Union Planters Bank, N.A. v. Kendrick

• Decision Date: 24 August 2004
• Docket Number: No. SC 85473.,SC 85473.
• Citation: 142 S.W.3d 729
• Parties: STATE ex rel. UNION PLANTERS BANK, N.A. et al., Relators, v. The Honorable Larry L. KENDRICK, Judge of the Circuit Court of St. Louis County, Missouri, Respondent.
• Court: Missouri Supreme Court

142 S.W.3d 729

STATE ex rel. UNION PLANTERS BANK, N.A. et al., Relators, v. The Honorable Larry L. KENDRICK, Judge of the Circuit Court of St. Louis County, Missouri, Respondent.

No. SC 85473.

Supreme Court of Missouri, En Banc.

August 24, 2004.

Motion to Modify Denied September 28, 2004.

John C. Rasp, Michael A. Clithero, Geoffrey G. Gerber, Brian R. Plegge, Carrie A. Wrisberg, Robyn G. Fox, Frank Susman, Kenneth B. Newman, Andrew D. Dillon, Martin M. Green, David T. Butsch, Allen P. Press, St. Louis, MO, for Relators.

Gerald P. Greiman, Daniel V. Conlisk, Patrick T. McLaughlin, St. Louis, MO, for Respondent.

WILLIAM RAY PRICE, JR., Judge.

Relators seek a writ of prohibition ordering Respondent to de-certify the class in the underlying matter. Relators allege that class counsel cannot adequately represent the members of the class because class counsel accepted funds from potential defendants to finance the lawsuit only against other parties, with an "implicit understanding" that class counsel would not sue them. Additionally, two of the class representatives are or have ties to these potential defendants.

A preliminary writ of prohibition was granted, which is now made absolute as modified.

I. Background

1. Factual allegations

This lawsuit involves allegations by individuals who purchased a series of bonds issued by the Arch Leasing Corporation Trust ("the Trust"). The Trust was organized by the principals of St. Louis Leasing Corporation ("SLLC"), with the assistance of Jerry Liss, the principal owner of J.E. Liss & Company, Inc., an investment banking and brokerage firm ("Underwriter"), to issue up to $50 million worth of bonds to raise money for SLLC's operations.

Bond proceeds were to be used to pay for a part of the purchase price of new computers that were then to be leased to large companies for varying periods of time. The other part of the purchase price was to be paid for using funds borrowed from various banks. The lease payments were to be used to repay the funds from the banks and some of the interest due on the bonds. SLLC actually oversaw the purchase of the computers and marketed them to the lessees.

The bondholders were only to receive interest payments for three years, after which the principal was to be paid in full. The money for the principal payoff was to come from the "residual value" of the computers. Marshall & Stevens, Inc., was to provide an appraisal or estimate of the residual value of the computers as each lease was entered into.

Magna Bank (now Union Planters Bank, "UPB") was the indenture trustee. UPB's duties, prior to default, were to act as the paying agent. Delaware Bank was the statutory trustee. Arch Leasing Corporation ("Arch"), an affiliate of SLLC that shared its offices and personnel, was the managing trustee with day-to-day responsibility for collecting the bond proceeds, paying them out, and generally handling the business affairs of the Trust.

Purchasers of the bonds signed a subscription agreement with their broker, gave their broker a check for the face amount of the bonds, and then the money was sent to an escrow agent. Throughout, there were to be periodic closings at which the Trust was to deliver certain opinions from its officers, Robert Chlebowski and Lynne Frownfelter, and its counsel, Doster and Doster, P.C., to Underwriter. R. Philipp, of Krantz & Philipp ("Underwriter's counsel"), was also required to give certain opinions at each closing, including an opinion as to whether the Prospectus for the bonds had any false or misleading statements in it. After each closing, the escrow agent sent the money to Arch, and UPB was directed to issue the bonds. The Trust issued $14,011,000 in bonds in fifteen increments between May 19, 1995, and November 30, 1995.

Plaintiffs allege that, during 1995, Arch allowed SLLC to use up to $3.6 million of the bond proceeds for purposes other than the purchase of computers. Plaintiffs claim that use of this money by SLLC was an event of default under the indenture of trust, making any issuance of additional bonds improper until the situation was corrected. Plaintiffs also allege that Underwriter's counsel called the UPB officer handling the account and informed him that the financial statements showed that monies were being improperly used by SLLC, though suit was not filed against him. Nonetheless, the Trust issued $8,995,000 worth of bonds after July 1995.

Plaintiffs further allege that Doster & Doster, P.C., continued to give opinions that the financial statements did not contain any fraudulent or misleading information in spite of its knowledge of the diversion of funds. Finally, plaintiffs allege that UPB, with knowledge of the diversion of funds, continued to participate in the issuance and sale of the additional bonds, in breach of the indenture of trust.

In the last half of 1995, SLLC's financial condition worsened, and on January 2, 1996, SLLC filed for bankruptcy. The first bonds were to have been paid off on May 19, 1998, but the Trust had insufficient funds to do so. Consequently, the Trust filed suit to compel UPB to distribute available funds to all bondholders on a pro rata basis (the 1998 Action). UPB sold all the collateral and continued to make payments to the bondholders after the default. The 1998 Action was concluded in 2002, and the court discharged UPB from further duties as indenture trustee.

2. The initiation of the class action lawsuit

In August of 1998, David Bax, William Glaser, and William Myers, brokers for certain bondholders (hereinafter "the brokers"), initially hired Gerald P. Greiman to represent them in objecting to the sale of collateral in the 1998 Action. The firm's fees were paid out of a $20,000 retainer that was provided exclusively by the brokers.¹

On December 18, 1998, the brokers and Liss met with Greiman to hire his firm ("Class Counsel") to investigate the possibility of filing a class action on behalf of the bondholders. The initial exploration into the possibility of suit was funded by the remainder of the $20,000 retainer the brokers had paid in the 1998 Action. Underwriter and the brokers agreed to loan an additional $100,000, $60,000 of which came from Liss, to retain Class Counsel to pursue the class action.² Underwriter and the brokers provided assistance to Class Counsel in piecing together the facts about the alleged wrongdoing in the bond transaction, and consequently, an "implicit understanding" arose that Class Counsel would not pursue any claims against Underwriter or the brokers on behalf of the bondholders. At that point, the firm had no clients to form the class, and no bondholders were consulted about the agreement.³

After the issue of funding was resolved, the brokers began to assist Class Counsel in identifying bondholders who might be interested in serving as class representatives. The first official engagement letter concerning the instant matter was not sent until July 6, 1999. That letter was sent to several potential class representatives, including Norma Ducommun, Susan Deuver, Dorothy Earle, East Maine Baptist Church, Rona Hodes, Penny Hogfeldt and Anthony D'Agostino of Commercial Mortgage and Finance Company, John Schultheis, and Gary and Jeane Yamine.

Hodes had a Series 6 NASD license that was held by Underwriter, received commissions from the sale of the bonds, was employed by Underwriter as a registered representative and broker during the period at issue in the lawsuit, and is part of the group of brokers Class Counsel agreed not to sue.

The initial engagement letter stated, in relevant part:

At the outset of our representation, certain bondholders, as well as certain brokers involved in selling the bonds, have contributed to a fund to pay certain of our fees and expenses as set forth above. That fund aggregates $120,000.

....

While the funding third parties will not be our clients, we expect to obtain ongoing assistance from them in pursuing your claims. Accordingly, it may be necessary at times to share privileged or otherwise confidential information with them, and we assume we have your approval to do so. Similarly, in light of the ongoing assistance we anticipate, as well as the funding they have contributed, we will not be in a position to consider or pursue any potential claims against any such parties or any entity with which any of them is affiliated. We assume this meets with your approval as well.

The letter advised potential class members that they were free to obtain independent counsel to investigate claims against Underwriter and/or the brokers, but noted that the "fees and expenses associated with individual bondholders retaining their own separate counsel could be quite substantial." Finally, the letter asked potential plaintiffs to approve an arrangement whereby, in the event of any recovery, the unidentified persons who contributed to "the fund" would be reimbursed for their contributions first, before any recovery would be distributed to the class.

After the first engagement letter was sent, Class Counsel had telephone conversations with Gary Yamine and Hodes, during which Liss was discussed "in some disparaging context." On October 6, 1999, Class Counsel sent a second engagement letter to the same individuals, which stated:

As stated in the engagement letter [of July 6, 1999], we are not in a position to consider or pursue any claims against various brokers involved in selling the bonds, including but not limited to J.E. Liss & Company, Inc., as they are assisting with this case and have provided some of the funding for it.

The letter also alluded to a class action filed in Wisconsin against Underwriter, but did not indicate that the class action concerned a different transaction than the bond sale at issue in the present matter. Commercial Mortgage & Finance Company, Ducommun, Duever, Earle, East Maine Baptist Church, Hodes, Schultheis, and the Yamines initially agreed to serve as the named pl...