LNC Inv., Inc. v. First Fidelity Bank, Nat. Ass'n

Citation935 F. Supp. 1333
Decision Date01 August 1996
Docket NumberNo. 92 Civ. 7584 (MBM).,92 Civ. 7584 (MBM).
PartiesLNC INVESTMENTS, INC. and Charter National Life Insurance Company, Plaintiffs, v. FIRST FIDELITY BANK, NATIONAL ASSOCIATION, New Jersey, United Jersey Bank, National Westminster Bank, N.J., Riker, Danzig, Scherer, Hyland & Perretti and Clapp & Eisenberg, Defendants.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

Seth T. Taube, McCarter & English, New York City, for First Fidelity Bank, N.A.

Robert C. Myers, Heather K. McDevitt, Dewey Ballantine, New York City, for Shawmut Bank Connecticut, N.A. Mitchell A. Karlan, Gibson, Dunn & Crutcher, New York City, pro se.

OPINION AND ORDER

MUKASEY, District Judge.

Plaintiffs LNC Investments, Inc. and Charter National Life Insurance Company invested in an equipment trust (the "Trust") established by defendant First Fidelity with Eastern Airlines in 1986. Plaintiffs have sued several trustees for violation of the Trust Indenture Act's ("TIA") prudent person requirement, breach of the Indenture's prudent person requirement, and breach of fiduciary duties under the Indenture and New York common law. Plaintiffs have sued also the law firms Riker, Danzig, Scherer, Hyland & Perretti ("Riker, Danzig"), and Clapp & Eisenberg for malpractice, alleging that those firms negligently advised their clients.

First Fidelity, the collateral trustee, moves to implead Shawmut Bank Connecticut, N.A. and Shawmut's attorneys, Gibson, Dunn and Crutcher ("Gibson, Dunn"), as third-party defendants on the following theories: (1) contribution under the TIA, (2) contribution under New York law, and (3) indemnification under New York law. For the reasons that follow, First Fidelity's motion is granted only to the extent that First Fidelity seeks contribution from Shawmut under New York law, and is denied in all other respects.

I.

The subject matter of the underlying case has been the focus of three prior opinions, familiarity with which is assumed for current purposes. LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1994 WL 73648 (S.D.N.Y. Mar. 3, 1994); LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1994 WL 225408 (S.D.N.Y. May 26, 1994); LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1995 WL 231322 (S.D.N.Y. Apr. 19, 1995). I will restate the facts only briefly here.

First Fidelity and Eastern established the Trust in 1986 pursuant to a Secured Equipment Indenture and Lease Agreement. The Trust sold certificates to investors, used the proceeds to buy airplanes from Eastern, and then leased those planes back to the airline. (Second Amended Compl. ("SAC") ¶¶ 10, 11, 14) Eastern's lease payments enabled the trust to repay principal and interest to certificate holders. The terms of the Trust, and the responsibilities of the various parties, were defined by the "Secured Equipment Indenture and Lease Agreement," dated November 15, 1986, and a "Second Supplemental Indenture," dated February 18, 1987 (together, the "Indenture").

The Trust issued three series of trust certificates, with declining rights of priority to payment, graduated interest rates and increasingly distant maturity dates. (Id. at ¶¶ 11, 12) A different trustee was appointed to protect the rights of the investors in each series. Midlantic Bank served as First Series Trustee, United Jersey Bank ("UJB") as Second Series Trustee, and National Westminster Bank, N.J. ("NatWest"), as Third Series Trustee from the date of the Second Supplemental Indenture until August 31, 1990, when it resigned and was succeeded by Shawmut. (Id. at ¶ 15) Shawmut served as Third Series Trustee for the remainder of the life of the trust. The Indenture appointed First Fidelity as the "Collateral Trustee," and First Fidelity so served for the duration of the trust. (SAC ¶¶ 15, 16) Riker, Danzig served as counsel to First Fidelity, Clapp & Eisenberg represented UJB, and Gibson, Dunn advised both Shawmut and Natwest at all times relevant to this action.

On March 9, 1989, Eastern filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. 11 U.S.C. §§ 1-1330 (1994). The filing resulted in an automatic stay of all actions or claims against Eastern, 11 U.S.C. § 362(a) (1994), and prevented the Trust from recovering the airplanes — the trust collateral. Just before Eastern filed for bankruptcy, an independent appraiser valued the airplanes at approximately $682 million and cautioned that their value would decline rapidly in the near future. (SAC ¶¶ 19, 20) A year-and-a-half later, on November 14, 1990, the trustees moved to lift the stay. (Id. at ¶ 29) By the time the stay was lifted on January 18, 1991, the value of the collateral aircraft had plummeted, leaving the certificate holders undersecured. (Id. at ¶ 25) Second series certificate holders will receive only part of their principal and no interest, and third series certificate holders will receive neither principal nor interest. (Id. at ¶ 27)

Plaintiffs contend that these losses could have been prevented if the trustees had requested a lifting of the stay when bankruptcy first was declared. The trustees' failure to do so, plaintiffs maintain, breached: (1) the prudent man requirement of the TIA, 15 U.S.C. § 77ooo(c) (1994), (2) the prudent man requirement of the agreement, §§ 9.02 and 9A.01 of the Indenture, and (3) fiduciary duties under the Indenture and New York common law. (SAC ¶¶ 33-47)

The first of the three prior opinions in this case dismissed plaintiffs' complaint with leave to amend to allege events of default other than Eastern's filing of the bankruptcy petition. That opinion also required plaintiffs to post an undertaking upon the filing of the amended complaint. LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1994 WL 73648 (S.D.N.Y. Mar. 3, 1994). In the second opinion I eliminated the requirement that plaintiffs post an undertaking, after determining that plaintiffs owned more than 10% of the outstanding trust certificates and therefore were protected from the undertaking requirement by § 7.11 of the Indenture. LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1994 WL 225408 (S.D.N.Y. May 26, 1994). Finally, in the third opinion I denied defendants' Rule 12(b)(6) motion to dismiss the amended complaint, for the reason that a hypothetical determination of a Bankruptcy Court's ruling on a prompt motion to lift the stay could not be made before trial, and that absent such a determination the complaint could not be dismissed. LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1995 WL 231322 (S.D.N.Y. Apr. 19, 1995).

In defense of the action, Third Series Trustee NatWest filed a third-party complaint against its successor Third Series Trustee Shawmut for both contribution and indemnification. Shawmut moved to dismiss that complaint pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief could be granted. Before that motion was decided, Fleet Financial Group, Shawmut's parent corporation, acquired NatWest. See Saul Hansell, Fleet Buys NatWest Cheap, in a Deal that's Widely Applauded, N.Y. Times, Dec. 20, 1995, at D8. As a result, the third-party action between NatWest and Shawmut was dismissed without prejudice by stipulation of the parties. (4/30/96 Stip. of Dismissal)

On April 19, 1996, First Fidelity filed the present motion to implead Shawmut and Gibson, Dunn.

II.

Rule 14(a) of the Federal Rules of Civil Procedure allows a defending party to implead a party "who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff." Fed.R.Civ.P. 14(a). A defending party may file a third-party complaint without leave of court, within 10 days after serving the answer. Thereafter, however, the third-party plaintiff must obtain leave of court to implead another party. Id. Leave should be granted when, after considering the delay by the movant, the complication of trial, and the merits of the proposed third-party complaint, the court concludes that the benefits of consolidation outweigh the prejudice to plaintiff and third-party defendants. State of New York v. Solvent Chem. Co., 875 F.Supp. 1015, 1021 (S.D.N.Y.1995).

One factor relevant here is First Fidelity's delay before making this motion. Plaintiffs filed their first complaint against First Fidelity on October 16, 1992. That complaint was amended on April 6, 1994, and amended again on May 25, 1995. First Fidelity did not file this motion for more than three-and-a-half years after the filing of the original complaint, and for almost a year after the filing of the operative complaint.

First Fidelity explains that it did not attempt to implead Shawmut sooner because until recently Shawmut was a part of this case by virtue of NatWest's third-party action against it. First Fidelity suggests that while NatWest's third-party complaint was pending against Shawmut, it too could seek contribution and indemnification from Shawmut. That argument fundamentally mischaracterizes the nature of a litigation. Shawmut was in this case only to respond to NatWest's specific claims against it; Shawmut was not in the case to respond to all claims made by all parties. Any outcome of Shawmut's motion to dismiss NatWest's third-party complaint would have been irrelevant to First Fidelity's motion to implead and does not justify First Fidelity's two-year delay. That unreasonable delay is not dispositive, but must be considered along with the merits of the motion.

With respect to Gibson, Dunn, First Fidelity argues that it could not have moved earlier to implead because it was not aware of Gibson, Dunn's important role in the transactions at issue. That argument too is flawed, because it is contrary to the facts of this case, as well as First Fidelity's own assertions. Gibson, Dunn has been involved in the transactions giving rise to this action since 1988, when it was retained as couns...

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