Leverso v. SouthTrust Bank of AL., Nat. Assoc.

• Decision Date: 15 April 1994
• Docket Number: No. 93-6017,93-6017
• Citation: 18 F.3d 1527
• Parties: Francis M. LEVERSO, Elaine E. Leverso, Frank Klevitz, Mary Klevitz, Plaintiffs-Counter-Defendants-Appellees, Stephen D. Lieberman, Marlene F. Lieberman, Henry E. Cohen, Joanna S. Cohen, Daniel B. Morgan, J.B. Morgan, Norman L. Grier, Louella Boucher, Investments Nationale Limited Partnership, A Florida limited partnership; individually and on behalf of all others similarly situated, Plaintiffs, Rudolph Hajek, Jean Hajek, Plaintiffs-Counter-Defendants, v. SOUTHTRUST BANK OF AL., NAT. ASSOC., Defendant-Counter-Claimant-Appellee, Wheeler Bondholders, Claimant-Appellant, Shearson Lehman Hutton, Inc., Movant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1527

18 F.3d 1527

Francis M. LEVERSO, Elaine E. Leverso, Frank Klevitz, Mary Klevitz, Plaintiffs-Counter-Defendants-Appellees Stephen D. Lieberman, Marlene F. Lieberman, Henry E. Cohen Joanna S. Cohen, Daniel B. Morgan, J.B. Morgan, Norman L Grier, Louella Boucher, Investments Nationale Limited Partnership, A Florida limited partnership; individually and on behalf of all others similarly situated, Plaintiffs Rudolph Hajek, Jean Hajek, Plaintiffs-Counter-Defendants, v. SOUTHTRUST BANK OF AL., NAT. ASSOC., Defendant-Counter-Claimant-Appellee, Wheeler Bondholders, Claimant-Appellant, Shearson Lehman Hutton, Inc., Movant.

No. 93-6017.

United States Court of Appeals, Eleventh Circuit.

April 15, 1994.

Frank O. Burge, Jr., Burge & Wettermark, Birmingham, AL, Robert M. Sedgwick, Holtzmann, Wise & Shepard, New York City, for claimant-appellant.

Robert H. Rutherford, Burr & Forman, Birmingham, AL, Frank M. Wilson, Landis Sexton, Beasley, Wilson, Allen, Main & Crow, Montgomery, AL, for defendant-counter-claimant-appellee.

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

Before BLACK, Circuit Judge, JOHNSON and HENDERSON, Senior Circuit Judges.

BLACK, Circuit Judge:

Following a Florida development district bond default, class representatives of the class action suit underlying this appeal entered into a settlement agreement on behalf of the bondholders, the trustee of the bond proceeds, and other third parties. The agreement included a distribution plan that allocated the net settlement funds among the bondholders according to a pro rata share of the bondholders' cost basis, or the amount each bondholder paid for the bonds. Under this plan, bondholders who paid a higher amount for their bonds during the initial offering would receive a larger settlement than bondholders who paid a lesser amount in the secondary market after the initial offering and after the default. The district court approved the settlement agreement, including the distribution plan. Members of the class who had purchased their bonds in the secondary market at substantially lower prices objected to the distribution plan in the district court and now appeal the district court's approval of it. ¹ We hold that the distribution plan is contrary to the bond trust indenture's governing terms and vacate the district court's approval of the distribution plan.

I.

This appeal had its genesis in the late 1970s, when a large condominium project was planned for Palmetto, Florida. Improvements to the land were to be financed through tax-free bonds issued by the Palms of Terra Ceia Bay Community Development District (CDD or district), which was created in late 1982 pursuant to Chapter 190, Florida Statutes. ² SouthTrust Bank of Alabama was chosen as indenture trustee to administer the bond proceeds.

The CDD issued $11,500,000 in Special Assessment and General Obligation Capital Improvement Bonds, Series 1983, dated March 1, 1983. The bonds were issued pursuant to a resolution of the district and an "Indenture of Trust" (trust indenture) between the district and SouthTrust. They were secured by a pledge of revenues from special assessments and ad valorem taxes to be levied against the properties within the district. The land for the improvements was purchased by the CDD with a portion of the bond proceeds. The district's authority to levy the taxes, however, was conditioned on completion of the improvements--such as a golf course, clubhouse, water and sewage systems, streets, landscaping, and street lighting--so that the property to be taxed was benefitted.

The development project subsequently failed, defaulting on its interest payments and spawning numerous lawsuits in state and federal court. The suit from which this appeal arose was a class-action suit on behalf of all bondholders ³ against the indenture trustee, SouthTrust Bank. Mediation during the class action suit led to the settlement agreement approved by the district court. The settlement encompasses all parties to all the lawsuits. ⁴

The settlement agreement provided for a $2.5 million cash distribution to all persons holding bonds as of the record date. ⁵ The distribution plan provides in relevant part:

6. Disbursement of Proceeds. The proceeds of the Settlement Fund shall be disbursed to the Bondholders in such manner as shall be determined by the Court. The parties shall recommend to the Court the following plan of Distribution:

....

(iii) The remainder of the Settlement Fund [after 6(i) and 6(ii) deductions] shall be disbursed to the Bondholders proportionately according to the "Cost Basis" of each said Bondholder in the Bonds which it owns as of the Record Date.... "Cost Basis" shall be that amount, net of premiums, accrued interest, discounts, or other adjustments, actually paid by each Bondholder for the Bond or Bonds which he or she owns. Commissions paid to underwriters and brokers in connection with the purchase shall be included in Cost Basis. Each Bondholder shall receive an amount equal to the sum determined by applying to the total amount of the Settlement Fund remaining after deduction of [6(i) and 6(ii) amounts] ... a fraction the denominator of which is the total amount of all claims submitted by all Bondholders (and allowed by the Court) and the numerator of which is the claim submitted by said Bondholder.

Notwithstanding the foregoing, no Bondholder shall be entitled to receive an amount in excess of his Cost Basis in his Bond(s)....

7. Allocation of Bondholder Payments; Surrender of Bonds; Coupons. The Settlement Fund shall be applied in the manner set forth in the preceding paragraph as a payment of principal only and without payment for or on account of any interest due to the Bondholders with respect to the Bonds, without preference or priority of any Bond over any other Bond, ratably, according to the amounts available therefor in the Settlement Fund, without discrimination or privilege....

The settlement agreement provided that all of its terms, including the manner of disbursement of the settlement fund, were subject to court approval. Settlement Agreement p 18. It further required that any questions or issues relating to the distribution plan be submitted to the court. A severability clause stipulated that:

[A]ll questions relating to the distribution shall be entrusted to the Court for its decision in accordance with the general equitable powers of the Court. Any appeal or dispute which may arise concerning ... the Plan of Distribution ... shall not be grounds for delay in the entry of a Final Judgment approving this Settlement Agreement....

Id. at p 19. Pursuant to that clause, only the distribution plan approved by the district court was appealed. Consequently, we do not address the remainder of the settlement agreement as it was approved by the district court.

II.

In order to approve the settlement agreement, the district court was required to determine that it was fair, adequate, reasonable, and not the product of collusion. Bennett v. Behring Corp., 737 F.2d 982, 986 (11th Cir.1984). This Circuit has outlined several factors useful in making that determination. See, e.g., Holmes v. Continental Can Co., 706 F.2d 1144, 1147-49 (11th Cir.1983); In re Corrugated Container Antitrust Litig., 643 F.2d 195, 213 (5th Cir.1981). The district court thoroughly addressed six factors ⁶ and ruled that each weighed in favor of settlement. We review the district court's approval of the settlement agreement for abuse of discretion. Id. at 207.

In our review, we must determine whether the district court's approval was "based on adequate and careful analysis of 'the facts of the case in relation to the relevant principles of applicable law.' " Corrugated Container, 643 F.2d at 212 (quoting Cotton v. Hinton, 559 F.2d 1326, 1331 (5th Cir.1977)). The gravamen of this appeal, whether the distribution plan approved by the district court is contrary to the bondholders' rights under the governing trust indenture, is founded on construction of the trust indenture. Construction of a trust indenture is a question of contract law and interpretation, over which this Court has plenary authority. Broad v. Rockwell Int'l Corp., 642 F.2d 929, 940, 948 (5th Cir. Apr.) (en banc), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981). ⁷

Initially, we note that as part of the district court's assessment of the legal arguments and the substance of the opposition to the settlement, see supra note 6, the court rejected Appellants' stated opposition to the distribution plan without applying the bonds' governing trust indenture or the applicable principles of contract law. Bondholders' rights are a matter of contract, governed by the trust indenture and general principles of contract law. Broad, 642 F.2d at 940-41 & n. 10; see generally id. at 940-46; American Bar Foundation, Commentaries on Indentures at 2 (1971) (Commentaries ). Indeed, trust indenture boilerplate provisions, such as those at issue in this appeal, were developed in order to standardize debenture indenture contractual rights and provide uniformity to the financial market. Commentaries at 1-3. It is therefore imperative that the terms of the indenture govern the parties' contractual rights as determined by the judiciary. E.g., Broad, 642 F.2d at 940-46; Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889-91 ("We concede without apology that we believe contract provisions specifying 60-day periods mean 60 days rather than 60 days plus an additional period calculated by the length of the chancellor's foot."); see also Katz v. Oak Indus. Inc., 508 A.2d 873, 880-82 (Del.Ch.1986).

The district court therefore abused its discretion when it failed to apply the terms of the governing trust indenture and settled principles of contract law in assessing whether the settlement agreement was fair, adequate, and reasonable. Nonetheless, because the law favors...