U.S. Trust Co. of New York v. Alpert, 92 Civ. 9393 (KMW).

• Decision Date: 30 March 1998
• Docket Number: No. 92 Civ. 9393 (KMW).,No. 93 Civ. 3935(KMW).,92 Civ. 9393 (KMW).,93 Civ. 3935(KMW).
• Parties: UNITED STATES TRUST COMPANY OF NEW YORK, The Bank of New York, and The Chase Manhattan Bank, N.A., as trustees of certain unit investment trusts, Plaintiffs, v. Steven L. ALPERT, et al., and Isaac T. Avery, Jr. et al., and Dale D. Ackerman, et al., Defendants. INVESTORS FIDUCIARY TRUST COMPANY, as Trustee of the Kemper Tax-Exempt Income Trust, Plaintiff, v. Janet C. JENNER, et al., and Thomas B. Bachhuber, et al., and Howard R. Stevens, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

10 F.Supp.2d 290

UNITED STATES TRUST COMPANY OF NEW YORK, The Bank of New York, and The Chase Manhattan Bank, N.A., as trustees of certain unit investment trusts, Plaintiffs, v. Steven L. ALPERT, et al., and Isaac T. Avery, Jr. et al., and Dale D. Ackerman, et al., Defendants.

INVESTORS FIDUCIARY TRUST COMPANY, as Trustee of the Kemper Tax-Exempt Income Trust, Plaintiff, v. Janet C. JENNER, et al., and Thomas B. Bachhuber, et al., and Howard R. Stevens, et al., Defendants.

No. 92 Civ. 9393 (KMW).

No. 93 Civ. 3935(KMW).

United States District Court, S.D. New York.

March 30, 1998.

Jack Kaplan, Carter, Ledyard & Milburn, New York City, Richard B. Dannenberg, Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, NY, for U.S. Trust Co., Plaintiff.

Richard B. Dannenberg, Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, NY, Ellen J. Bickal, Emmet, Marvin & Martin, New York, NY, for Bank of New York, Plaintiff.

Richard Tufaro, Milbank, Tweed, Hadley & McCloy, New York, NY, Kent T. Stauffer, Kent T. Stauffer, New York, NY, Jack Kaplan, Carter, Ledyard & Milburn, New York City, Richard B. Dannenberg, Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, NY, for Chase Manhattan Bank (National Association), Plaintiff.

John K. Weir, Mark A. Saunders, Haight Gardner Holland & Knight, New York, NY, for Robert Haserot, Defendant.

John K. Weir, Haight Gardner Holland & Knight, New York, NY, for Steven L. Alpert, Marianne Brachfield, Roger Brandwein, Mary C. Christoffel, Robert J. Christoffel, Dana Dangelo, Charles Fischer, Hugh A. Galloway, Patricia S. Gallucci, Nathan Grodstein, Edward F. Huntington, Defendants.

John F. Triggs, Camhy, Karlinsky & Stein, LLP, New York, NY, for Isaac T. Avery, Jr., Annabel R. Bogdonoff, Leonard Romanik, Carlton G. Thomas, Margaret West, Goldie Miller, Frances M. Neyland, Roland R. Neyland, Glenn Palmer, Defendants.

Christopher Lovell, Lovell & Stewart, LLP, New York, NY, for Sandra Clementi, Defendant.

Christopher Lovell, Lovell & Stewart, LLP, New York, NY, John F. Triggs, Camhy Karlinsky & Stein, LLP, New York, NY, for Donald J. Phillips, Ralph E. Phillips, Wilton J. Benolt, Robert W. Bernthal, Jane S. Dowdall, John B. Mantonya, Stanley A. Maple, Pauline D. Raymond, Earl W. Rogers, Defendants.

Edward F. Haber, Shapiro, Grace, Haber & Urmy, Boston, MA, for Helen Berlin, Betty Ann Blumenthal, Bedford Chapin, Martha J. Clark, Cynthia Wood Daniels, Defendants.

ORDER

KIMBA M. WOOD, District Judge.

Plaintiff Trustees (the "Trustees" or "plaintiffs") of various unit investment trusts (the "Trusts") bring these two interpleader actions (93 Civ. 9393 and 93 Civ. 3935 will be referred to herein as "U.S. Trust action" and "Investors Fiduciary action," respectively) to determine which of three defendant classes of investors in the Trust — Current Holders, Former Holders and Continuous Holders — are entitled to monies paid to the Trusts in settlement of securities fraud claims arising from the default of bonds held by the Trusts. I referred this case to Magistrate Judge Sharon E. Grubin for general pre-trial case management and dispositive motions. Each of the defendant classes now moves for summary judgment in both actions. In addition, plaintiff U.S. Trust moves for summary judgment dismissing the counterclaims of the Current Holders in Action One.

In a Report and Recommendation dated December 17, 1997 (the "Report"), Magistrate Judge Sharon E. Grubin recommended, in each of the two interpleader actions, that I deny the summary judgment motion of the Former Holders and grant the summary judgment motions of the Current Holders and the Continuous Holders and award them the interpleaded settlement proceeds (the "interpleaded Fund"), to be distributed according to their pro rata shares as determined under the Indentures. Magistrate Judge Grubin further recommended that I grant plaintiff U.S. Trust's motion for summary judgment on the Current Holders' counterclaims for breach of contract and fiduciary duty. Defendants Former Holders and Current Holders in Action One have filed timely objections to portions of the Report, to which plaintiffs and defendants Continuous Holders and Current Holders have responded. Pursuant to Rule 72(b) of the Federal Rules of Civil Procedure, I review de novo those portions of the Report to which defendants object. For the reasons stated below, I adopt the Report, attached hereto, in all respects.

I. Discussion

The facts of the case are thoroughly discussed in Magistrate Judge Grubin's Report and Recommendation, familiarity with which is assumed. Defendant Former Holders in each of the actions and Defendant Current Holders in the U.S. Trust action have all filed separate objections, which I consider in turn.

A. The Report and the Former Holders' Objections

In Magistrate Judge Grubin's careful and comprehensive Report, she concludes that, under the terms of the trust indentures involved in both actions, "the interpleaded Fund must be distributed to members of the Current Holder and Continuous Holder classes, who were the owners of record of units in the Trusts on the applicable Record Dates when the Trusts came into possession of the distributions from the settlement funds." (See Report at 17.)

Defendant Former Holders in Action One "generally object" to the Report, repeating the arguments made in their motion papers (see FH1 Objs. at 4-5); they reiterate their position that principles of equity, the "provenance" of the interpleaded Funds, language in some of the indentures, and Second Circuit law concerning the non-assignability of fraud claims, all militate in favor of awarding the interpleaded Fund to the Former Holders. Similarly, the objections of defendant Former Holders in the Investors Fiduciary action were raised in their motion papers. They now place particular emphasis on "significant language" in the Trust documents and Second Circuit law, which they contend establishes that proceeds from the settlement of the securities fraud claims belong to the Former Holders, "who acquired ownership rights in the trusts and bonds deposited in the Trust Funds." (See FH2 Objs. at 6-7; 8-19.) These defendant Former Holders also reassert that the principles of res judicata and equity weigh in favor of their summary judgment motion, referring the Court to their motion papers for elaboration of their positions. (See FH2 Objs. at 19-23.)

After a thorough review of all of the Former Holders' objections to this recommendation, I find that the Former Holders have merely repeated the arguments made in their briefings of the underlying motions, all of which were fully considered and rejected by Magistrate Judge Grubin.¹ (See Report at 17-35.) Because I agree with the reasoning and conclusions of Magistrate Judge Grubin's Report, I hereby adopt her recommendation that I deny the summary judgment motions of the Former Holders, and grant the summary judgment motions of the Current Holders and Continuous Holders, awarding them the interpleaded Fund, to be distributed according to their pro rata shares as determined under the indentures.

B. The Report and the Action One Current Holders' Objections

Magistrate Judge Grubin further recommended that I grant the summary judgment motion of plaintiffs as to defendant Current Holders' counterclaims for breach of contract and fiduciary duty in the U.S. Trust action, on the basis of her determination that the counterclaims "fail as a matter of law." Magistrate Judge Grubin found that because the plaintiff Trustees acted within the rights granted to them by law in bringing their interpleader action, no cause of action arises from their commencement of this action. (Report at 38-39, 44.) She further indicates — in dicta — that even if the Current Holders were deemed to have stated a claim, they have "neither raised any genuine issue of material fact nor shown how further discovery could do so at all." Therefore, she concludes, summary judgment should be granted to plaintiffs as to defendant's counterclaims in any event.

In their objections to Magistrate Judge Grubin's recommendation, defendant Current Holders maintain that material issues of fact preclude summary judgment on their counterclaims. Although essentially repeating arguments made in their moving papers, defendant Current Holders do include in their objections a more focused discussion of their bases for concluding that a cause of action does arise under the circumstances of the instant case. They emphasize that interpleader actions may be commenced only where trustees face a "real and reasonable fear of double liability" and indicate that the terms of the indentures, the Investment Company Act of 1940 (the "1940 Act"), and the "limited discovery" they have obtained do not support such a fear. (See CH Objs. at 14, 17.) In addition, defendant Current Holders contend that the Report failed to address "a mixed question of law and fact ... as to `whether the Trustee's "right" to commence a statutory interpleader supersedes the statutory mandate of Section 26(a) of the ... 1940 Act.'" (See CH Objs. at 1-2.)

After a full consideration of defendant Current Holders' objections, I find that they have no merit and conclude that Magistrate Judge Grubin correctly determined that plaintiff Trustees' motion for summary judgment as to defendant Current Holders' counterclaims should be granted. In reaching this conclusion, I note in particular that defendant Current Holders have failed to establish that material questions of fact remain in dispute as to whether plaintiffs Trustees had a "real and reasonable fear of double liability or vexatious, conflicting claims." Washington Elec. Coop., Inc. v. Paterson, Walke, & Pratt, 985 F.2d 677, 679 (2d Cir. 1993). Under Rule 22 of the Federal Rules of Civil Procedure, an interpleader is available when a stakeholder "is or may be exposed to double or multiple liability." Fed. R.Civ.P. 22; the stakeholder who "legitimately fears...