Court Denied Summary Judgment to Defendant Bank of New York Mellon; Grants Partial Summary Judgment in Favor of Bondholders

3/23/2016 - Judge Legrome D. Davis of the United States District Court for the Eastern District of Pennsylvania granted in part the plaintiff bondholders’ motion for summary judgment in Becker v. The Bank of New York Mellon Trust Company, N.A., et al., No. 11-6460 (E.D. Pa.).  Judge Davis also denied, in its entirety, the defendant bond trustees’ motion for summary judgment on all claims stated in the case.  Barrack Rodos & Bacine serves as lead counsel in the action, representing bondholder Leonard Becker on behalf of a proposed class of bondholders who own revenue bonds issued in 1992 by Lower Bucks Hospital.  BNY Mellon served as the bond trustee for those bonds when the hospital filed for bankruptcy in January 2010.

The complaint alleges that BNY Mellon, as the bond trustee, was negligent and breached its fiduciary and contractual duties to the bondholders by failing to maintain perfected security interest in the property securing the bonds.  As a result, when Lower Bucks Hospital filed for bankruptcy and challenged the bondholders’ security interest, the bond trustee settled for less than the full amount it would have been entitled to obtain for bondholders had it fulfilled its duties and ensured that the security interest was perfected.  The plaintiff seeks compensation for harm suffered as a result of the trustee’s breaches.  The plaintiff also seeks the monies that the trustee received in the bankruptcy on behalf of the bondholders, which the trustee has thus far refused to distribute to bondholders, claiming that it is entitled to be indemnified for its bankruptcy-related expenses, as well as its expenses in defending against the plaintiff’s claims in this case.

In granting partial summary judgment for the plaintiff, Judge Davis ruled that BNY Mellon is not entitled to be indemnified from the bondholders’ funds for its fees, expenses, and costs, including legal costs and attorneys’ fees incurred in defense of this litigation.  The Court explained that:

[the] agreements in this case in no way express in unequivocal terms any intent or purpose on the part of the bondholders to indemnify the Indenture Trustee for loss resulting from its negligence or misconduct [and the] record establishes that the claimed expenditures were largely incurred by BNYM’s assertion of nonexistent rights to indemnification and a charging lien.  BNYM must bear those costs; not the bondholders. 

Judge Davis also ruled that BNY Mellon is not entitled to be indemnified from the bondholders’ funds for BNY Mellon’s ongoing efforts, post-confirmation of the plan of reorganization, to make a third-party release of claims (which would have benefited only BNYM) part of that plan. The Court explained:.  

BNYM’s potential liability could not deplete the bankruptcy estate or affect the bondholders’ recovery under the Plan.  After the effective date of the Plan, BNYM asserted the third party release before the bankruptcy court and appellate tribunals to protect only its personal interests … [and] should bear the risks and the costs of its chosen strategy.   

Notably, Judge Davis also rejected BNY Mellon’s argument that as indenture trustee, it had no duties other than those specifically set forth in the Indenture.  Judge Davis held that “Pennsylvania law imposes upon trustees common law duties arising from the nature of the fiduciary relationship” and that “[f]undamental common law duties arising from the nature of the fiduciary relationship apply to an indenture trustee as well.”  Judge Davis also decided that, while the evidence presents triable disputes as to the scope and particulars of the bond trustee’s duties, under “both the common law and transaction agreements, Defendants were required to act prudently, in good faith with undivided loyalty, using reasonable care under the circumstances.”  Click here for a copy of the court's opinion.

If you have any questions about the March 23, 2016 decision, or the litigation generally, please contact BR&B partner Lisa Port at lport@barrack.com.