In re Sunshine Jr. Stores, Inc., No. 04-16650.

• Citation: 456 F.3d 1291
• Decision Date: 18 July 2006
• Docket Number: No. 05-10031.,No. 04-16651.,No. 04-16650.
• Parties: In re: SUNSHINE JR. STORES, INC. d.b.a. Sunshine Supermarkets d.b.a. Jr. Food Stores, Debtor. Bank of New York, Plaintiff-Appellant, v. Sunshine-Jr. Stores, Inc., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

456 F.3d 1291

In re: SUNSHINE JR. STORES, INC. d.b.a. Sunshine Supermarkets d.b.a. Jr. Food Stores, Debtor Bank of New York, Plaintiff-Appellant, v. Sunshine-Jr. Stores, Inc., Defendant-Appellee.

No. 04-16650.

No. 04-16651.

No. 05-10031.

United States Court of Appeals, Eleventh Circuit.

July 18, 2006.

Vance E. Salter, Jeffrey P. Bast, Gustavo J. Membiela, Hunton & Williams, LLP, Miami, FL, for Bank of New York.

Marsha G. Rydberg, Thomas H. Rydberg, The Rydberg Law Firm, P.A., Tampa, FL, for Sunshine-Jr. Stores, Inc.

Appeals from the United States District Court for the Middle District of Florida.

Before TJOFLAT and BARKETT, Circuit Judges, and MILLS^*, District Judge.

TJOFLAT, Circuit Judge:

In this Chapter 11 case, the bankruptcy court sanctioned the Bank of New York ("BONY") for repeatedly refusing to obey several orders the court issued for the benefit of Sunshine-Jr. Stores, Inc. (The "Debtor"). First, the court struck BONY's response to the Debtor's claim for interest on funds BONY held as a fiduciary for the Debtor. Second, having struck BONY's response, the court gave the Debtor judgment for the interest. Third, the court ordered BONY to pay the Debtor's attorney's fees.

BONY appealed these decisions to the district court, which affirmed. BONY now appeals to this court. BONY acknowledges that it held the Debtor's funds, as alleged, but asserts that it was not doing so as a fiduciary and thus had no obligation to pay interest on those funds. As for the sanctions, BONY contends that they were inappropriate on several grounds. We are unpersuaded by BONY's arguments and therefore affirm.

Part I of this opinion sets out the factual background of this case. Part II analyzes BONY's various challenges to the bankruptcy court's imposition of sanctions, award of interest, and award of attorney's fees. Part III addresses BONY's claim that it was an Indenture Trustee with contractual duties, not a conventional trustee with an implied fiduciary duty. Part IV briefly concludes.

I.

In December 1992, the Debtor commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the Middle District of Florida. On May 12, 1994, the bankruptcy court confirmed the Debtor's Plan of Reorganization ("Reorganization Plan"). As part of the Reorganization Plan, the Debtor executed a Trust Indenture Agreement (also referred to herein as the "Agreement"). The purpose of the Agreement was to establish an efficient method for paying the Debtor's general unsecured creditors ("Class 7 Creditors"), who were numerous and geographically scattered. Under the Agreement, each Class 7 Creditor was issued a promissory note (the "Notes") in satisfaction of its allowed claim.¹ These Notes were then secured by a lien on substantially all of the Debtor's assets, valued at approximately $14 million (the "Collateral").²

To avoid the administrative difficulties of having each individual Noteholder hold a lien on the Collateral, the Trust Indenture Agreement appointed an Indenture Trustee to hold the liens in trust for the benefit of all Noteholders.³ The Agreement limited the responsibilities and duties of the Indenture Trustee to those specifically set forth in the Agreement, qualified under the Trust Indenture Act of 1939 ("TIA").⁴ The Agreement also permitted the creation of a separate trust in which the Debtor would place funds sufficient to satisfy the principal and interest of the Notes in full, if the Debtor decided to call the Notes in advance of maturity (the "Prepayment Funds").⁵ The Debtor appointed NationsBank as the Indenture Trustee.

In 1995, E-Z Serve Convenience Stores, Inc. ("E-Z Serve") agreed to acquire the Debtor and its assets, including the Collateral.⁶ To allow the acquisition to proceed, the Debtor on July 6, 1995 moved the bankruptcy court to enter an order allowing all of the Notes to be called and prepaid in full, and directing the Indenture Trustee to release its liens on the Collateral. The bankruptcy court granted the Debtor's motion, and on October 2, 1995, the Debtor called the Notes for prepayment and deposited with NationsBank approximately $1 million, the amount necessary to prepay all of the Notes. The Notes became immediately due and payable by the Debtor when they were called and ceased to accrue interest. Upon receipt of the Prepayment Funds, NationsBank released the liens on the Collateral.

In December 1995, BONY acquired the corporate trust division of NationsBank. As part of this acquisition, NationsBank transferred to BONY $983,935.11 in Prepayment Funds that had yet to be claimed by Noteholders. The record does not indicate whether BONY also received from NationsBank a copy of the Trust Indenture Agreement or the Debtor's Reorganization Plan, or whether it was otherwise apprised of the circumstances under which NationsBank came into possession of the Prepayment Funds. BONY nevertheless disbursed Prepayment Funds to those Noteholders who tendered their Notes.

According to the Debtor, it made several requests of two BONY officers, Irene Siegel and Janet Lee (née Wong), to account for those Noteholders who had yet to tender their Notes for payment. BONY then provided what the Debtor regarded as an inaccurate printout of the unpaid Noteholders. Based on this printout, the Debtor issued a second call notice to Noteholders. BONY paid those Noteholders who then tendered their Notes. During this period, the Debtor continued to ask BONY for a more accurate accounting, but BONY did not respond to its requests.

On April 24, 2000, the Debtor moved the bankruptcy court to issue an order requiring BONY to provide a final accounting for all payments NationsBank and BONY made to Noteholders, and to establish procedures for paying those Noteholders who sought payment but had lost their Notes. The Debtor served the motion on "Janet Wong, Bank of New York" that day. BONY did not oppose the motion or otherwise respond to it. The court granted the motion and ordered BONY to provide the Debtor with a full accounting no later than June 1, 2000.⁷ The order further stated that "[i]f the Indenture Trustee fails timely to provide said accounting and statement [of all claimants for whom funds still are being held], this Court shall issue an Order to Show Cause as to why the Indenture Trustee has failed and refused to fulfill its fiduciary duty to the Debtor." BONY did not provide the Debtor with a final accounting by the date mandated by the court, nor did it otherwise respond to the court's order.

On December 13, 2000, the Debtor moved the court for an order "directing The Bank of New York to pay EZ Serve [sic] all remaining money that it has on deposit pursuant to the trust indenture, plus any and all other funds which currently are in its custody, possession and control that in any way relate to [the Debtor]."⁸ The Debtor served this motion on "Irene Siegal, Vice President, The Bank of New York" the same day. Again, BONY did not oppose or otherwise respond to the motion. The court granted the motion on February 23, 2001, and ordered BONY to provide to the Debtor's counsel "a complete accounting reflecting all payments made to creditors" no later than March 31, 2001 (the "February 23 Order"). The court further directed the Debtor to publish a notice in periodicals serving those areas in which most of the remaining Noteholders resided, stating that all outstanding claims and Notes had to be tendered for payment within 30 days of the notice publication date. After that 30-day period expired, the Prepayment Funds held by BONY would be returned to the Debtor "in accordance with federal law." The Debtor published the notice on March 30, 2001, and filed a Notice of Publication with the court on April 10, 2001.⁹ Again, BONY did not respond to the court's order, and did not release the Prepayment Funds to the Debtor.

On May 11, 2001, the Debtor moved the court for an "order to show cause," alleging that although BONY had "provided the Debtor with some information about `recent' payments, it ha[d] failed to provide a complete accounting, which would allow the Debtor to conclude the case."¹⁰ The Debtor served this motion on "Irene Siegal, Vice President, and Janet Wong, of The Bank of New York." Even though an amended motion for an order to show cause was served on Siegal and Wong on May 14, 2001, and a second amended motion was sent by certified mail to Wong on May 31, 2001, BONY did not respond.¹¹ The court granted the Debtor's motion on June 14, 2001, and entered an order commanding BONY to appear before the court on August 13, 2001 "to show cause why the Debtor should not be granted the relief requested." As before, BONY ignored the order and failed to appear on August 13, 2001 as directed.

At the August 13 hearing, the court stated that BONY owed both the Debtor and the court a fiduciary duty, and that it had failed to carry out that duty. Accordingly, the court stated its intention to set an evidentiary hearing at which it would determine the reasonable interest rate that BONY owed to the Debtor on the Prepayment Funds. The court also stated that it would determine the appropriate attorney's fees and costs to charge BONY for its failure to comply with the court's orders.

On September 12, 2001, the court entered an "Order to Show Cause for Contempt Against Bank of New York," reiterating what it had announced at the August 13 hearing (the "September 12 Order"). In that order, the court held (1) that "BONY owes a fiduciary duty to this Court, the Reorganized Debtor, and its creditors;" (2) that "BONY's fiduciary duty includes an obligation to provide this Court and the Reorganized Debtor with an adequate accounting of the funds it received, those it has paid, and the amount it continues to hold for the Reorganized Debtor and its creditors;" and (3) that "BONY's fiduciary duty includes payment of reasonable interest on the funds that it holds for the Reorganized [Debtor]." The court therefore...