This is a lengthy (50 page) opinion, so I will try to briefly summarize the issues addressed by the court. Note that much of the facts and findings deal with the Bank’s failure to respond to several court orders, and the Bankruptcy Court’s sanctions for that bad faith conduct. For brevity, I have omitted discussion of those issues, although the Bank’s conduct ended up costing it quite a bit of money. The opinion is linked below, and should be reviewed from all parties to trust relationships.
In re Sunshine Jr. Stores, Inc., Bank of New York v. Sunshine Jr. Stores, Nos. 04-16650, 04-16651, 05-10031 (11th Cir. July 18, 2006).
Debtor filed a Chapter 11 in December 1992. As part of its reorganization Plan, it executed a Trust Indenture Agreement appointing NationsBank as Trustee. The purpose of the trust was to administer the promissory notes and liens (on Debtor’s property) distributed to the general unsecured creditors under the Plan (avoiding the administrative problems of dealing with many individual noteholders). The Trust Agreement also permitted the creation of a separate trust in which the Debtor could deposit funds sufficient to call and pay the notes in advance of maturity (the "prepayment funds.").
In October 1995, a Purchaser acquired the Debtor and its assets, including the collateral securing the Notes, and Debtor called the Notes and deposited prepayment funds (approx. $1 million) with NationsBank. In December 1995, Bank of New York (BONY) acquired the corporate trust division of NationsBank and the unclaimed funds were transferred to BONY, which continued to disburse the funds to noteholders tendering their Notes.
Apparently, between 1995 and 2000, BONY continued to pay the tendered Notes, and allegedly did not properly respond to the Debtor’s requests for an accurate accounting. In April 2000, the Debtor moved the Bankruptcy Court for an order requiring an accounting and setting procedures for paying notes of persons who have lost their Notes. This initiated a period of time in which BONY failed to comply with court orders, appear at hearings, or provide documents and accounting to the Debtor (discussed in great detail in the opinion). This led to the Bankruptcy Court striking the Bank’s opposition to the Debtor’s request for interest on the trust funds, and the rate of interest applied, and ordering the Bank to pay interest and attorneys fees.
BONY appealed, arguing that under the Indenture Trust Agreement, assumed in the purchase of NationsBank’s trust department, it was not liable for interest and had no fiduciary duty to the Debtor or others. The District Court affirmed the Bankruptcy Court Order and BONY appealed.
The Eleventh Circuit’s findings (sans the sanctions issues), brielfy summarized, are as follows —
- BONY was not an assignee of the Indenture Trust Agreement because under Florida law, an assignment of a contract requires the consent of the other party, and there was no novation or "substitute contract" between BONY and Debtor. Therefore, BONY could not rely upon the Trust Agreement’s provisions regarding interest and fiduciary duties of the indenture trustee.
- Pursuant to the terms of the Indenture Trust Agreement (quoted in detail in the opinion), the pre-payment funds were not governed by the Indenture Trust Agreement but instead the intent was that the funds would be placed in a common law trust. The Debtor could have deposited the funds with parties other than BONY (then NationsBank), without those parties becoming indenture trustees, and the responsibilities were different with respect to the corpus. Thus, NationaBank became a common law trustee with respect to the prepayment funds.
- The Trust Indenture Agreement provided for a successor trustee if the trustee is merged or acquired. While BONY was not a party to that agreement (see no. 1, above), the "expression of will" was, under trust law, sufficient to transfer NationsBank’s common law trust obligations to BONY.
- As a common law trustee, BONY owed a fiduciary duty to the Debtor, as a residuary beneficiary of the trust.
- BONY held approximately $487,000 for over 5 years, earning interest on it while the Debtor was unable to use the money. BONY did not relinquish this profit to the Debtor, and such self-dealing was a "clear violation of BONY’s duty of loyalty to the Debtor."