U.S. Trust Co. of New York v. Executive Life Ins. Co.

• Decision Date: 15 April 1987
• Citation: 791 F.2d 10
• Parties: UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, the Chase Manhattan Bank, N.A., as Trustee, Sharon Steel Corporation, Inc., UV Industries, Inc., Liquidating Trust and David Finkelstein, Arthur R. Gralla, Paul Kolton, Theodore W. Kheel, Edwin Jacobson and Martin Horowitz, as Trustees of the UV Industries, Inc., Liquidating Trust, Plaintiffs, Sharon Steel Corporation, United States Trust Company of New York, Plaintiffs-Appellees, v. EXECUTIVE LIFE INSURANCE CO., Occi & Co., Staniels & Co., Translife & Co., Nest & Co., Agway Insurance Company and First Missouri Bank and Trust Co., on behalf of themselves and as representatives of a class of former Holders of 9 1/4% Senior Subordinated Notes due
• Court: U.S. Court of Appeals — Second Circuit

Page 10

791 F.2d 10

UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, the Chase Manhattan Bank, N.A., as Trustee, Sharon Steel Corporation, Inc., UV Industries, Inc., Liquidating Trust and David Finkelstein, Arthur R. Gralla, Paul Kolton Theodore W. Kheel, Edwin Jacobson and Martin Horowitz, as Trustees of the UV Industries, Inc., Liquidating Trust, Plaintiffs Sharon Steel Corporation, United States Trust Company of New York, Plaintiffs-Appellees, v. EXECUTIVE LIFE INSURANCE CO., Occi & Co., Staniels & Co. Translife & Co., Nest & Co., Agway Insurance Company and First Missouri Bank and Trust Co., on behalf of themselves and as representatives of a class of former Holders of 9 1/4% Senior Subordinated Notes due April 15, 1987, Mimi Shapiro, Mortimer A. Shapiro, Pacific & Co., Cede & Co. and North Star Oil Company, on behalf of themselves and as representatives of a class of Holders of 9 1/4% Senior Subordinated Notes Due April 15, 1987, Bucher & Co., William W. Humphrey, Trustee, and Louis H. Spiner, Trustee, on behalf of themselves and as representatives of a class of former Holders of 5 3/8% Subordinated Debentures Due November 15, 1995, and Bear Stearns & Co., Cede & Co. Julian S. Goldberg, Mericka & Co., Mutual Shares Corp. and Mutual Qualified Income Fund, Saxon & Co., on behalf of themselves and as representatives of a class of Holders of 5 3/8% Subordinated Debentures Due November 15, 1995, Defendants, Nest & Co., on behalf of the 9 1/4% Selling Class, Defendant-Appellant, Mimi Shapiro, Mortimer A. Shapiro, Mutual Shares Corp., Mutual Qualified Income Fund, and Bear Stearns & Co., Defendants-Appellees.

No. 346, Docket Nos. 85-7543, 85-7559.

United States Court of Appeals, Second Circuit.

Argued Dec. 4, 1985.

Decided May 15, 1986.

Michael B. Roitman, Boston, Mass. (Fine & Ambrogne, Boston, Mass., of counsel), for defendant-appellant Nest & Co.

Stephen Lee Crystal, New York City (Crystal and Driscoll, P.C., New York City, of counsel), for defendants-appellees Mimi Shapiro and Mortimer Shapiro.

Robert J. Hausen, New York City (Stephen A. Oxman, Shearman & Sterling, New York, of counsel), for plaintiff-appellee Sharon Steel Corp.

Bernard Cedarbaum, New York City (Carter, Ledyard & Milburn, New York City, of counsel), for plaintiff-appellee U.S. Trust Co. of N.Y.

Before FRIENDLY, ^* CARDAMONE and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This is an appeal from decisions of Judge Edelstein in this federal statutory interpleader action granting summary judgment to one class of claimants, denying summary judgment to another class, 602 F.Supp. 930 (S.D.N.Y.1984), and denying the request of the latter class's representative for attorneys' fees, 602 F.Supp. 942 (S.D.N.Y.1985).

This action arose out of Sharon Steel Corporation's ("Sharon") assumption of the liabilities of UV Industries ("UV"), including UV's obligations under certain debentures. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir.1982), cert. denied, 460 U.S. 1012, 103 S.Ct. 1253, 75 L.Ed.2d 482 (1983). Sharon and various trustees for the holders of UV notes brought suit to determine which of two competing classes of holders was entitled to certain interest payments deposited by Sharon with United States Trust Company of New York ("U.S. Trust"), the indenture trustee, pending resolution of this action. With respect to this aspect of the appeal, we affirm the judgment of the district court for reasons stated infra. However, we remand to the district court a request for attorneys' fees made by Nest & Co., the representative of the appellant class.

DISCUSSION

This interpleader action is a contest between two classes of holders of a certain issue of UV debentures, the 9 1/4% Senior Subordinated Notes Due April 15, 1987 (the "Notes"), over the interest on the Notes paid by Sharon to U.S. Trust on April 1, 1980, October 1, 1980, and April 1, 1981 (the "stake"). U.S. Trust refused to distribute these amounts to the then holders of the Notes pursuant to Section 13.03 ¹ of the U.S. Trust Indenture (the "Indenture"), which prohibited payment of any monies on the Notes in the event of a default in payment of principal or interest on a senior indebtedness. At the time of U.S. Trust's refusal, the trustees of an issue of senior indebtedness (the "Senior Notes") had already issued notices of default on the Senior Notes. If this default triggered Section 13.03, then Section 2.03 ² of the Indenture which established a mechanism for distributing interest payments on the Notes in the event of a default in payment, was also triggered. That Section provided for the declaration of a special record date for payment of such interest after the cure of the default.

On May 5, 1983, the Senior Notes were fully paid. Therefore, the default on the senior indebtedness was cured, and, even under Section 2.03, U.S. Trust was able to disburse the interest payments on the Notes previously deposited by Sharon. Following Section 2.03, U.S. Trust declared a special record date of June 30, 1983 for payment of this accrued interest and, of course, interest on this interest. Under Section 2.03, these payments were to be made to the holders of the Notes as of the special record date (the "Holding Class").

The competing class (the "Selling Class"), which consists of those who held the Notes when Sharon deposited the interest payments with U.S. Trust but subsequently transferred them to members of the Holding Class, contends that use of the special record date mechanism was improper. It alleges that the default on the Senior Notes was not the type of default that triggered Section 13.03, and, in turn, Section 2.03. Sharon and U.S. Trust initiated this action to resolve the question of which of the two classes was entitled to payment. Judge Edelstein held for the Holding Class. We agree.

The Selling Class contends that because Sharon deposited the interest payments on the Notes with U.S. Trust, it never defaulted in payment, and the special record date provision of Section 2.03 was never triggered. Section 6.01 of the Indenture defines "Event of Default" to include:

(a) default in the payment of any instalment [sic] of interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of 30 days (it being understood that if the entire amount of such payment of interest is deposited by the Company with the Trustee ... before the expiration of such period of 30 days, such default shall no longer be considered to be continuing under this Indenture).

Because Sharon deposited the interest payments with U.S. Trust, the Selling Class argues, Sharon avoided default on the Notes, and the interest payments should have been distributed to the then holders, the Selling Class. However, Section 13.03 of the Indenture, supra note 1, prohibits the payment of interest on the Notes during the period of default in payment on any senior indebtedness. Section 13.03 in effect requires a default in the payment of interest on the Notes in the event of a default in payment on senior indebtedness. We held in Sharon Steel Corp. v. Chase Manhattan Bank, N.A., supra, that there was in fact a...