Ag Capital Funding v. State Street Bank

• Decision Date: 25 June 2008
• Docket Number: No. 114.,114.
• Parties: AG CAPITAL FUNDING PARTNERS, L.P., et al., Appellants, v. STATE STREET BANK AND TRUST COMPANY, Respondent. (And Other Actions.).
• Court: New York Court of Appeals Court of Appeals

896 N.E.2d 61

11 N.Y.3d 146

AG CAPITAL FUNDING PARTNERS, L.P., et al., Appellants, v. STATE STREET BANK AND TRUST COMPANY, Respondent.

(And Other Actions.).

No. 114.

Court of Appeals of New York.

June 25, 2008.

Kasowtiz, Benson, Torres & Friedman LLP, New York City (James J. Stricker and David M. Friedman of counsel), for appellants.

Kelley Drye & Warren LLP, New York City (Steven P. Caley, Robert S. Friedman and Kevin J. Smith of counsel), for respondent.

C. Dawn Causey, General Counsel, American Bankers Association, Washington, D.C. (Gregory F. Taylor, Jill M. Goldman and Cristeena Naser of counsel), for American Bankers Association, amicus curiae.

OPINION OF THE COURT

JONES, J.

In this appeal arising out of the issuance of a series of debt securities by nonparties Loewen Group International, Inc. and Loewen Group, Inc. (collectively Loewen), the question before us is whether plaintiffs have viable claims against defendant State Street Bank and Trust Company (State Street) for breach of contract, violation of the federal Trust Indenture Act of 1939 (see 15 U.S.C. § 77aaa et seq.), breach of fiduciary duty and negligence based on its alleged failure to deliver debt transaction registration statements arguably required to secure the debt. We conclude that plaintiffs' contract and Trust Indenture Act claims are barred by a release previously executed by plaintiffs as part of a bankruptcy settlement with Loewen and that no fiduciary duties exist. However, because negligence claims are not barred by the release, and because there is an issue of fact as to whether State Street owed and violated a duty of care to plaintiffs, we reinstate the cause of action for negligence brought by plaintiffs against State Street.

Facts¹

In May 1996, Loewen and collateral trustee Bankers Trust entered into a Collateral Trust Agreement (CTA). As relevant here, the CTA permitted holders of future debt offerings to acquire secured-creditor status with respect to the same pool of collateral. Specifically, the CTA provided that future

"trustees or like representatives acting on behalf of Holders of any proposed Additional Secured Indebtedness ... may become Secured Party Representatives under this Collateral Trust Agreement and be entitled to the benefits of the security interests in the Collateral as set out herein and in the other Collateral Documents. 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" (emphasis added).

In the late 1990s, in an effort to raise capital, Loewen issued a series of debt securities.² Three of the debt securities, the pass-through asset trust securities (PATS), issued in September 1997, and the Series 6 and 7 Notes (Notes), issued in May 1998, are relevant here. Under the indenture for each transaction, Loewen engaged State Street to serve as indenture trustee and administer the debt issue. Plaintiffs—various insurance companies, mutual funds and investment funds—are holders of the PATS and Notes, which were valued at approximately $750 million when issued. For each transaction, Loewen and State Street executed an additional secured indebtedness registration statement (ASIRS) as set forth in the CTA. Each ASIRS, incorporating by reference the CTA between Loewen and Bankers Trust, provided:

"By executing and delivering this Additional Secured Indebtedness Registration Statement and, upon the acceptance and recordation hereof by the Trustee in accordance with Section 2.3 of the Collateral Trust Agreement, State Street ... as trustee under the indenture . . . hereby agrees on behalf of itself and the Holders it represents to be bound by all the terms and provisions of the [CTA] applicable to a Holder and a Secured Party Representative" (emphasis added).³

It is undisputed that no ASIRS for the PATS or the Notes was ever delivered to or received by Bankers Trust.

In June 1999, Loewen filed for chapter 11 bankruptcy protection. Because no ASIRS was delivered for the subject debt securities, uncertainty arose as to whether the holders of those instruments had secured-creditor status. In the bankruptcy proceeding, plaintiffs approved Loewen's fourth reorganization plan and settled their claims against Loewen by accepting a discounted value for the Notes and PATS. Plaintiffs also agreed to "release" State Street in accordance with Loewen's reorganization plan, which provided that

"each holder of a CTA Note Claim, each Indenture Trustee and each Principal CTA Creditor will be deemed to forever release, waive and discharge [State Street] ... from any claims, demands, rights, causes of action[] or liabilities that, if enforced against [State Street], entitle [State Street] to an Allowed Claim for indemnification from [Loewen]."

The indentures for the subject transactions required that Loewen

"shall indemnify [State Street] for, and hold it harmless against, any loss or liability incurred by it arising out of or in connection with the administration of this trust and its rights or duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.... [Loewen] need not reimburse any expense or indemnify against any loss or liability to the extent incurred by [State Street] through its negligence, bad faith or willful misconduct" (emphasis added).

Thus, State Street was not indemnified by Loewen, and therefore not released by plaintiffs, as to any claim based on its negligence.

Procedural History

In 2002, plaintiffs commenced this action against State Street, alleging six causes of action: (1) breach of the PATS ASIRS and the Notes ASIRS, (2) breach of the PATS indenture and the Notes indenture, (3) violation of the federal Trust Indenture Act, (4) breach of fiduciary duty as an indenture trustee, (5) breach of fiduciary duty as a secured party representative and (6) negligence. In sum, plaintiffs alleged that State Street's failure to deliver the ASIRS to Bankers Trust for registration as required under the CTA and the ASIRS caused plaintiffs to settle their claims in Loewen's bankruptcy for "tens of millions of dollars" less than if State Street had delivered the ASIRS. In its answer, State Street denied the complaint's allegations and asserted various affirmative defenses, including release. State Street further countered that the subject notes were secured, whether or not they were registered.⁴ In January 2005, State Street moved for summary judgment dismissing the complaint, and plaintiffs moved for partial summary judgment on their contract claims (i.e., breach of the ASIRS and breach of the indentures), as well as their breach of fiduciary duty as indenture trustee and negligence claims. Plaintiffs also sought an award of damages.

In July 2005, Supreme Court (1) granted State Street's motion to the extent of dismissing plaintiffs' claims for breach of contract and violation of the Trust Indenture Act, (2) granted plaintiffs' motion to the extent of granting them summary judgment as to liability on their breach of fiduciary duty as indenture trustee and negligence claims and (3) otherwise denied the motions. Specifically, the court held that the release plaintiffs executed as part of the Loewen bankruptcy settlement barred their contract and violation of the Trust Indenture Act claims, but did not affect their breach of fiduciary duty and negligence claims.

Further, the court, relying on the Appellate Division's 2004 decision dismissing State Street's third-party claims, held that plaintiffs were entitled to summary judgment as to liability on their breach of fiduciary duty as indenture trustee and negligence claims. However, in our November 2005 decision reversing the dismissal of the third-party negligence and contribution claims, we noted that the Appellate Division's comments on the merits of the main claim were "premature and beyond the scope of the appeal" (5 N.Y.3d at 590 n. 3, 808 N.Y.S.2d 573, 842 N.E.2d 471).

After our November 2005 decision, State Street moved to vacate certain portions of Supreme Court's July 2005 decision and to renew its summary judgment motion as to the remaining claims, arguing that this Court rejected the Appellate Division's conclusion that plaintiffs could predicate tort claims on State Street's failure to perform ministerial tasks. In May 2006, Supreme Court (1) vacated so much of its prior order that granted plaintiffs summary judgment on the breach of fiduciary duty as indenture trustee and negligence claims, (2) granted State Street's motion to renew and (3) upon renewal, denied State Street's motion for summary judgment dismissing plaintiffs' breach of fiduciary duty (as indenture trustee and secured party representative) claims and their negligence claim. The parties appealed from Supreme Court's July 2005 and May 2006 orders to the extent they were aggrieved.

The Appellate Division dismissed plaintiffs' claims for breach of contract and violation of the Trust Indenture Act, explaining that because these claims were not predicated upon State Street's negligence, bad faith or willful misconduct, they are clearly barred by the release (40 A.D.3d 392, 393-394, 837 N.Y.S.2d 607 [1st Dept. 2007]). The court further concluded that the remaining claims for breach of fiduciary duty and negligence "should have been dismissed since they are essentially duplicative of the claims for breach of contract" (id. at 394, 837 N.Y.S.2d 607). The court stated that, "[n]otwithstanding the wording of" such claims, "it is apparent that plaintiffs have not alleged the breach of an extracontractual duty redressable in tort" (id.). We granted plaintiffs leave to appeal and now modify and reinstate the negligence claim against State Street.

Discussion

Plaintiff...