Ag Capital Funding v. State Street Bank

• Decision Date: 17 November 2005
• Citation: 842 N.E.2d 471,5 N.Y.3d 582
• Parties: AG CAPITAL FUNDING PARTNERS, L.P., et al., Plaintiffs, v. STATE STREET BANK AND TRUST COMPANY, Defendant and Third-Party Plaintiff-Appellant. Salomon Smith Barney Inc. et al., Third-Party Defendants-Respondents.
• Court: New York Court of Appeals Court of Appeals

842 N.E.2d 471

5 N.Y.3d 582

AG CAPITAL FUNDING PARTNERS, L.P., et al., Plaintiffs, v. STATE STREET BANK AND TRUST COMPANY, Defendant and Third-Party Plaintiff-Appellant.

Salomon Smith Barney Inc. et al., Third-Party Defendants-Respondents.

Court of Appeals of New York.

November 17, 2005.

Kelley Drye & Warren LLP, New York City (Steven P. Caley, John M. Callagy

and Robert S. Friedman of counsel), for third-party defendant-appellant.

Cleary Gottlieb Steen & Hamilton LLP, New York City (Mitchell A. Lowenthal, David H. Herrington, Karen Bekker and David Lehn of counsel), for Salomon Smith Barney Inc., third-party defendant-respondent.

Allen & Overy LLP, New York City (Michael S. Feldberg, Jacob S. Pultman, Kelly A. Berkell, Karen Lee and Nicole K. Avallone of counsel), for Thelen Reid & Priest LLP, third-party defendant-respondent.

Covington & Burling, New York City (C. William Phillips, Jonathan M. Sperling and Stephanie Yu of counsel), for UBS Warburg LLC, third-party defendant-respondent.

Kasowitz, Benson, Torres & Friedman LLP, New York City (James J. Stricker, Ronald R. Rossi and Matthew R. DiBlasi of counsel), for plaintiffs.

OPINION OF THE COURT

CIPARICK, J.

Because an underwriter or issuer of securities can, by statements and acts interpreted in light of industry custom and practice, assume a duty that may be imposed upon a secured party representative or indenture trustee, and because such allegations are adequately pleaded in a third-party complaint and supplemental documentary evidence, we reinstate causes of action for negligence and contribution brought by the secured party representative/indenture trustee against the underwriters and the issuer's counsel.

Loewen Group International, Inc. and Loewen Group, Inc. (collectively Loewen), owner and operator of cemeteries and funeral homes throughout the United States, United Kingdom and Canada, issued notes and other debt securities to raise capital in several transactions in the late 1990s. All of the debt securities were to be supported by a single pool of collateral. The transactions at issue in this case involved securities known as pass-through asset trust securities (PATS) and Series 6 and 7 Notes, but the earlier transactions are relevant as background.

The first of the debt securities, consisting of Series 1 and 2 Notes, were already in existence prior to a May 1996 Collateral Trust Agreement (CTA). The CTA, entered into between Loewen Group and Bankers Trust Company (Bankers Trust), established the pool of assets intended to secure the debt offerings, and provided that Bankers Trust would serve as collateral trustee of the pool. The agreement explicitly secured the Series 1 and 2 Notes, and provided a mechanism for holders of future debt offerings to acquire secured-creditor status. The CTA provides for the delivery by such holders, or their representative — called a secured party representative — of a document called an additional secured indebtedness registration statement (ASIRS) to Bankers Trust. The ASIRS was to be signed by Loewen and the holder or secured party representative. The CTA provided: "To become a Secured Party Representative hereunder each such representative or Holder must deliver to the Trustee, for acceptance and registration in the Secured Indebtedness Register, an Additional Secured Indebtedness Registration Statement . . . ."

The Series 3 and 4 Notes were the first debt issued by Loewen after the effective date of the CTA. Salomon Smith Barney (Salomon) served as lead underwriter and was represented by Davis Polk & Wardwell (Davis Polk) at the closing. Thelen Reid & Priest LLP (Thelen) served as counsel for Loewen, the issuer. A copy of the executed ASIRS for this transaction was faxed to Bankers Trust, the collateral trustee, by Thelen on October 4, 1996. A predecessor in interest of third-party plaintiff, State Street Bank and Trust Company (State Street), was the indenture trustee under the indenture and the secured party representative as defined in the CTA.

The Series 5 Notes were issued on September 26, 1997. These notes were also secured by the CTA. An executed copy of the ASIRS was delivered by Loewen's Canadian counsel, Russell & DuMoulin, to Bankers Trust at the close of that transaction. State Street was not involved in the Series 5 Notes transaction.

The problem with the transactions involved in this case — the PATS, Series 6 Notes and Series 7 Notes — is that, in each of them, the ASIRS did not find its way to Bankers Trust.

PATS in the amount of $300,000,000 were issued on September 30, 1997. UBS Warburg (UBS) was the lead underwriter in that transaction, represented by Skadden, Arps, Slate, Meagher & Flom LLP (Skadden), who hosted the closing. State Street again served as the indenture trustee and thus was the secured party representative, as defined in the CTA and ASIRS.¹ Thelen, counsel for the issuer, drafted the ASIRS, which was then signed by Loewen and State Street and left at Skadden's office at the closing along with the other closing documents. An attorney from Skadden, UBS's counsel, later said that a Skadden associate had delivered the ASIRS to Bankers Trust, but he thereafter retracted the statement. No record exists of the ASIRS having been delivered to Bankers Trust for the PATS transaction.

The Series 6 and 7 Notes involved essentially the same parties and procedures as the Series 3 and 4 Notes. Salomon served as the lead underwriter on this $450,000,000 transaction, again represented by Davis Polk. Loewen was again represented by Thelen, and State Street again accepted the role of indenture trustee pursuant to the May 28, 1998 indenture and secured party representative under the CTA. The closing took place on May 28, 1998 but Davis Polk, the closing host, failed to place the ASIRS on the closing checklist. Thelen, realizing this omission post-closing, circulated a copy of the ASIRS for signature.² Loewen and State Street both signed the document and returned it to Thelen. Thelen then faxed a copy of the executed ASIRS signature page to Davis Polk on June 1, 1998. State Street did not receive a copy of the fully executed ASIRS. Bankers Trust has no record of receiving or recording the ASIRS for the Series 6 and 7 Notes transaction.

In June 1999, Loewen, represented by Jones, Day Reavis & Pogue (Jones Day), filed for chapter 11 bankruptcy. Because no ASIRS had been filed for the PATS and the Series 6 and 7 Notes, there was doubt as to whether the investors and holders of those instruments had the secured-creditor status they had expected. In the reorganization proceeding, investors settled their claims against Loewen by accepting a discounted value for the notes. The investors then commenced this lawsuit against State Street, claiming that State Street's failure to deliver the ASIRS caused the investors to settle for "tens of millions of dollars" less than they would otherwise have received. The investors' action against State Street is still pending and is not directly an issue on this appeal, which only concerns State Street's third-party complaint against UBS, Salomon and Thelen.

In its third-party complaint, State Street asserts that in the event that it is found liable to the investors in the underlying proceeding, it may recover from the underwriters UBS and Salomon under four causes of action: negligence, common-law indemnity, contribution and unjust enrichment. State Street asserted the same four causes of action against Thelen, the issuer's counsel, but added as well claims for negligent misrepresentation and attorney malpractice. Each third-party defendant sought dismissal pursuant to CPLR 3211(a)(1) and (7). Supreme Court granted the motions in part, dismissing all causes of action except for the contribution and negligence claims against all three third-party defendants.

Third-party defendants appealed. State Street also cross-appealed the dismissal of its attorney malpractice and negligent misrepresentation claims. The Appellate Division modified Supreme Court by dismissing the remaining causes of action (10 A.D.3d 293, 781 N.Y.S.2d 88 [2004]). We granted leave to appeal and now modify and reinstate the contribution and negligence claims against UBS, Salomon and Thelen.

In deciding this appeal, we express no opinion on the merits of the underlying claims against State Street. We assume for purposes of this appeal that the claims are meritorious and consider whether, on that assumption, State Street has pleaded valid third-party claims.³

To the extent that the Appellate Division held that the documentary evidence precluded State Street from prevailing on its contribution and negligence claims, the Court erred. In order to prevail on a CPLR 3211(a)(1) motion, the moving party must show that the documentary evidence conclusively refutes plaintiff's (here third-party plaintiff's) allegations (see Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002]). Assuming that the controlling documents in this case place the duty to file the ASIRS on State Street, these documents— the CTA, ASIRS and indentures—do not definitively refute State Street's allegations that the duty thereafter was assumed by the third-party defendants.

The Appellate Division also erred to the extent that it dismissed State Street's claims for contribution and negligence under CPLR 3211(a)(7). When assessing the adequacy of a complaint in light of a CPLR 3211(a)(7) motion to dismiss, the court must afford the pleadings a liberal construction, accept the allegations of the complaint as true and provide plaintiff (here third-party plaintiff) "the benefit of every possible favorable inference" (Leon v. Martinez, 84 N.Y.2d 83, 87, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994]; see also Goshen, 98 N.Y.2d at 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190). "Whether a [third-party] plaintiff can ultimately establish its allegations is not part of the calculus in...