AG CAPITAL FUNDING PARTNERS, L.P., et al., Plaintiffs, v STATE STREET BANK AND TRUST COMPANY, Defendant and Third-Party Plaintiff-Appellant. SALOMON SMITH BARNEY INC. et al., Third-Party Defendants-Respondents.
Court of Appeals of the State of New York
Argued October 18, 2005; decided November 17, 2005
5 N.Y.3d 582 | 842 N.E.2d 471 | 808 N.Y.S.2d 573
Kelley Drye & Warren LLP, New York City (Steven P. Caley,
Cleary Gottlieb Steen & Hamilton LLP, New York City (Mitchell A. Lowenthal, David H. Herrington, Karen Bekker and David Lehn of counsel), for Salomon Smith Barney Inc., third-party defendant-respondent. I. State Street Bank and Trust Company undertook a contractual duty to deliver the additional secured indebtedness registration statement to Bankers Trust Company. (Nau v Vulcan Rail & Constr. Co., 286 NY 188; This Is Me, Inc. v Taylor, 157 F3d 139; Kurz v United States, 156 F Supp 99, 254 F2d 811; Ortelere v Teachers’ Retirement Bd. of City of N.Y., 25 NY2d 196; Rudman v Cowles Communications, 30 NY2d 1; Apfel v Prudential-Bache Sec., 81 NY2d 470; Weiner v McGraw-Hill, Inc., 57 NY2d 458; New York State Med. Care Facilities Fin. Agency v Bank of Tokyo Trust Co., 163 Misc 2d 551, 216 AD2d 126; W.W.W. Assoc. v Giancontieri, 77 NY2d 157; R/S Assoc. v New York Job Dev. Auth., 98 NY2d 29.) II. Salomon Smith Barney Inc. had no duty to deliver the additional secured indebted-
Allen & Overy LLP, New York City (Michael S. Feldberg, Jacob S. Pultman, Kelly A. Berkell, Karen Lee and Nicole K. Vallone of counsel), for Thelen Reid & Priest LLP, third-party defendant-respondent. I. Thelen Reid & Priest LLP owes no legal duty to State Street Bank and Trust Company, and dismissal of State Street‘s claims for negligence, negligent misrepresentation and attorney malpractice was therefore proper. (Prudential Ins. Co. of Am. v Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377; LNC Invs., Inc. v First Fid. Bank, N.A., 935 F Supp 1333; Alpert v Shea Gould Climenko & Casey, 160 AD2d 67; National Westminster Bank v Weksel, 124 AD2d 144; Lucas v Lalime, 998 F Supp 263; Harz v United States, 711 F Supp 114; King v Schonberg & Co., 233 AD2d 242; Weiss v Manfredi, 83 NY2d 974; Rovello v Klein, 304 AD2d 638; Hudson Riv. Club v Consolidated Edison Co. of N.Y., 275 AD2d 218.) II. As indenture trustee, State Street Bank and Trust Company was obligated to deliver the additional secured indebtedness registration statement. (New York State Med. Care Facilities Fin. Agency v Bank of Tokyo Trust Co., 163 Misc 2d 551, 216 AD2d 126; Beck v Manufacturers Hanover Trust Co., 218 AD2d 1; Semi-Tech Litig., LLC v Bankers Trust Co., 353 F Supp 2d 460; LNC Invs., Inc. v First Fid. Bank, N.A., 935 F Supp 1333; Hazzard v Chase Natl. Bank of City of N.Y., 159 Misc 57, 258 AD2d 950, 282 NY 652; Elliott Assoc. v J. Henry Schroder Bank & Trust Co., 838 F2d 66; Meckel v Continental Resources Co., 758 F2d 811; United States Trust Co. of N.Y. v First Natl. City Bank, 57 AD2d 285.) III. Dismissal of State Street Bank and Trust Company‘s contribution claim was proper because Thelen Reid & Priest LLP did not owe any legal duty to plaintiffs or to State Street. (LNC Invs., Inc. v First Fid. Bank, N.A., 935 F Supp 1333; Aglira v Julien & Schlesinger, 214 AD2d 178; Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw & Folley, 71 NY2d 21; Dormitory Auth. of State of N.Y. v Caudill Rowlett Scott, 160 AD2d 179.)
Covington & Burling, New York City (C. William Phillips,
Kasowitz, Benson, Torres & Friedman LLP, New York City (James J. Stricker, Ronald R. Rossi and Matthew R. DiBlasi of counsel), for plaintiffs. I. The question presented by State Street Bank and Trust Company has no bearing on whether State Street has properly stated a claim against the third-party defendants. (Lunney v Prodigy Servs. Co., 94 NY2d 242; Cuomo v Long Is. Light. Co., 71 NY2d 349; Society of Plastics Indus. v County of Suffolk, 77 NY2d 761.) II. Even assuming arguendo that the Court considers State Street Bank and Trust Company‘s first question, there is no legal or factual basis for any holding by this Court that, as a matter of law, State Street was not obli-
OPINION OF THE COURT
CIPARICK, J.
Because an underwriter or issuer of securities can, by statements and acts interpreted in light of industry custom and practice, assume a duty that may be imposed upon a secured party representative or indenture trustee, and because such allegations are adequately pleaded in a third-party complaint and supplemental documentary evidence, we reinstate causes of action for negligence and contribution brought by the secured party representative/indenture trustee against the underwriters and the issuer‘s counsel.
Loewen Group International, Inc. and Loewen Group, Inc. (collectively Loewen), owner and operator of cemeteries and funeral homes throughout the United States, United Kingdom and Canada, issued notes and other debt securities to raise capital in several transactions in the late 1990s. All of the debt securities were to be supported by a single pool of collateral. The transactions at issue in this case involved securities known as pass-through asset trust securities (PATS) and Series 6 and 7 Notes, but the earlier transactions are relevant as background.
The first of the debt securities, consisting of Series 1 and 2 Notes, were already in existence prior to a May 1996 Collateral
The Series 3 and 4 Notes were the first debt issued by Loewen after the effective date of the CTA. Salomon Smith Barney (Salomon) served as lead underwriter and was represented by Davis Polk & Wardwell (Davis Polk) at the closing. Thelen Reid & Priest LLP (Thelen) served as counsel for Loewen, the issuer. A copy of the executed ASIRS for this transaction was faxed to Bankers Trust, the collateral trustee, by Thelen on October 4, 1996. A predecessor in interest of third-party plaintiff, State Street Bank and Trust Company (State Street), was the indenture trustee under the indenture and the secured party representative as defined in the CTA.
The Series 5 Notes were issued on September 26, 1997. These notes were also secured by the CTA. An executed copy of the ASIRS was delivered by Loewen‘s Canadian counsel, Russell & DuMoulin, to Bankers Trust at the close of that transaction. State Street was not involved in the Series 5 Notes transaction.
The problem with the transactions involved in this case—the PATS, Series 6 Notes and Series 7 Notes—is that, in each of them, the ASIRS did not find its way to Bankers Trust.
PATS in the amount of $300,000,000 were issued on September 30, 1997. UBS Warburg (UBS) was the lead underwriter in that transaction, represented by Skadden, Arps, Slate, Meagher & Flom LLP (Skadden), who hosted the closing. State Street again served as the indenture trustee and thus was the secured
The Series 6 and 7 Notes involved essentially the same parties and procedures as the Series 3 and 4 Notes. Salomon served as the lead underwriter on this $450,000,000 transaction, again represented by Davis Polk. Loewen was again represented by Thelen, and State Street again accepted the role of indenture trustee pursuant to the May 28, 1998 indenture and secured party representative under the CTA. The closing took place on May 28, 1998 but Davis Polk, the closing host, failed to place the ASIRS on the closing checklist. Thelen, realizing this omission post-closing, circulated a copy of the ASIRS for signature.2 Loewen and State Street both signed the document and returned it to Thelen. Thelen then faxed a copy of the executed ASIRS signature page to Davis Polk on June 1, 1998. State Street did not receive a copy of the fully executed ASIRS. Bankers Trust has no record of receiving or recording the ASIRS for the Series 6 and 7 Notes transaction.
In June 1999, Loewen, represented by Jones, Day Reavis & Pogue (Jones Day), filed for chapter 11 bankruptcy. Because no ASIRS had been filed for the PATS and the Series 6 and 7 Notes, there was doubt as to whether the investors and holders of those instruments had the secured-creditor status they had expected. In the reorganization proceeding, investors settled their claims against Loewen by accepting a discounted value for the notes. The investors then commenced this lawsuit against State Street, claiming that State Street‘s failure to deliver the
In its third-party complaint, State Street asserts that in the event that it is found liable to the investors in the underlying proceeding, it may recover from the underwriters UBS and Salomon under four causes of action: negligence, common-law indemnity, contribution and unjust enrichment. State Street asserted the same four causes of action against Thelen, the issuer‘s counsel, but added as well claims for negligent misrepresentation and attorney malpractice. Each third-party defendant sought dismissal pursuant to
Third-party defendants appealed. State Street also cross-appealed the dismissal of its attorney malpractice and negligent misrepresentation claims. The Appellate Division modified Supreme Court by dismissing the remaining causes of action (10 AD3d 293 [2004]). We granted leave to appeal and now modify and reinstate the contribution and negligence claims against UBS, Salomon and Thelen.
In deciding this appeal, we express no opinion on the merits of the underlying claims against State Street. We assume for purposes of this appeal that the claims are meritorious and consider whether, on that assumption, State Street has pleaded valid third-party claims.3
To the extent that the Appellate Division held that the documentary evidence precluded State Street from prevailing on its contribution and negligence claims, the Court erred. In order to prevail on a
The Appellate Division also erred to the extent that it dismissed State Street‘s claims for contribution and negligence under
The amended third-party complaint alleges that UBS, by undertaking the role of underwriter for the PATS, and by its counsel agreeing to deliver the ASIRS to Bankers Trust, assumed a duty to “exercise reasonable care in running the closing and to ensure the PATS ASIRS was filed, delivered and/or registered with Banker‘s Trust.”4 In support of this allegation, State Street proffers an affidavit from William Barrett stating that based on his 40 years of experience in the field of corporate trusts and the over 300 closings involving indenture trusts that he attended he could not recall the indenture trustee ever making any filings. Instead he stated the “custom and practice within the corporate trust industry [is] that the issuer of the
State Street also proffers evidence that a Skadden attorney claimed to have delivered the ASIRS in the PATS transaction. In particular, State Street offers a transcript of a voicemail in which a Skadden attorney discusses in vivid detail how a Skadden associate clearly remembered that he physically delivered the ASIRS to Bankers Trust. The text of the message is further corroborated by notes taken by Loewen‘s bankruptcy counsel, Jones Day, from its interviews of Skadden attorneys who took part in the transaction. While Skadden‘s claim that the ASIRS was actually delivered has since been retracted, the documentary evidence of Skadden‘s admissions is offered by State Street to supplement the allegation of the third-party complaint that UBS, through its counsel, assumed a duty to file the ASIRS.
Likewise, the third-party complaint as against Salomon alleges that Salomon, as lead underwriter of the Series 6 and 7 Notes debt offering, undertook through its counsel‘s actions the duty to deliver the ASIRS.5 In addition to allegations of industry custom of placing the duty to distribute documents properly with the host of the closing, the third-party complaint supplemented by documentary evidence alleges Salomon‘s counsel‘s failure to include the ASIRS on the closing checklist. When the
State Street further claims not only that custom and prior practice between the parties placed a duty to deliver the ASIRS on the underwriter, but also that it placed the duty on Thelen, counsel for the issuer. The allegation against Thelen is that it breached its duty of care by failing to register or assure that the ASIRS for the PATS and Series 6 and 7 transactions were duly registered. Third-party plaintiff supports this claim by documents indicating that Loewen‘s counsel—Thelen in the Series 3 and 4 transaction, and Russell & DuMoulin in the Series 5 transaction—recorded the ASIRS with Bankers Trust following the close of these transactions. Further, Ms. Johnson testified in her deposition that the Series 6 and 7 transaction had a “cookie cutter” resemblance to the Series 3 and 4 transaction in form and structure. In addition, State Street alleges that it never even received an executed copy of the ASIRS in the Series 6 and 7 transaction, just a blank copy that it was instructed to sign and return to Thelen. It alleges that Thelen made repeated representations that the debt was fully secured and ranked equally with the other Loewen secured debt, pointing to the April 16, 1999 letter from Michelle Johnson, where she states that “the Series 1 through 4 and 6 and 7 senior notes issued by Loewen Group International, Inc. are secured indebtedness under the Collateral Trust Agreement.” All the notes, she continues, are “Class C Secured Indebtedness.”
State Street argues that the aforementioned actions in conjunction with industry custom and practice demonstrate how any duty it may have owed to the investors or subsequent holders of the notes was assumed by UBS, Salomon and Thelen. Third-party defendants argue that they never assumed such a duty, nor may custom be used to impose such an obligation. They further state that the Court is precluded from finding a
We agree with State Street that its allegations of industry practice give support to its claim (see e.g. Phillips v McClellan St. Assoc., 262 AD2d 748, 749 [3d Dept 1999] [stating that “evidence of industry practice and standards is admissible to establish a duty of care“]). Further, a course of conduct that induces reliance, as alleged here, may implicate a duty of care (see e.g. Nallan v Helmsley-Spear, Inc., 50 NY2d 507, 522-523 [1980]). The industry custom as set forth in the supplemental evidentiary materials, coupled with the parties’ conduct, supports a claim that the third-party defendants together or in part assumed that duty. The pleadings allege that the third-party defendants did not act reasonably in relation to such duty.
Accepting the allegations in the third-party complaint as true, as we must at this preliminary pleading stage, as supplemented by the additional evidence submitted, we conclude that if State Street is found to have breached a duty and is held liable in the underlying action for failure to deliver the ASIRS to Bankers Trust then each of the third-party defendants may be liable as well. The third-party complaint has sufficiently pleaded a cause of action for negligence as it is alleged that all three third-party defendants assumed the duty that State Street may have had to act in relation to the delivery and filing of the ASIRS. Contrary to the dissenting view, we see no basis for treating Thelen differently at this point, as the submissions more than adequately support a cause of action against Thelen for negligence.
We turn next to State Street‘s cause of action seeking contribution. A claim for contribution rises and falls based on the existence of separate tortfeasors (see
Clearly there was no actual privity between Thelen and State Street. Thelen served as counsel for Loewen, who was not by any means unified in interest with State Street, the latter being the agent of the holders. Nor could it be said that the relationship closely resembled privity. As such, no claim for negligent misrepresentation lies. The claim for attorney malpractice also fails as State Street does not set forth a claim for fraud or collusion or any of the other exceptions to the privity rule. This was a rather complex transaction involving sophisticated parties and their counsel. Any misrepresentations or misunderstandings as pleaded do not give rise to a claim of attorney malpractice or negligent misrepresentation absent a showing of a privity-like relationship.
In conclusion, at this early stage of the action, the third-party complaint must be allowed to proceed as third-party plaintiff, State Street, has adequately pleaded causes of action in negligence and contribution against the underwriters and counsel for the issuer for failure to deliver the ASIRS as required to Bankers Trust, the collateral trustee, in the PATS and Series 6 and 7 Notes transactions.
Accordingly, the order of the Appellate Division should be modified, without costs, by reinstating the negligence and contribution causes of action in the third-party complaint against all third-party defendants, and as so modified, affirmed.
As the majority explains, we assume in this case (without deciding) that State Street had a duty to plaintiffs to make sure the ASIRS was delivered to Bankers Trust. The sufficiency of the third-party complaint turns on whether State Street has adequately alleged that the underwriters (UBS and Salomon) and the issuer‘s counsel, Thelen, undertook by their actions or words to perform this duty on State Street‘s behalf. To me, the record shows that if anyone made such an undertaking it was the underwriters, not Thelen.
An expert affidavit submitted by State Street says that, according to the custom of the corporate trust industry, documents like the ASIRS are filed by “the issuer of the debt or its counsel and/or the underwriter or its counsel.” The affidavit thus provides no basis for saying whether it was Thelen or the underwriters who undertook the duty in these transactions. One indication that it was the underwriters is the simple fact that, in each of the transactions, the ASIRS wound up in the underwriter‘s counsel‘s possession. In the PATS transaction, the ASIRS was left with other closing documents at the underwriter‘s counsel‘s office. In the Series 6 and 7 Notes transaction, the ASIRS was prepared and signed after the closing, and then faxed by Thelen to the underwriter‘s counsel.
I agree with the majority that, from these facts, it is possible to infer that all parties, including State Street, were relying on the underwriters to deliver the ASIRS to its proper destination. But these facts cannot support an inference that anyone was relying on Thelen to perform that task. Nor do the later statements by counsel for the underwriter in the PATS transaction, in which counsel seemed to assume that delivery of the ASIRS was something the underwriter‘s counsel should have taken care of, support an allegation that the delivery was Thelen‘s responsibility.
The only facts the majority refers to in support of its holding that the claim against Thelen may be maintained are: (1) that the issuer‘s counsel delivered the ASIRS to the collateral trustee in two prior, similar transactions; and (2) that Thelen signed letters saying that the Series 6 and 7 Notes were properly
Accordingly, I would affirm the Appellate Division‘s order to the extent that it dismissed the third-party complaint against Thelen.
Chief Judge KAYE and Judges ROSENBLATT, GRAFFEO and READ concur with Judge CIPARICK; Judge R.S. SMITH dissents in part in a separate opinion in which Judge G.B. SMITH concurs.
Order modified, etc.