Cruden v. Bank of New York

• Decision Date: 01 April 1992
• Docket Number: Nos. 1470,s. 1470
• Citation: 957 F.2d 961
• Parties: Fed. Sec. L. Rep. P 96,472, RICO Bus.Disp.Guide 7909 Stanley C. CRUDEN, Philip Zerylnick, individually and on behalf of a class of persons similarly situated, and Sibalin, S.A., a corporation, Plaintiffs-Appellants, v. The BANK OF NEW YORK, a corporation; Irving Trust Company, a corporation; Sterling National Bank & Trust Company of New York, a corporation; Bankers Trust Company, a corporation; Rockwood National Corporation, a corporation, and James E. Townsend, an individual, Defendants, The Bank of New York, a corporation; Irving Trust Company, a corporation; Sterling National Bank & Trust Company of New York, a corporation, and Bankers Trust Company, a corporation, Defendants-Appellees. Stanley C. CRUDEN, Individually and on behalf of a Class of Persons Similarly Situated; Philip Zerylnick, and Sibalin, S.A., a corporation, Plaintiffs-Appellants, v. IRVING TRUST COMPANY, a corporation; Rockwood National Corporation, a corporation; James E. Townsend, an individual; the Bank of New York, a corporation; Sterling National Bank & Trust Company of New York, a corporation; Bankers Trust Company, Defendants-Appellees. to 1473, 1463-1466, Dockets 91-7187, 91-7189, 91-7191, 91-7193, 91-7041, 91-7047, 91-7053 and 91-7065.
• Court: U.S. Court of Appeals — Second Circuit

Page 961

957 F.2d 961

Fed. Sec. L. Rep. P 96,472, RICO Bus.Disp.Guide 7909

Stanley C. CRUDEN, Philip Zerylnick, individually and on behalf of a class of persons similarly situated, and Sibalin, S.A., a corporation, Plaintiffs-Appellants, v. The BANK OF NEW YORK, a corporation; Irving Trust Company,

a corporation; Sterling National Bank & Trust Company of

New York, a corporation; Bankers Trust Company, a

corporation; Rockwood National Corporation, a corporation,

and James E. Townsend, an individual, Defendants,

The Bank of New York, a corporation; Irving Trust Company,

a corporation; Sterling National Bank & Trust Company of

New York, a corporation, and Bankers Trust Company, a

corporation, Defendants-Appellees.

Stanley C. CRUDEN, Individually and on behalf of a Class of

Persons Similarly Situated; Philip Zerylnick, and Sibalin, S.A., a corporation, Plaintiffs-Appellants, v. IRVING TRUST COMPANY, a corporation; Rockwood National

Corporation, a corporation; James E. Townsend, an

individual; the Bank of New York, a corporation; Sterling

National Bank & Trust Company of New York, a corporation;

Bankers Trust Company, Defendants-Appellees.

Nos. 1470 to 1473, 1463-1466, Dockets 91-7187, 91-7189,

91-7191, 91-7193, 91-7041, 91-7047, 91-7053 and 91-7065.

United States Court of Appeals, Second Circuit.

Argued May 16, 1991.

Decided Jan. 6, 1992.

As Amended April 1, 1992.

Michael P. Malakoff, Pittsburgh, Pa., (Richard A. Finberg, Berger Kapetan Malakoff & Meyers, Pittsburgh, Pa., Jules Brody, Stull, Stull & Brody, New York City, of counsel), for plaintiffs-appellants.

Clifford Peterson (Robert L. Laufer, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, of counsel), for defendant-appellee Sterling Nat. Bank & Trust Co. of New York.

Alfred W.J. Marks (Wallace E.J. Collins, Emmet, Marvin & Martin, New York City, of counsel), for defendants-appellees The Bank of New York and Irving Trust Co.

David Rabinowitz (Helen Gavaris, Moses & Singer, New York City, of counsel), for defendant-appellee Bankers Trust Co.

Linda H. Joseph (Joseph A. Podwika, Mary C. Fitzgerald, Jaeckle, Fleischmann & Mugel, Buffalo, N.Y., of counsel), for defendants-appellees Rockwood Nat. Corp. and James E. Townsend.

Before LUMBARD and CARDAMONE, Circuit Judges, and LASKER, District Judge. ^*

CARDAMONE, Circuit Judge:

Plaintiffs, debenture holders of a defaulted lender, appeal from January 25 and January 28, 1991 judgments of the United States District Court for the Southern District of New York (Keenan, J.) which granted summary judgment dismissing, on various grounds, plaintiffs' claims against the successor of the debentures' issuer or guarantor and the Indenture Trustees. The district court's ruling covered four separate This opinion is necessarily long because the numerous clauses of the Indentures and the Trust Indenture Act upon which the multiple parties' rights hinge must be set forth to make this appeal intelligible. But its length should not deter the reader because--just as the daunting facade in the Wizard of Oz was stripped away revealing an ordinary man manually operating a wind machine, so here--after all the facts have been exposed what remains to be decided are two rather straightforward legal questions: whether the statute of limitations bars plaintiffs' claims against all defendants and whether defendant Trustees properly relied on the opinion of counsel. For the reasons discussed below, the judgments of the district court are affirmed, in part, reversed in part, and remanded.

                actions arising from the same set of facts.   In each, the debenture holders are suing (1) Rockwood National Corporation claiming it is liable--as successor to the issuer or guarantor, Levin-Townsend Computer Corporation (Levin-Townsend)--for payment obligations of debentures, (2) James E. Townsend, a former President of Rockwood National, and (3) the four banks who acted as Indenture Trustees for the four sets of debentures involved.   Three actions brought by Stanley Cruden and Philip Zerylnick were certified as class actions pursuant to Fed.R.Civ.P. 23(b)(3), with Cruden and Zerylnick representing a class of individual debenture holders (the Cruden actions).   The fourth action was brought by Sibalin, S.A., a Panamanian corporation with its principal place of business in Geneva, Switzerland, and a debenture holder (the Sibalin action).   The Sibalin action involves substantially the same claims against the same defendants, but raises some distinct issues and consequently will be referred to separately when necessary
                

FACTS

In the late 1960's, Levin-Townsend, a New Jersey corporation, raised capital by entering into a series of Trust Indentures under which it or its subsidiary, Levin-Townsend International, Inc. (International), issued debentures to the public. The Cruden plaintiffs are holders of $2,349,600 in debentures issued by Levin-Townsend. Sibalin owns $266,000 worth of debentures issued by International. Although International was the obligor on this bond issue, payment was unconditionally guaranteed by Levin-Townsend.

Defendant Bank of New York is the Indenture Trustee for one series of these debentures designated as 5 1/4 percent Convertible Subordinated Debentures. Defendant Sterling National Bank & Trust Co. of New York (Sterling) is the Indenture Trustee for a series designated as 7 percent Convertible Senior Subordinated Debentures. Defendant Irving Trust Co. (Irving) is the Indenture Trustee for debentures designated as 5 1/2 percent Convertible Subordinated Debentures. Defendant Bankers Trust Co. (Bankers Trust) is the Indenture Trustee for the International bond issue, debentures designated as 5 percent Guaranteed Convertible Debentures. The Indenture Agreements for the Irving and the Bank of New York issues were entered into on April 15 and September 15, 1967, respectively. The Indenture Agreements for the Sterling and Bankers Trust issues were entered into on August 1, 1968. Chase Manhattan Bank originally was a party to the Sterling Indenture Agreement and was succeeded by Sterling on September 24, 1971. Each Indenture Agreement was made with Levin-Townsend, and each of the debentures was convertible into common stock of Levin-Townsend. Interest was due semi-annually over the 15 to 20 year life of the debentures. Principal was due as to the Sterling issue on August 1, 1983, and as to the other issues thereafter.

Beginning in July 1972, a series of events took place that are the centerpiece of the instant dispute. First, Levin-Townsend changed its name to Rockwood Computer Corporation (still referred to for convenience as Levin-Townsend). Second, Levin-Townsend formed two Delaware corporations: Rockwood Computer Corporation (Computer), and Rockwood National Corporation (National). Third, on August 8, 1973 pursuant to terms of an Agreement and Plan of Reorganization, Computer became a wholly-owned subsidiary of National National and Computer thereafter entered into Supplemental Indenture Agreements with each of the defendant Trustees in which the conversion and payment/guarantee obligations described in the original Indentures were split. Computer agreed to assume the obligation of paying principal and interest on the debentures issued by Levin-Townsend and to assume the role of guarantor as to the International issue; National agreed to permit the conversion of the debentures into its stock. Immediately after the August 8, 1973 reorganization was consummated, Computer's 86 percent-owned real estate subsidiary, National Equities, Inc. (NEI), was transferred to National, in exchange for a $40,946,638 non-interest-bearing promissory note. This note was never paid.

                Levin-Townsend transferred substantially all of its assets to Computer, and Computer assumed all Levin-Townsend's debts.   Further, National became the 100 percent stockholder of Computer, and Levin-Townsend shareholders received shares in National on a one-for-one basis, with no new shareholders being added
                

In 1976, Computer, its subsidiary International (formerly the subsidiary of Levin-Townsend), and NEI went into default for nonpayment of interest on various of the debentures. These defaults were cured by an Exchange Offer in 1978 orchestrated by National in which 73 percent of the total outstanding debentures of Computer, International and NEI were tendered. National offered cash and its own convertible income debentures due January 1993 in exchange for the debentures of these three companies, and all back interest due on the debentures not exchanged was paid in full.

On March 16, 1979 the original purchase price for the NEI stock was reduced from $41 to $7.8 million. Then, an extremely peculiar transaction took place that resulted in this debt being erased. National sold to Computer the stock of Rockwood Leasing Services, Inc. The assets of Rockwood Leasing consisted of $23.2 million in principal amount of Computer debentures obtained in the above Exchange Offer and a promissory note of Computer in the amount of $600,000. Thus, the $41 million note for National's purchase of NEI was initially deferred, then written down by 80 percent, and ultimately exchanged for Computer's own securities, which National had obtained with funds originating from Computer.

In August 1983 Computer and International defaulted on the payment of principal and interest on the Sterling and Bankers Trust issues, respectively. This forced Computer to file a voluntary bankruptcy petition, which constituted a default under the Indentures. All other debenture series shortly thereafter went into default.

PROCEDURAL HISTORY

In June 1985 the Cruden plaintiffs filed three lawsuits in the Southern District of New York. The actions were certified as class actions on February 1, 1988. Sibalin filed its suit in July 1987. All plaintiffs are suing the Trustees for violations of the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq. (1988), and for breach of the Indentures. They...