Nuveen Mun. Trust ex rel. Nuveen High Yield Municipal Bond Fund v. Withumsmith Brown, P.C.

• Decision Date: 16 August 2012
• Docket Number: No. 10–4633.,10–4633.
• Citation: 692 F.3d 283,56 Bankr.Ct.Dec. 255
• Court: U.S. Court of Appeals — Third Circuit
• Parties: NUVEEN MUNICIPAL TRUST, on behalf of its series NUVEEN HIGH YIELD MUNICIPAL BOND FUND, a Massachusetts Business Trust, Appellant v. WITHUMSMITH BROWN, P.C., A New Jersey Professional Corporation; Lindabury, McCormick, Estabrook & Cooper P.C., a New Jersey Professional Corporation.

692 F.3d 283

56 Bankr.Ct.Dec. 255

NUVEEN MUNICIPAL TRUST, on behalf of its series NUVEEN HIGH YIELD MUNICIPAL BOND FUND, a Massachusetts Business Trust, Appellant

v.WITHUMSMITH BROWN, P.C., A New Jersey Professional Corporation; Lindabury, McCormick, Estabrook & Cooper P.C., a New Jersey Professional Corporation.

No. 10–4633.

United States Court of Appeals,

Third Circuit.

Argued June 21, 2012.

Filed: Aug. 16, 2012.

Alexander Bilus, Esquire, Robert C. Heim, Esquire, (Argued), Brielle M. Rey, Esquire, Wayne Pollock, Esquire, Dechert LLP, Philadelphia, PA, G. Eric Brunstad, Jr., Esquire, (Argued), Matthew J. Delude, Esquire, Collin O. Udell, Esquire, Dechert LLP, Hartford, CT, David P. Stich, Esquire, Solomon, Blum, Heymann & Stich, New York, NY, Professor Stephen B. Burbank, Philadelphia, PA, for Appellant.

Michael J. Canning, Esquire, (Argued), Catherine J. Bick, Esquire, Donald F. Campbell, Jr., Esquire, (Argued), Jaclyn B. Kass, Esquire, Giordano, Halleran & Cielsa, Red Bank, NJ, for Appellee WithumSmith+Brown, P.C.

William A. Cambria, Esquire, Louis A. Modugno, Esquire, (Argued), James J. DiGiulio, Esquire, William F. O'Connor, Jr., Esquire, McElroy, Deutsch, Mulvaney & Carpenter, LLP, Morristown, NJ, for Appellee Lindabury, McCormick, Estabrook & Cooper, P.C.

Christian D. Wright, Esquire, Benjamin Z. Grossberg, Esquire, Young, Conaway, Stargatt & Taylor, LLP, Wilmington, DE, for Professor Geoffrey C. Hazard, Jr.

Before: AMBRO, VANASKIE and ALDISERT, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

This case is on appeal to us for the second time. It arises from a loan transaction between Appellant Nuveen Municipal Trust (“Nuveen”), on behalf of its “Nuveen High Yield Municipal Bond Fund,” and Bayonne Medical Center (“Bayonne”). In connection with the transaction, Bayonne provided Nuveen with an audit report authored by Bayonne's accounting firm, Appellee WithumSmith+Brown, P.C. (“Withum”), and an opinion letter authored by Bayonne's counsel, Appellee Lindabury, McCormick, Estabrook & Cooper P.C. (“Lindabury”). Soon after the transaction, Bayonne filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Nuveen contends that the audit report and opinion letter concealed problem aspects of Bayonne's financial condition, and had it known about these financial issues, it would not have entered into the transaction.

Nuveen filed this action against Withum and Lindabury, asserting fraud (as to Withum only), negligent misrepresentation, and malpractice (as to Lindabury only), and representing that the District Court had diversity jurisdiction under 28 U.S.C. § 1332. The Court dismissed the action with prejudice based on Nuveen's noncompliance with New Jersey's Affidavit of Merit statute, N.J. Stat. Ann. §§ 2A:53A–26 et seq. (the “AOM Statute” or “Statute”), which requires the timely filing of an affidavit of merit attesting to the viability of claims in certain actions against professionals.

On initial appeal to us, Nuveen brought to our attention Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F.3d 192 (3d Cir.2007), which held that, for purposes of diversity jurisdiction, the citizenship of a trust is determined by the citizenship of its beneficial shareholders. Because Nuveen may be considered a trust, Emerald called into question the District Court's previously asserted basis for jurisdiction. We granted Nuveen's unopposed motion to remand the case to allow the District Court to reconsider its jurisdiction.

On remand, Withum and Lindabury raised a new basis for jurisdiction—that the action was “related to” Bayonne's bankruptcy proceeding, and thus that the District Court had jurisdiction under 28 U.S.C. § 1334(b). The Court accepted this basis for jurisdiction and re-entered its order dismissing the action with prejudice. Both the jurisdictional decision and its dismissal of the action are on appeal to us now. Nuveen also raises two new choice-of-law arguments on appeal: that the AOM Statute is a procedural pleading requirement that conflicts with Federal Rule of Civil Procedure 8 such that the Statute cannot be applied in federal court, as federal procedural rules preempt conflicting state ones; or that certain provisions to protect plaintiffs with respect to the Statute are substantive state law that must be applied by a federal court under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and its progeny.

We agree that the District Court had “related to” jurisdiction under 28 U.S.C. § 1334(b). We further hold that the AOM Statute can be applied by a federal court without conflicting with Rule 8, and that the protections Nuveen identifies are procedural under Erie, thus not requiring a federal court to follow them. If the AOM Statute applies to the action, we believe that Nuveen's noncompliance with it calls for the action's dismissal, but question whether this action is subject to the Statute. Because the New Jersey Supreme Court has not addressed key issues regarding the application of the Statute, we reserve deciding whether the District Court was correct to dismiss the action with prejudice and certify two questions of law regarding the Statute to the New Jersey Supreme Court.

I. Factual and Procedural Background

In the attempt to salvage its action from dismissal purely based on its counsel not filing timely affidavits of merits, Nuveen's arguments fall into four broad categories: (i) jurisdiction; (ii) the AOM Statute's application in federal court under Erie and its progeny; (iii) the Statute's application to its action as a legal matter; and (iv) whether its noncompliance with the Statute can be excused. To decide these issues, we detail the history of the loan transaction, Bayonne's bankruptcy proceeding, this action, the Statute, and the proceedings in and decisions of the District Court.

A. Loan Transaction and Bayonne's Bankruptcy

In October 2006, Nuveen, on behalf of one of its bond funds, purchased a $10 million Bond Anticipation Note (“BAN”) from Bayonne. In connection with the transaction, Bayonne provided Nuveen with an audit report prepared by Withum regarding Bayonne's company-prepared 2005 financial statements. As Bayonne's counsel in the transaction, Lindabury provided Nuveen with an opinion letter addressing Bayonne's ability to repay the BAN. It included the typical opinion that Bayonne had the power and authority to enter into the BAN transaction and that, other than one disclosed investigation not relevant here, there were no investigations or suits that “could reasonably be expected to ... materially [and] adversely affect the capability of [Bayonne] to comply with its obligations under [the BAN], or materially [and] adversely affect the transactions contemplated to be consummated on the part of [Bayonne] as described in the [BAN].”

Six months later, in April 2007, Bayonne filed its Chapter 11 petition in the Bankruptcy Court for the District of New Jersey. In October 2007, the Bank of New York, master trustee, filed a proof of claim on behalf of Nuveen and other secured creditors totaling $46,673,886.79. Nuveen's portion of the claim was for $10,533,989.84 (including approximately $10,000,000 principal on the BAN, $436,136.98 in interest, and $97,852.86 for Nuveen's fees and expenses).

As a prelude to this action, in May 2008 Nuveen requested that Bayonne provide it with documents to determine whether it had a cause of action against Bayonne's officers, directors, and “pre-petition professionals” for misrepresentations or other conduct that induced Nuveen to purchase the BAN. Bayonne did not respond, and Nuveen served a subpoena on it and then filed a motion to compel. Notably, in the materials accompanying its motion to compel, Nuveen represented that any amounts it recovered from such actions would reduce its claim against Bayonne's bankruptcy estate. It also specifically identified potential suits against Withum and Lindabury.

No doubt partially in response to Nuveen's (and possibly other creditors') requests for documents, Bayonne made a global settlement agreement among it, the Official Committee of Unsecured Creditors, and certain secured creditors that included Nuveen (the “Settlement Agreement”). Approved by the Bankruptcy Court in September 2008, the Settlement Agreement provided that it would be implemented by a plan of liquidation. In the event the confirmed plan did not conform to the Settlement Agreement, or Bayonne's bankruptcy case was converted or dismissed, the Agreement would control and survive.¹ It further provided that the secured creditors would not pursue claims against any of Bayonne's former officers, directors or trustees, but preserved the secured creditors' right to bring claims against any third parties ( i.e., Withum and Lindabury) retained by, or who had rendered services to, Bayonne.

The Settlement Agreement granted the secured creditors a general unsecured claim in the amount of $46,673,886.79 (the dollar amount asserted in the master trustee's proof of claim), which would be reduced “dollar for dollar” for sums received by the secured creditors through certain distributions defined in the Agreement. Thus it effectively fixed Nuveen's claim against Bayonne's estate as a secured claim in an amount to be determined based on funds in Bayonne's estate and an unsecured claim to be paid pro rata with other unsecured claims.

B. District Court Complaint

In accordance with the Settlement Agreement, Nuveen filed this action against Withum and Lindabury in December 2008. As to Withum, Nuveen asserted that Bayonne's 2005 financial statements were false and misleading because they recorded substantial revenue from a sham charitable pledge and showed as assets a substantial amount of uncollectible accounts receivable. Nuveen contended that if Withum had examined the financial statements consistent with Generally Accepted Accounting Principles and specific accounting...