PAUL CHEATHAM I.R.A., APPELLEE, v. HUNTINGTON NATIONAL BANK, APPELLANT.
No. 2018-0184
SUPREME COURT OF OHIO
August 22, 2019
Slip Opinion No. 2019-Ohio-3342
Submitted February 19, 2019
NOTICE
This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published.
SLIP OPINION NO. 2019-OHIO-3342
PAUL CHEATHAM I.R.A., APPELLEE, v. HUNTINGTON NATIONAL BANK, APPELLANT.
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Paul Cheatham I.R.A. v. Huntington Natl. Bank, Slip Opinion No. 2019-Ohio-3342.]
Bondholder‘s right to sue—
(No. 2018-0184—Submitted February 19, 2019—Decided August 22, 2019.)
APPEAL from the Court of Appeals for Lucas County, No. L-16-1292, 2017-Ohio-9234.
{¶ 1} This case presents a question of first impression regarding the rights of a bondholder to seek redress for injuries suffered by a prior holder of the bonds. At common law, only the person who suffered the injury can, absent assignment of a chose in action, seek redress for the injury. The Sixth District Court of Appeals found a statutory exception to the common-law rule for securities under
{¶ 2} A chose in action is personal in nature and, absent assignment, cannot be asserted by another.
{¶ 3} Additionally, the language of the trust indenture in this case—the agreement in the bond contract made between a bond issuer and the indenture trustee—does not provide an independent basis for bypassing the common law rule agаinst automatic assignment of claims. Language stating that actual ownership of the bond is a condition precedent to the maintenance of a cause of action that arises under the Trust Indenture does not automatically transfer a right to a cause
Facts
{¶ 4} In 1998, Lucas County issued $6.59 million in revenue bonds to back construction of the Villa North Health Care and Rehabilitation Center. The parties agree that Lucas County was the lessor and, technically, the obligor on the bonds in order to make them exempt from federal taxes. The bonds, however, were not an obligation of the county: the actual obligor (and lessee) was the Foundation for the Elderly, Inc. Lucas County had to pay only those receipts that it had received from the Foundation for the Elderly. Appellant, Huntington National Bank, entered a trust indenture with Lucas County in which it agreed to collect payments on the bonds and distribute funds, whether principal or interest, to the bondholders.
{¶ 5} The project had its difficulties. In June 2003, Huntington informed the bondholders that the obligor and lessee had defaulted on approximately $420,000 in principal and interest payments. A new entity, Benchmark Healthcare of Toledo, Inc. (Benchmark), assumed the lease but defaulted in December 2003. In May 2004, Huntington informed the bondholders that Benchmark had filed for reorganization under Chapter 11 of the Bankruptcy Code. Benchmark filed an amended reorganization plan in December 2007, but by July 2009, reorganization had failed. The bankruptcy was dismissed, and Huntington filed a foreclosure action against Benchmark.
{¶ 6} Appellee, Paul Cheatham I.R.A. (Cheatham IRA), alleged that beginning in 2003, it began purchasing the bonds. This was a potentially risky investment strategy: identify distressed, nontaxable bonds and buy them at a discount with the hope that any problems that had caused the value of the bonds to decline would be remedied, resulting in an increase in value. In fact, the Cheatham IRA continued to purchase the bonds after Benchmark filed for reorganization under the bankruptcy code, paying 32 cents on the dollar. However, out оf an initial
{¶ 7} The Cheatham IRA filed a class-action complaint, alleging that Huntington had breached the trust indenture. It alleged that the trust indenture required Huntington to exercise the rights and power vested in it by the trust indenture using the same degree of care and skill that a prudent person would exercise or use under the circumstances in the conduct of that person‘s own affairs. It further alleged that Huntington allowed the Villa North project to be mismanaged despite having available to it different remedies that could have protected the interests of the bondholders. Its claimed damages were the value of the bоnds had Huntington acted immediately upon default to accelerate payment of interest and principal and disgorgement of Huntington‘s fiduciary fees to the bondholders based on their proportionate share of the bonds.
{¶ 8} The Cheatham IRA asked the court to certify a class of more than 50 bondholders who, on November 14, 2014 (the date of final distribution), owned bonds secured by the Villa North project. The Cheatham IRA argued in support of its motion for a class action that it had satisfied Civ.R. 23(B)(3), which requires that questions of law or fact common to the class predominate over questions that affect the individual members and that a class action is the superior means of adjudicating the dispute. Huntington opрosed class certification, arguing that individual members of the proposed class of bondholders purchased their bonds at different times in the life of the Villa North project, so the evidence and legal issues on the breach-of-contract claim would differ based on when the class members acquired the bonds.
{¶ 9} The Cheatham IRA argued that it established commonality under
{¶ 10} The trial court held that commonality had not been established. It found that the Cheatham IRA had alleged numerous breaches of the trust indenture over a significant period of time and that the original bondholders’ claims based on those breaches did not transfer to subsequent purchasers under the rights in the security language in
{¶ 11} On appeal, the Sixth District Court of Appeals reversed. That court noted that the Cheatham IRA had phrased the issue as whether the purchaser of a bond acquires causes of action that arose, under the terms of a Trust Indenture, prior to the time that the bondholder acquired the bonds. 2017-Ohio-9234, 102 N.E.3d 597, ¶ 13. Acknowledging that this was an issue of first impression in Ohio, the court of appeals looked to
{¶ 12} A concurring judge stated her view that under
{¶ 13} We accepted jurisdiction over an appeal filed by Huntington, agreeing to hear the following proposition of law: Absent a valid assignment of claims, the mere sale of a municipal bond does not autоmatically vest in the buyer, by operation of
Analysis
{¶ 14} The law distinguishes the rights inuring to the possession of property from personal rights or claims that remain with the seller or transferor of that property after sale to another. A personal right is known as a chose in action, meaning a proprietary right in personam, such as a debt owed by another person, a share in a joint-stock company, or a claim for damages in tort. Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co., 112 Ohio St.3d 482, 2006-Ohio-6551, 861 N.E.2d 121, ¶ 19, quoting Black‘s Law Dictionary 258 (8th Ed.2004). The term can also be defined as [t]he right to bring an action to recover a debt, money, or thing. Id., quoting Black‘s at 258.
{¶ 16} By the 17th century, as English commerce expanded, the law also evolved and came to recognize that choses in action could be assigned. Id. at 276. Indeed, Ohio has long permitted the assignment of a chose in action to a third party. See Townsend v. Carpenter, 11 Ohio 21, 23 (1841); Erie Brewing Co. v. Ohio Farmers Ins. Co., 81 Ohio St. 1, 23, 89 N.E. 1065 (1909).
{¶ 17} There is no question that the Cheatham IRA purchased its bonds after Huntington allegedly breached the trust indenture. There is likewise no question that the Cheatham IRA has not been assigned any rights to causes of action by a party who held the bonds at a time when the Cheatham IRA alleges that Huntington‘s alleged breach occurred. The Cheatham IRA has stated that its class certification effort is based upon the fundamental proposition that the purchase of one of the bonds at issue in this case gives the purchaser all of the rights in that
{¶ 18} The court of appeals erred to the extent that it held that a breach-of-contract claim that accrued before the sale of a bond automatically transferred with the bond under
{¶ 19} The clearest statement of intent behind
{¶ 20} In other words, after property has passed into the hands of a bona fide purchaser, subsequent purchasers, even those with notice of asserted defenses, take clear of the defense. The reason is to protect the bona fide purchaser so that he can sell what he has purchased. Abraham Lincoln Ins. Co. v. Franklin S. & L. Assn., 434 F.2d 264, 266 (8th Cir.1970). As an expression of the shelter rule, § 8-302(a) does not define ‘rights in the security’ as any right assоciated with the security that the transferor ‘had or had power to transfer.’ Instead, the phrase ‘had or had power to transfer’ stands for the unremarkable proposition that people
{¶ 21} We interpret the UCC with an eye toward maintaining uniformity with other states. See Casserlie v. Shell Oil Co., 121 Ohio St.3d 55, 2009-Ohio-3, 902 N.E.2d 1, ¶ 18; Edward A. Kemmler Mem. Found. v. 691/733 E. Dublin–Granville Rd. Co., 62 Ohio St.3d 494, 499, 584 N.E.2d 695 (1992). In fact,
{¶ 22} Our holding is consistent with federal law under the Trust Indenture Act,
{¶ 23} We hold that
{¶ 24} Although the Cheatham IRA claims in its motion for class certification that the class includes all those who hold bonds, it has largely abandоned that position on appeal. It makes no argument that the official comment or history of
{¶ 25} [A] trust indenture is defined as ‘a document containing the terms and conditions governing a trustee‘s conduсt and the trust beneficiaries’ rights.’ Deutsche Bank Natl. Trust Co. v. Rudolph, 8th Dist. Cuyahoga No. 98383, 2012-Ohio-6141, ¶ 8, quoting Black‘s Law Dictionary 838 (9th Ed.2009). It is, then, a contract between the bondholders and the indenture trustee. Drage v. Santa Fe Pacific Corp., 8th Dist. Cuyahoga No. 67966, 1995 Ohio App. LEXIS 2833, at *9 (July 3, 1995), fn. 1; In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1309 (11th Cir.2006) (an indenture trustee is created and governed by contract). Unlike the ordinary trustee, who has historic common-law duties imposed beyond those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agreement. Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir.1985). Because the trust indenture is a contract, we construe it consistently with basic principles of contract construction. Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir.1982); Jamie Securities Co. v. The Limited, Inc., 880 F.2d 1572, 1576 (2d Cir.1989).
{¶ 26} The trust indenture states that it is intended for the equal and proportionate benefit, security and protection of all present and future holders and owners of the Bonds issued or to be issued under and secured by [the] Indenture. In addition, the indenture states that a holder of a bond shall have no right to enforce the indenture except as provided in the Indenture.
{¶ 27} From these terms, the Cheatham IRA argues that the class includes current bondholders and that those bondholders can assert a claim for breach of the trust indenture even if the breach occurred before they purchased the bond.
{¶ 28} Language stating that the trust indenture is for the benefit, security and protection of all present and future holders and owners of the Bonds says
{¶ 29} That only bondholders can enforce the terms of the indenture means that persons who do not hold a bond have no right to enforce its terms. This language does nothing more than define who has standing to sue based on the contractual relationship between the indenture trustee and the bondholders the trust is directly intended to benefit. This language limits the indenture trustee‘s liability to third persons—not bondhоlders—consistent with the rule that [p]erformance of a contract will often benefit a third person. But unless the third person is an intended beneficiary * * *, no duty to him is created. Hill v. Sonitrol of Southwestern Ohio, 36 Ohio St.3d 36, 40, 521 N.E.2d 780 (1988), quoting 2 Restatement of the Law 2d, Contracts, Section 302, Comment e (1981).
{¶ 30} Parties to a contract may include terms in derogation of common law, see, e.g., Alyeska Pipeline Serv. Co. v. Wilderness Soc., 421 U.S. 240, 256, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975) (absent statute or enforceable contract, litigants pay their own attorneys’ fees), but the intent to do so must be clearly indicated, 17 Mile, L.L.C. v. Kruzel, 8th Dist. Cuyahoga No. 99358, 2013-Ohio-3005, ¶ 17. And in this case, Section 11.03 of the trust indenture states that any rights that are not specifically mentioned in the trust indenture are not implied:
With the exception of rights herein expressly conferred, nothing expressed or mentioned in or to be implied from this Indenture or the Bonds is intended or shall be construed to give to any person other than the parties hereto, the Lessee, and the Bondholders any legal or equitable right, remedy or claim under or in respect to this Indenture or any covenants, conditions and provision herein contained; this Indenture and all of the covenants, condition and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto, the Lessee and the Bondholders as herein provided.
{¶ 31} Not only does the trust indenture contain no language stating that accrued causes of action basеd on the trust indenture automatically transfer to subsequent bondholders in contradiction to the common-law rule, it also forbids an implication that accrued rights are automatically transferred. It follows that language stating that only bondholders can bring suit for a violation of the trust indenture does not by itself transfer a chose in action that is a personal property right to a subsequent holder of a bond.
{¶ 32} The Cheatham IRA maintains that a claim for breach of a trust indenture is a nonpersonal claim and a right in the security that travels with the bond. In support of this argument, it cites In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025, 1030 (Del.Ch.2015), in which the court considered whether to approve a settlement in a shareholder derivative suit challenging a transaction in which one corporation sold its controlling equity position in a second corporation to the two most senior officers of the second corporation. Several shareholders of the second corporation brought a derivative action on behalf of the
{¶ 33} Activision addressed corporate stock and the the causes of action conferred on stockholders by specific statutory provisions of the [Delaware General Corporation Law]. Id. at 1049. Among those statutory causes of action conferred on shareholders are the right to vote, the right to compel payment of a contractually specified dividend, and the right to own and alienate shares. Id. at 1049-1050. Activision acknowledges that these Delaware statutory rights are different from personal claims, a [q]uintessential example of which would include a claim for breach of an agreement to purchase or sell shares of stock, for which thе the nature of the underlying property does not matter. Id. at 1056. This is because this type of breach-of-contract claim arises not from the security itself but from the contract between the buyer and seller. Id.. This claim is a chose in action that is a personal-property right that can be transferred only by express assignment.
{¶ 35} The Cheatham IRA purchased the bonds at a discount that reflected the ongoing issues with the Villa North project. In a real sense, it has suffered no injury from Huntington‘s alleged breach of the trust indenture that occurred before it purchased the bonds because that alleged mismanagement contributed in part to the reduced price the Cheatham IRA paid for the bonds. See Bluebird Partners, L.P. v. First Fid. Bank, 896 F.Supp. 152, 157 (S.D.N.Y.1995) (Market forces assured that the price plaintiff paid for certificates which would never be wholly redeemed reflected their diminished value. The injury was sustained by the sellers who parted with these certificates at a reduced price, not by plaintiff who purchased them at their post-bankruptcy value); see also In re Nucorp, 772 F.2d at 1490 (automatic assignment would remove the remedy from those to whom the statute
{¶ 36} It follows that absent specific assignment of a chose in action for breach of contract, the trust indenture here does not automatically assign that right. The Cheatham IRA has, by virtue of being a bondholder, standing to enforce the terms of the trust indenture, but that does not mean that it was assigned a chose in action that accrued before it owned the bonds. The Cheatham IRA has been clear that its claim is based on Huntington‘s alleged failure to act upon notice of the initial default. Only those who owned the bonds at the time of the original default could bring an action for that breach of the trust indenture.
{¶ 37} This case came to us on appeal from a judgment finding that the court of common pleas erred by refusing to certify a class action on grounds that the class lacked commonality. A class action is a representative action in which a plaintiff sues a defendant on behalf of a group or class of absent persons who have suffered harm similar in kind to the named plaintiff. As applicable here, the Cheatham IRA relies on Civ.R. 23(B)(3) as a basis for certifying a class: the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.
{¶ 38} Civ.R. 23 is modeled after Fed.R.Civ.P. 23, so federal law is persuasive authority when interpreting the Ohio rule. Stammco, L.L.C. v. United Tel. Co. of Ohio, 136 Ohio St.3d 231, 2013-Ohio-3019, 994 N.E.2d 408, ¶ 18. On the question of commonality under Civ.R. 23(B)(3)—that there are issues of law or fact common to the class—we consider whether a class action has the capacity to generate common answers apt to drive the resolution of the litigation. (Emphasis added in Wal-Mart Stores.) Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011), quoting Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U.L.Rev. 97, 132 (2009). With
{¶ 39} The Cheatham IRA concedes that if a breach-of-contract claim did not automatically transfer, a class action is no longer viable. We therefore reverse the judgment of the Sixth District Court of Appeals, and we remand to the court of common pleas for further proceedings. We express no opinion on whether any breach-of-contract claims that the Cheatham IRA asserts accrued after its purchase of Villa North bonds remain viable.
Judgment reversed and cause remanded.
O’CONNOR, C.J., and FRENCH and DONNELLY, JJ., concur.
FISCHER, J., concurs in the judgment and in paragraphs 1 through 23 of the majority opinion.
KENNEDY, J., concurs in judgment only, with an opinion joined by DEWINE, J.
KENNEDY, J., concurring in judgment only.
{¶ 40} I agree with the majority‘s conclusion that absent a valid assignment of claims, the sale of a municipal bond does not automatically vest in the buyer all claims and causes of action of the seller relating to the bond that arose before the transaction. I write separately, however, because I think the court need look no further than the plain and unambiguous language of
{¶ 41} A court‘s interpretation of a statute is a question of law that we review de novo. Stаte v. Pariag, 137 Ohio St.3d 81, 2013-Ohio-4010, 998 N.E.2d 401, ¶ 9. When the statutory language is plain and unambiguous, and conveys a clear and definite meaning, we must rely on what the General Assembly has said. Jones v. Action Coupling & Equip., Inc., 98 Ohio St.3d 330, 2003-Ohio-1099, 784 N.E.2d 1172, ¶ 12, citing Symmes Twp. Bd. of Trustees v. Smyth, 87 Ohio St.3d 549, 553, 721 N.E.2d 1057 (2000).
{¶ 42} Where a statute defines terms used therein, such definition controls in the application of the statute * * * Good Samaritan Hosp. of Dayton v. Porterfield, 29 Ohio St.2d 25, 30, 278 N.E.2d 26 (1972), citing Terteling Bros., Inc. v. Glander, 151 Ohio St. 236, 241, 85 N.E.2d 379 (1949), and Woman‘s Internatl. Bowling Congress, Inc. v. Porterfield, 25 Ohio St.2d 271, 275, 267 N.E.2d 781 (1971). Terms that are undefined in a statute are accorded their common, everyday meaning.
{¶ 43}
{¶ 44} The crux of this dispute rests on the meaning of the phrase rights in the security, which the General Assembly did not define in
an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer:
(a) Which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer;
(b) Which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and
(c) Which:
(i) Is, or is of a type, dealt in or traded on securities exchanges or securities markets; or
(ii) Is a medium for investment and by its terms expressly provides that it is a security governed by this chapter.
{¶ 45} The General Assembly did not define rights or in; therefore, I will consider the dictionary definitions of these terms. Rights has multiple definitions, but in the context of securities, the relevant definition is: a claim or title to property or a possession. Id.
{¶ 46} In likewise has numerous definitions. However, in
{¶ 47} Applying these definitions,
{¶ 48} The Sixth District Court of Appeals concluded that appellee Paul Cheatham I.R.A.‘s claim for breach of the Trust Indenture arises out of the contract with the bondholders, and is therefore properly considered a ‘right in the security’ that passes to a subsequent purchaser under
{¶ 49} To find otherwise would require this court to read the phrase related to into
{¶ 50} Because the plain and unambiguous language of
DEWINE, J., concurs in the foregoing opinion.
Strauss Troy and Ronald R. Parry, for appellee.
Porter, Wright, Morris & Arthur, L.L.P., Kathleen M. Trafford, J. Philip Calabrese, and Jay A. Yurkiw, for appellant.
Thompson Hine, L.L.P., Scott A. King, Brian J. Lamb, and Terry W. Posey Jr., urging reversal for amicus curiae American Bankers Association.
Dennis D. Hisch, urging reversal for amici curiae commercial-law professors.