

LNC INVESTMENTS, INC. and Charter National Life Insurance Company, Plaintiffs-Appellants, v. FIRST FIDELITY BANK, N.A. NEW JERSEY, United Jersey Bank and National Westminster Bank, Defendants-Appellees.

No. 98-7617.

United States Court of Appeals Second Circuit.

Argued Jan. 11, 1999.

Decided March 26, 1999.

Raymond Fitzgerald, Butler, Fitzgerald & Potter, New York, NY, for plaintiffs-appellants.

Daniel A. Pollack, Pollack & Kaminsky, New York, NY (Martin I. Kaminsky and Edward T. McDermott, on the brief, and Elizabeth J. Gorman, LeBoeuf, Lamb, Green & MacRae, L.L.P., Newark, NJ, and Laurence Greenwald, Strook & Strook & Lavan, New York, NY, of counsel), for defendants-appellees United Jersey Bank and National Westminster Bank.

Seth T. Taube, McCarter & English, Newark, NJ (Steven A. Beckelman and Joseph T. Boccasini, on the brief), for defendant-appellee First Fidelity Bank, N.A. New Jersey.

Before: JACOBS and SOTOMAYOR, Circuit Judges, and SAND, ^* District Judge.

SOTOMAYOR, Circuit Judge:

Plaintiffs-appellants LNC Investments, Inc. ("LNC") and Charter National Life Insurance Company ("Charter") (collectively, "Bondholders") appeal from a judgment of the United States District Court for the Southern District of New York (Mukasey, J.) dismissing their claims for breach of fiduciary duty, breach of contract and violation of § 315(c) of the Trust Indenture Act of 1939 ("TIA"), 15 U.S.C. § 77ooo (c) (1997), following a jury verdict in favor of defendants-appellees First Fidelity Bank, N.A. New Jersey ("First Fidelity"), United Jersey Bank and National Westminster Bank (collectively, "Trustees"). The Bondholders own bonds that were issued by a trust administered by the Trustees. The bonds were secured by aircraft The Bondholders allege that as a result of the Trustees' conduct throughout Eastern's bankruptcy, they will not receive all of the principal and interest to which they are entitled under the bonds, and they seek to hold the Trustees responsible for any shortfall. Specifically, the Bondholders claim that the Trustees acted imprudently by, among other things, waiting too long to move the bankruptcy court to lift the automatic bankruptcy stay or, alternatively, to order whatever other measures were necessary, possibly including the provision of additional security, to ensure that the Bondholders' interest in the collateral aircraft was adequately protected during the bankruptcy proceeding. The Bondholders argue that if the Trustees had moved earlier to lift the stay or for adequate protection, the bankruptcy court would have either lifted the stay and released the collateral to the Trustees, in which case the Trustees could have sold the aircraft for more than the bonds' value, or denied the motion, in which case the Bondholders' claims against Eastern's estate would have received superpriority over the claims of Eastern's other creditors.

that the trust purchased from Eastern Air Lines, Inc. ("Eastern") and then leased back to Eastern pursuant to a sale/leaseback transaction. In March 1989, Eastern filed for bankruptcy, while still in possession of the aircraft.

After a trial, the jury found that the Trustees breached the prudent person standard applicable under the contract, the TIA and the common law of fiduciary duty, but that their imprudence did not proximately cause injury to the Bondholders. On appeal, the Bondholders argue, among other things, that (1) the district court improperly instructed the jury that the Bondholders had to establish proximate cause, including a reliance component, to prevail on their claims; and (2) the district court should have instructed the jury that the Bondholders' claims would have received superpriority status if the Trustees had moved more quickly to lift the stay or for adequate protection and if their motion had been denied. We hold that the general proximate cause instruction given by the district court was appropriate, but that the Bondholders are nevertheless entitled to a new trial because the reliance portion of the instruction was erroneous, as was the district court's failure to give the Bondholders' requested instruction on the applicability of New York General Obligations Law § 13-107(1). We further hold that the district court's superpriority instruction was erroneous because it required the jury to decide the legal question whether the Bondholders' claims would have qualified for superpriority status if the Trustees' motion had been made earlier and been denied.

BACKGROUND

A. The Trust Indenture

On November 15, 1986, Eastern entered into a sale/leaseback transaction with a secured equipment trust ("Trust") created pursuant to an equipment indenture and lease agreement ("Trust Indenture" or "Indenture") between Eastern and defendant First Fidelity, the Indenture Trustee. The transaction called for Eastern to sell 110 used aircraft to the Trust, and for the Trust, in turn, to lease the same aircraft back to Eastern. The Trust issued three series of equipment trust certificates ("Bonds"), each in different initial principal amounts and with different interest rates and maturity dates, in order to raise the funds needed to purchase the aircraft. The three series of Bonds had a total principal value of $500,000,000. Under the Trust Indenture, Eastern promised to make lease payments to the Trust in amounts sufficient to pay the principal and the interest due on the Bonds as well as the expenses of the Trust. Title to the aircraft was to be held in trust as collateral for the Bonds. On February 13, 1987, in connection with the registration of the Bonds with the U.S. Securities and Exchange Commission, the Trust Indenture

was amended to designate a separate Trustee for each series of Bonds ¹ and to redesignate First Fidelity as the collateral Trustee, which held title to the aircraft.

B. Eastern's Bankruptcy

On March 9, 1989, while still in possession of the collateral aircraft, Eastern filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York seeking protection under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 1101 et seq. Eastern's bankruptcy constituted an "Event of Default" under the Indenture. See Trust Indenture § 7.01(g)(i)(2). Upon an Event of Default, the Trustees were to "excercise [sic] such of the rights and powers vested in [them] by [the Trust Indenture], and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs." Trust Indenture § 9.02; see also 15 U.S.C. § 77ooo (c) ("The indenture trustee shall exercise in case of default (as such term is defined in such indenture) such of the rights and powers vested in it by such indenture, and ... use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs."). Eastern's bankruptcy petition therefore triggered the Trustees' obligations of prudence under the Trust Indenture and the TIA.

Eastern's bankruptcy petition also triggered the automatic stay of § 362(a) of the Bankruptcy Code, which prevented the Trustees from taking possession of the collateral aircraft. See 11 U.S.C. § 362(a) (1993) ("[A] petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate...."). As of the date of Eastern's bankruptcy petition, there were 104 aircraft, with an appraised value of $681,800,000, remaining in the collateral pool, and the aggregate principal value of the outstanding Bonds was $453,765,000. The Trust was therefore oversecured by more than $228 million, or, in other words, it maintained an "equity cushion" in that amount. Over the course of the next twenty months, however, the market value of the aircraft decreased significantly as a result of various factors, including the Iraqi invasion of Kuwait in August 1990, which caused fuel prices to rise. As of November 9, 1990, the appraised value of the 67 aircraft remaining in the collateral pool, together with the funds set aside in a "cash collateral account" from the sales and leases of aircraft formerly in the collateral pool, totaled somewhere between $475,443,000 and $589,679,000.

On November 14, 1990, the Trustees filed a motion for adequate protection pursuant to § 363(e) of the Bankruptcy Code, which requires a bankruptcy court to prohibit or condition a bankrupt party's use, sale or lease of property serving as collateral if such action is "necessary to provide adequate protection" of the creditor's interest in the collateral. See 11 U.S.C. § 363(e) (1993). The Trustees' motion sought protection of their interest in the collateral aircraft "in light of the rapid and constant deterioration of any equity cushion in the [c]ollateral [a]ircraft." Alternatively, the Trustees moved pursuant to § 362(d) of the Bankruptcy Code, 11 U.S.C. § 362(d)(1) (1993), for relief from the automatic stay of § 362(a) (collectively, "Lift Stay/Adequate Protection Motion" or "Motion"). Before the bankruptcy court ruled on the Motion, however, Eastern announced that it would cease operations entirely. On the same day, January 18, 1991, the Trustees and Eastern's Chapter

11 trustee executed two stipulations providing for, among other things, Eastern's release to the Trustees of the remaining aircraft in the collateral pool and the majority of the funds set aside in the cash collateral account. On January 23 and 24, 1991, the bankruptcy court approved the stipulations releasing the collateral to the Trustees.

C. The Bondholders' Claims

The Bondholders purchased second series and, in LNC's case, third series Bonds at various times between September 1989 and March 1994. ² The Bondholders subsequently...