E.F. Hutton Southwest Properties II, Ltd., In re

Decision Date19 February 1992
Docket NumberNo. 91-1331,91-1331
Citation953 F.2d 963
PartiesFed. Sec. L. Rep. P 96,961, Bankr. L. Rep. P 74,524 In re E.F. HUTTON SOUTHWEST PROPERTIES II, LTD., Through its Limited Partners Committee, Debtor. E.F. HUTTON SOUTHWEST PROPERTIES II, LTD., Through its Limited Partners Committee, Plaintiff-Appellant, v. UNION PLANTERS NATIONAL BANK, Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Robert E. Goodman, Jr., Fults, Francis & Goodman, Dallas, Tex., for plaintiff-appellant.

Thomas J. Walsh, Jr., Robert M. Field, McDonnell Boyd, Memphis, Tenn., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before REYNALDO G. GARZA, GARWOOD, Circuit Judges, and SCOTT, District Judge. 1

REYNALDO G. GARZA, Circuit Judge:

In this case, a debtor sued an indenture trustee which did not invest funds which it collected while the funds were contested and therefore undistributed. For the reasons below, we hold that the district court did not err in granting summary judgment in favor of the indenture trustee on all claims.

BACKGROUND

On June 28, 1984, Plaintiff-Appellant ("Hutton") entered into a Purchase Agreement with four financial institutions ("the Purchasers"), including State Mutual Life Assurance Company ("State Mutual"). Under the Purchase Agreement, the Purchasers agreed to make loans to Hutton. The loans were to be secured by, among other things, notes executed in favor of Hutton by Hutton's limited partners ("the LP Notes") and by payments on, or other proceeds of, the LP Notes. The loans were also to be secured by surety bonds issued in respect of substantially all of the LP Notes ("the Bonds") and by payments on, or other proceeds of, the Bonds.

In connection with the Purchase Agreement, Hutton and Defendant-Appellee ("Union Planters") entered into a Pledge and Trust Agreement ("the Trust Agreement") also dated June 28, 1984. Under the Trust Agreement, Union Planters agreed to act as collateral trustee of the LP Notes and the Bonds and, in that capacity, to collect payments on the LP Notes and the Bonds and pay them to the Purchasers to satisfy their loans to Hutton. The Trust Agreement provides that New York law governs.

On September 2, 1988, Hutton filed a Chapter 11 bankruptcy petition in the Bankruptcy Court for the Northern District of Texas. The bankruptcy court appointed the Limited Partners Committee ("the LPC") as an official committee of According to the sworn affidavit of Jackson W. Moore ("Moore"), 3 Union Planters received communications from both Hutton and State Mutual claiming exclusive right to the funds which Union Planters held during the bankruptcy proceedings. Moore states that Union Planters offered to hold the disputed funds to a date certain in order to give the contending parties an opportunity to resolve their differences, and further offered to interplead the disputed property, at the request of either party, into a competent court. Moore states that State Mutual, the sole remaining holder of Notes (as defined in the Trust Agreement), repeatedly instructed Union Planters orally and in writing not to take such action, but to continue retaining possession of the disputed property, as the parties hoped to finalize a settlement within a short period of time. Moore states that in January, 1989, State Mutual and Hutton informed Union Planters that the contending parties were preparing a consent order to adjudicate the claim and to specify how Union Planters was to discharge the funds held. According to Moore, at no time prior to late January, 1989, did either party request that Union Planters invest the funds and its counsel advised that there was no requirement to do so. 4

                Hutton's equity holders.   Between August, 1988 and February, 1989, payments on the LP Notes or the Bonds relating to LP Notes were made from time to time to Union Planters as trustee.   The total of such payments was approximately $6,000,000.   The Trust Agreement contained no term expressly requiring Union Planters to invest the proceeds of the LP Notes or the Bonds 2 and Union Planters did not invest any portion of such payments during the remainder of 1988
                

Jack H. Balzersen, Hutton's counsel during the relevant period, stated in his sworn affidavit:

In January, 1989, the Debtor and State Mutual advised Union Planters that they desired Union Planters to immediately invest the funds it was holding as trustee. On January 27, 1989, the Debtor and State Mutual specifically authorized Union Planters to invest the funds. Union Planters refused to do so until February 7, 1989.

Union Planters invested the funds in U.S. securities.

Hutton filed an adversary proceeding against Union Planters in its bankruptcy case. Hutton asserted claims for breach of contract, breach of fiduciary duty, negligence and unjust enrichment, all regarding Union Planters' "failure" to invest the funds. Union Planters answered, asserting numerous defenses.

On September 10, 1990, Hutton filed a Motion for Partial Summary Judgment in the bankruptcy court. On September 13, 1990, the matter was withdrawn to the District Court for the Northern District of Texas. Both parties filed motions for summary judgment with supporting affidavits. The issues were fully briefed and argued.

On February 11, 1991, the district court entered a Memorandum and Order ("Original Opinion") denying Hutton's motion and granting that of Union Planters. The district court held that a provision in the Trust Agreement, on which Union Planters relied, exculpating Union Planters from liability for actions taken on advice of counsel was not, as Hutton had argued, void as a matter of public policy.

Hutton sought reconsideration of the Original Opinion in a Motion for Alteration, Amendment or Vacation filed on February 21, 1991. Hutton argued that the advice of counsel clause should not preclude its Hutton also sought additional time for discovery, which the district court denied.

                claims for breach of fiduciary duty, negligence and unjust enrichment.   By a second Memorandum Opinion and Order ("Supplemental Opinion") entered on March 25, 1991, the district court denied Hutton's motion
                

Hutton appeals.

ANALYSIS

As this is an appeal from a summary judgment, with one exception, we review all issues de novo, using the same criteria as the district court and viewing all facts and inferences to be drawn therefrom in the light most favorable to Hutton as the non-prevailing party. LeJeune v. Shell Oil Co., 950 F.2d 267, 268 (5th Cir.1992). We review the district court's refusal to grant Hutton further discovery on an abuse of discretion standard. Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 402 (5th Cir.1981).

I. The District Court did not Err in Finding that Union Planters was an Indenture Trustee.

In its Supplemental Opinion, the district court found:

By the terms of the Trust Agreement, Union Planters received a security interest in, and a pledge of, certain investor notes and investor bonds for the benefit of other noteholders. Therefore, the trust at issue in the case was a trust indenture and Union Planters was an indenture trustee.

Hutton claims that Union Planters was a traditional trustee, rather than an indenture trustee, because the word "indenture" does not appear in the Trust Agreement. As the district court noted in its Supplemental Opinion, however:

Just as a trust may be created without the term "trust" being used, an indenture trust may be created without a bright sign declaring it "Indenture Trust." It is the substance of the Trust Agreement that determines the character of the trust and the duties of the trustee.

We agree. It is the substance of an agreement which governs its character as a trust. See generally Evans Fur Co. v. Chase Manhattan Bank, N.A. (In re Sakowitz, Inc.), 949 F.2d 178 (5th Cir.1991).

Hutton also claims that Union Planters was not an indenture trustee because, as it originally held security for only four Purchasers, it held security for the benefit of "a limited group of noteholders" rather than for "public debenture holders." It is true that the difficulties of issuing secured corporate debt to numerous bondholders gave rise to the need for indenture trustees. In the words of one commentator:

Use of the indenture vehicle in connection with the issuance of corporate debt dates back to the early nineteenth century when the largest enterprises of the day, the railroads, issued debt secured by mortgages. These issuers found it impractical to name all of the original bondholders as mortgagees, since the public records would have to be amended frequently as title to the bonds passed from person to person. Moreover, an 1873 case held that in the absence of a trustee, every single holder had to be a party to a foreclosure action.

Martin D. Sklar, The Corporate Indenture Trustee: Genuine Fiduciary or Mere Stakeholder?, 106 Banking L.J. 42, 43-44 (1989) (footnotes omitted).

In other words:

It would be wholly impractical to have the security run to the group of bondholders directly or to have a separate security instrument for each bondholder. Such action would cause crippling complexity in the execution and enforcement of the security and in cases of transfers of the bonds. To make the transaction feasible the security interest must be centered in a single entity which is to act for the bondholders who purchase their bonds from time to time and for their successors in interest. To give that holder the powers and duties which are desired the trust offers the best legal device available.

G. Bogert, TRUSTS AND TRUSTEES § 250, pp. 254-55 (West 1977).

There is also a need for an indenture trustee for issues of modern day unsecured corporate debentures:

The debt represented by the debenture is typically not secured by specific assets of the issuer, and is frequently subordinated to senior indebtedness of the issuer. It is usually the case...

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