New York State Medical Care Facilities Finance Agency v. Bank of Tokyo Trust Co.

• Decision Date: 28 November 1994
• Citation: 163 Misc.2d 551,621 N.Y.S.2d 466
• Parties: NEW YORK STATE MEDICAL CARE FACILITIES FINANCE AGENCY, Plaintiff, v. BANK OF TOKYO TRUST COMPANY and Shawmut Bank of Boston, N.A., Defendants.
• Court: New York Supreme Court

Page 466

621 N.Y.S.2d 466

163 Misc.2d 551

NEW YORK STATE MEDICAL CARE FACILITIES FINANCE AGENCY, Plaintiff, v. BANK OF TOKYO TRUST COMPANY and Shawmut Bank of Boston N.A., Defendants.

Supreme Court, New York County Individual Assignment Part 49.

Nov. 28, 1994.

Bryan R. Williams, of counsel, DeForest & Duer, New York City, for plaintiff.

George F. Hritz, of counsel, Davis, Scott, Weber & Edwards, P.C., New York City, for defendant Bank of Tokyo Trust Co.

Edward Burnbaum, of counsel, Lynch, Rowin, Novack, Burnbaum & Crystal, P.C., New York City, for defendant Shawmut Bank of Boston.

HERMAN CAHN, Justice.

Defendant Bank of Tokyo Trust Company ("BOTT") moves to dismiss the complaint based on documentary evidence pursuant to CPLR § 3211(a)(1), or, in the alternative, for summary judgment pursuant to CPLR § 3212.

Plaintiff New York State Medical Care Facilities Finance Agency ("MCFFA") is a New York based public benefit corporation. Pursuant to the New York State Medical Care Facilities Finance Agency Hospital Revenue Bond Resolution ("MCFFA Bond Resolution" or "Contract") adopted December 5, 1985, MCFFA created and issued a series of revenue bonds denominated the Hospital Revenue Bonds ("MCFFA Bonds"). On December 30, 1985, and in accordance with a provision in the MCFFA Bond Resolution, BOTT, also a New York corporation, was appointed trustee for the MCFFA Bonds. BOTT's official status as trustee was conferred upon its execution of the Trustee's Acceptance and Certificate.

The MCFFA Bonds were sold to the public. BOTT used a portion of the proceeds of the MCFFA Bond sale to purchase Massachusetts Health and Educational Facilities Authority GNMA Collateralized Revenue Bonds ("Massachusetts Bonds") in the principal amount of $4,850,000.

Defendant Shawmut Bank of Boston, N.A. ("Shawmut") served as trustee for the Massachusetts Bonds, and acted as paying agent and registrar for these bonds, as well. As trustee for the Massachusetts Bonds, Shawmut was required to provide notice of any proposed redemption of the Massachusetts Bonds both by mailing a copy of the notice of redemption to the registered owners of the bonds to be redeemed, and by publishing notice of the redemption in two authorized newspapers. Upon any such redemption, Shawmut was required to pay the bond owners the redemption price (principal plus premium), together with interest accrued to the date of redemption. The Massachusetts Bond Resolution provided that interest will cease to accrue on the bonds subsequent to the date of redemption.

BOTT, in its capacity as trustee, was designated the registered holder of the Massachusetts Bonds for the benefit of MCFFA. From approximately June or July, 1986 through January, 1990, BOTT received interest payments on the Massachusetts Bonds from Shawmut, and credited such payments to MCFFA semi-annually. In July 1990, however, BOTT neither received, nor forwarded to MCFFA, any interest on the bonds. (The July 1990 semi-annual interest payment would, according to MCFFA, have equalled $200,062.50). The Massachusetts Bonds had, in fact, been called for early redemption on January 1, 1990, and as of that date, interest on the bonds had ceased to accrue.

BOTT presented the Massachusetts Bonds to Shawmut for redemption on or about July 17, 1990. MCFFA states that BOTT received two payments from Shawmut shortly thereafter, in the total amount of $4,922,625, (comprised of the principal amount of $4,850,000. plus $72,625., a portion of the premium for early redemption), and $20,375 (the balance of the total early redemption premium payment of $93,000). Presumably, these sums were then forwarded to MCFFA.

As a result of BOTT's failure to timely present the bonds for early redemption, however, MCFFA was deprived of approximately six months' interest which could have been generated (the "lost return") had MCFFA had the opportunity to promptly re-invest the principal and premium. In short, MCFFA argues that it lost the use of almost $5,000,000 for the period from January 1 through July 18, 1990.

MCFFA claims to have demanded payment from BOTT of the interest on both the principal ($4,850,000.) and on the early redemption premium ($93,000) for the relevant period, but that BOTT has refused to pay same.

MCFFA pleads three causes of action against BOTT, each arising from BOTT's failure to promptly present the Massachusetts Bonds for redemption: (1) negligence in BOTT's failure to meet its obligations as trustee and registered owner of the bonds; (2) breach of BOTT's fiduciary duty as trustee, and (3) breach of contract. MCFFA seeks damages in excess of $250,000.

Article VII of the MCFFA Bond Resolution which relates to the trustee's duty of care, provides in relevant part that the trustee shall not be liable "except for its own negligence or default," and that "no implied covenants or obligations shall be read into this Resolution...." (Art. VII § 703[1]. The Resolution further provides that the trustee will not be held liable "for any action taken or omitted by it in good faith and believed to be ... within the discretion or rights conferred upon it...." (703[3], and provides that the trustee shall be indemnified "against any liabilities which it may incur in the exercise ... of its powers ... and which are not due to its negligence or default." ( § 703).

BOTT vigorously asserts that it had no obligation, either as a fiduciary or pursuant to the MCFFA Bond Resolution, to monitor the status of the bonds, to present the bonds within a reasonable period following a redemption call, or even to notify MCFFA of a redemption call. This is so, BOTT claims, because the MCFFA bond resolution specifically sets forth the exclusive duties for which BOTT was responsible, and, as no mention is made in the Contract of an obligation to monitor the bonds, BOTT was not required to do so. BOTT also insists that it did not, except in the event of a default, have a duty to exercise reasonable care in the performance of its services as trustee for MCFFA.

Plaintiffs, on the other hand, maintain that the Resolution does not relieve BOTT of "the duty to perform basic administrative tasks that are within the scope of every trustee under a trust indenture," and furthermore, that the terms of the Resolution indicate that BOTT is liable for negligence both prior to, and in the event of, a default. Specifically, MCFFA argues that the Resolution need not spell out every possible administrative task encompassed within the scope of a trustee's duties, and that an integral part of a trustee's duties in holding bonds as investments is to monitor those bonds for early redemption. MCFFA emphasizes the fact that BOTT has essentially conceded having received written notice of the early redemption from Shawmut, and failed to present the bonds on time or to notify plaintiff of the early call. MCFFA argues that "[t]here can be no question that an indenture trustee has an obligation to advise the principal for whom it holds bonds as investments that it has received notice of early redemption of those bonds ... Such a decision involves no exercise of judgment or discretion. It is a ministerial act."

MCFFA argues that it is custom and practice in the bond industry that, as part of its normal administrative duties, an indenture trustee is responsible for, among other things, reading its mail and acting upon or passing along any notices it has received, as well as for monitoring publications for the early redemption call of bonds. MCFFA further contends that it is undisputed that BOTT had acted as trustee for MCFFA on several other bond issues prior to January 1990 in which there was an early redemption call, and that on each of these occasions BOTT had informed MCFFA of the early redemption calls and had timely presented the bonds, although there was no specific provision in any of the bond resolutions governing those trustee relationships or any other documents explicitly requiring BOTT to do so.

The Court of Appeals has held that "[t]he standard by which the performance of the trustee is to be judicially measured is whether, in all the circumstances including ... [the granting of absolute discretion to the trustee] ... the trustee exercised 'such diligence and such prudence in the care and management [of the trust], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs.' " Matter of Hahn (62 N.Y.2d 821, 824, 477 N.Y.S.2d 604, 466 N.E.2d 144) (citations omitted). Although the express terms of a trust may relax, constrict, or otherwise modify the standard of care to which a particular trustee is held, "[a] provision in the terms of the trust fixing a standard of care or skill lower than that which would otherwise be required of a trustee is strictly construed." Restatement [Second] of Trusts § 174, comment d; see also O'Hayer v. St. Aubin (30 A.D.2d 419, 423, 293 N.Y.S.2d 147) (2d Dept.1968). Consistent with this latter principle is the requirement that specific language be evinced in order to lessen the standard of care. See Bogert, Trusts and Trustees § 541, at 172 [2d ed. rev. 1993]; see also Dubovsky & Sons, Inc. v. Honeywell, Inc. (89 A.D.2d 993, 994-95, 454 N.Y.S.2d 329) (2d Dept.1982); Brodheim v. Chase Manhattan Bank, N.A. (75 Misc.2d 285, 347 N.Y.S.2d 394). The Second Department has observed that "[i]t has been consistently held that exculpatory clauses in a contract which are intended to insulate one of the parties from liability resulting from his own negligence, will be enforced ... when expressed in sufficiently clear, unequivocal and unmistakable language." Dubovsky & Sons, Inc. v. Honeywell, Inc. [89 A.D.2d 993, 994-95, 454 N.Y.S.2d 329]. (citations omitted). Furthermore, even "[t]he grant of broad discretionary powers to the trustee does not relieve him from the duty to use ordinary skill and prudence in his administration of the trust." Bogert, Trusts and Trustees § 541, at 173...