Thornton v. Syracuse Sav. Bank

• Decision Date: 10 April 1992
• Docket Number: No. 1056,D,1056
• Citation: 961 F.2d 1042
• Parties: Grant THORNTON, Appellee, v. SYRACUSE SAVINGS BANK, Appellant. ocket 91-9159.
• Court: U.S. Court of Appeals — Second Circuit

Page 1042

961 F.2d 1042

22 Fed.R.Serv.3d 593

Grant THORNTON, Appellee, v. SYRACUSE SAVINGS BANK, Appellant.

No. 1056, Docket 91-9159.

United States Court of Appeals Second Circuit.

Argued Jan. 9, 1991.

After remand, final briefs submitted in Feb. 1992.

Decided April 10, 1992.

John Spelman, Philadelphia, Pa., (Charlotte E. Thomas, and Klehr, Harrison, Harvey, Branzburg & Ellers on the brief), for appellant.

Stanley J. Parzen, Chicago, Ill., (Marc Gary, Wendy Ackerman, Thomas W. Dimond, and Mayer, Brown & Platt, on the brief), for appellee.

Before FEINBERG, TIMBERS and NEWMAN, Circuit Judges.

TIMBERS, Circuit Judge:

Appellant Syracuse Savings Bank, also known as Norstar Bank of Central New York (Syracuse or the bank), appeals from a summary judgment in favor of appellee Grant Thornton entered October 1, 1991 in the District of Connecticut, Warren W. Eginton, District Judge, dismissing Syracuse's cross-claim for equitable subrogation.

The court held (1) that Syracuse was not entitled to discovery of a settlement agreement between Grant Thornton, a national accounting firm, and certain third party investors, (2) that Syracuse failed to state a claim under state law for equitable subrogation, and (3) that any claim for equitable subrogation was pre-empted by federal law.

Syracuse challenges these rulings on appeal. For the reasons that follow, we affirm the decision of the district court as to the first two rulings, but we do not reach the merits of the third.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

In 1985, an entity known as NATCO announced that it would undertake the renovation of a complex of properties near the boardwalk in Atlantic City, New Jersey, which would result in the creation of a tourist center known as "Boardwalk Marketplace." Boardwalk Marketplace was to be financed through the sale of interests in a number of limited partnerships. Investors financed their purchases of interests through the execution of promissory notes which were then sold in the secondary market. Syracuse allegedly paid par value for approximately $35,000,000 worth of notes, making it the largest single secondary purchaser.

Several months after Syracuse obtained the investors' notes, NATCO and the limited partnerships went into bankruptcy. Many investors refused to make further payments on the notes. They filed a class action against numerous defendants, including Syracuse and Grant Thornton. The investors claimed to have relied, at least in part, on NATCO financial statements audited by Grant Thornton and financial projections included in the Boardwalk partnership offering memoranda compiled by Grant Thornton. The investors charged that Grant Thornton acted negligently and violated § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. With respect to Syracuse, the investors sought rescission of the promissory notes and damages on the ground that it and other defendant banks knew or had reason to know of the alleged securities fraud and therefore did not acquire the notes in good faith.

On September 14, 1987, the district court held that Syracuse was not a holder in due course of the negotiable instruments because the promissory notes were not negotiable. In re Boardwalk Marketplace Sec. Litig., 668 F.Supp. 115 (D.Conn.1987). Following that decision, the bank and investors entered into a settlement agreement under which the investors agreed to pay 35% of the principal amount of the notes held by Syracuse and the investors' obligations to repay the remaining 65% were discharged. The district court approved the settlement and dismissed the investors' claims against Syracuse. The settlement agreement did not address the issue of whether Syracuse was subrogated to the investors' claims as to the 65% of the debt that was discharged.

After settling with the investors, Syracuse filed several cross-claims against Grant Thornton and its co-defendants. In one cross-claim, which is the subject of this appeal, Syracuse alleged that, as a result of its settlement with the investors which had partially discharged the investors' obligations to it, Syracuse had become "subrogated" to the investors' claims against Grant Thornton to the extent of the discharge (65%).

On March 10, 1989, Grant Thornton moved to dismiss the bank's cross-claims. Before that motion was fully briefed, Syracuse filed an amended cross-claim which deleted all claims against Grant Thornton other than the subrogation claim. On July 18, Grant Thornton again moved to dismiss on the grounds, among others, (1) that Syracuse failed to state a valid subrogation claim in that the cross-claim did not allege that Syracuse had discharged a debt for which Grant Thornton was primarily liable; (2) that Syracuse had alleged only a partial satisfaction of a debt as distinguished from the full payment required for subrogation; and (3) that Syracuse did not have a right of subrogation under the securities law.

In response to Grant Thornton's motion, Syracuse argued that the "full payment" rule applies only when the primary creditors (here, the investors) object to the subrogation claim. Shortly thereafter, the investors did object to the subrogation claim.

Before the court rendered a decision on the motion to dismiss, the investors and Grant Thornton on May 23, 1990 filed a stipulation of settlement. That stipulation expressly provided that Grant Thornton could withdraw from the settlement if "the Court does not enter an order or judgment granting the motion to dismiss the Syracuse Subrogation Claim with prejudice, which order or judgment has become Final."

On July 11, the court approved the settlement between Grant Thornton and the investors. On the same day, pursuant to Fed.R.Civ.P. 12(b)(6), the court dismissed Syracuse's subrogation cross-claim because the investors objected to the subrogation claim. The court stated that "the interests of the creditors would ... clearly be impaired by the assertion of a cross-claim for partial subrogation." While acknowledging that Syracuse had offered to stipulate to subordinate its rights to those of the investors, the court held that "such a stipulation is a matter for the parties to negotiate rather than an issue for the Court to decide. Indeed, this is a matter which could well have been negotiated at the time the Bank Defendants settled with the investors."

The court certified its ruling as a final judgment pursuant to Fed.R.Civ.P. 54(b). An appeal was taken to our Court. The investors filed an amicus brief, arguing that they had a vital interest in the appeal insofar as their settlement with Grant Thornton could be rescinded in the event that the district court's decision dismissing the cross-claim later was reversed.

On January 9, 1991, we heard Syracuse's appeal from the order dismissing with prejudice, pursuant to Rule 12(b)(6), Syracuse's cross-claim for equitable subrogation against Grant Thornton. In an unpublished order, we held that in considering Grant Thornton's motion to dismiss pursuant to Rule 12(b)(6) the district court relied on matters outside the pleadings--namely, the terms and effects of settlement agreements between the parties that were then before the court--and that Grant Thornton's motion therefore should have been converted into a motion for summary judgment pursuant to Fed.R.Civ.P. 56. Kopec v. Coughlin, 922 F.2d 152, 154-55 (2 Cir.1991). We vacated the district court's judgment of dismissal and remanded the case with instructions to convert the motion to dismiss into one for summary judgment and to permit the parties an opportunity to present supporting material.

On January 25, 1991, Magistrate Judge Margolis held a telephone conference in which Syracuse, Grant Thornton and the investors participated. Syracuse subsequently filed, pursuant to Fed.R.Civ.P. 56(f), an affidavit describing the general area in which it desired discovery to establish a record in opposition to Grant Thornton's motion for summary judgment. In this affidavit, Syracuse stated a need for discovery relating to the settlement agreement between Grant Thornton and the investors. Syracuse requested:

"[A]ll writings or documents relating to the settlement, including: all drafts of the agreement, all correspondence and communications relating thereto, and all memoranda and legal research relating thereto."

On February 25, 1991, the magistrate ruled that the broad discovery described in Syracuse's Rule 56(f) affidavit was not permissible under the work-product doctrine and the client confidentiality privilege. This ruling was made before any discovery requests were made. Syracuse filed an objection. The district court referred the matter back to the magistrate. While recognizing that "a party can be deemed to have waived its attorney-client privilege and/or work-product privilege with respect to a settlement when it injects into litigation an issue which requires testimony from its attorneys or testimony concerning the reasonableness of its attorneys' conduct with respect to such settlement," the magistrate ruled that discovery was precluded because discovery was sought in "the very action in which the discovery issues arose." This subsequent ruling by the magistrate was adopted by the district court.

On October 1, 1991, the district court granted Grant Thornton's motion for summary judgment. Syracuse now appeals from that judgment. On appeal, Syracuse contends that its claim satisfied the requirements for equitable subrogation, and accordingly the judgment of the district court should be reversed. Syracuse further contends that the court erroneously denied its requests for discovery.

II.

A.

We turn first to Syracuse's claim regarding the court's order denying discovery. Syracuse asserts that the court erred in holding that Syracuse failed to make a sufficient showing under Rule 56(f) to permit discovery with respect to the...