Opinion
00 Civ. 8154 (SAS)
July 12, 2002
MEMORANDUM OPINION
On October 24, 2000, plaintiffs initiated this class action alleging, inter alia, that The Bank of New York ("BNY") breached the terms of a trust agreement entered into with an off-shore insurance company, the Alpine Assurance Company ("Alpine") On April 27, 2001, this Court granted summary judgment to BNY on several grounds, see Craig v. The Bank of New York, 169 F. Supp.2d 202 (S.D.N.Y. 2001), and plaintiffs appealed, see Craig v. The Bank of New York, No. 00 Civ. 8154, 2002 WL 4599, at *1 (2d Cir. 2001). In its argument on appeal, BNY suggested two additional grounds for summary judgment that it had not asserted before this Court. First, BNY claimed that under paragraph 3.6 of the trust agreement BNY was entitled to rely in good faith on advice ofrcounsel. See NAIC Standard Form Trust Agreement For Alien Surplus Line Insurers (the "Agreement") ¶ 3.6. Second, BNY claimed that plaintiffs' claims fail for lack of causation. The Second Circuit remanded the case, directing this Court to determine:
whether material disputed issues of fact exist as to whether defendant acted in reliance on the advice of counsel "in respect of any action taken or omitted by [BNY] in good faith in accordance with said opinion" as provided for in ¶ 3.6 of the Agreement. [The "advice of counsel defense".]
Craig, 2002 WL 4599, at *1. The Second Circuit then directed that, if this Court concludes that there are material questions of fact with respect to the advice of counsel defense, I must determine:
whether there are material disputed issues of fact as to whether BNY's actions caused any loss to the beneficiaries or Alpine. [The "causation defense".]
Id.
For the reasons stated below, I find that there are no material disputed issues of fact as to whether BNY acted in good faith in reliance on the advice of counsel as provided for in paragraph 3.6 of the Agreement. Accordingly, the causation defense need not be addressed.
I. BACKGROUND
Because the background of this case has already been described in detail, see Craig, 169 F. Supp.2d at 203-06, only the facts relevant to the remand are summarized below.
On August 15, 1991, BNY entered into a standard National Association of Insurance Commissioners ("NAIC") trust agreement with Alpine. See Agreement. Because most states require that off-shore insurers have trusts with federallyinsured banks, the Agreement requires that Alpine have in its trust fund with BNY a minimum of $5,400,000 in cash, readily marketable securities or letters of credit. See id. ¶ 2.8. On August 30, 1991, pursuant to the Agreement, Alpine deposited 3,200,000 shares of Monoclonal stock with BNY, representing that the shares were worth $1.875 per share, or $6,000,000. See BNY's Responses to Additional Facts Proffered By Plaintiffs ("Def. Resp. 56.1") ¶ 9. On September 10, 1991, Alpine deposited 500,000 shares of Creative Classics stock with BNY, representing that the stock was worth $5.00 per share, or $2,500,000. See id. BNY received the stock, but unbeknownst to it, Alpine's managers had actually given BNY stocks that were not readily marketable and were only worth a few thousand dollars. See Account Statement, Ex. A to Affidavit of Jack Fruchtman, Vice President and Manager of the Insurance Trust and Escrow Unit in the Corporate Trust Division of The Bank of New York ("Fruchtman Aff.")
On September 26, 1991, BNY contacted its law firm, Emmet, Marvin Martin ("Emmet Marvin"), to seek legal advice about the value of the Monoclonal and Creative stock. See Def. Resp. 56.1 ¶ 11. Plaintiffs allege that on September 27, 1991, Stephen Frank, an attorney with Emmet Marvin, discovered that the Monoclonal stock was worth $0.01 per share, not $1.875 per share. See Plaintiffs' Statement of Facts in Opposition to Defendant's Supplemental Rule 56.1(a) Statement ("Pl. Supp. 56.1") ¶ 13. Frank and Robert Viets, another attorney with Emmet Marvin, reviewed the Agreement to determine the consequences of Alpine's inadequate funding. See Time Sheets, Ex. 2 to Supplemental Declaration of Robert L. Brace, counsel for plaintiff. On September 30, 1991, an Emmet Marvi.n attorney made an informal telephone inquiry to the Securities Valuation Office of the NAIC to determine if the stocks were readily marketable securities. See id. That same day, Frank began to draft BNY's resignation letter based on the assumption that the stocks were readily marketable and therefore recommended resignation pursuant to the terms of paragraph 3.9 of the Agreement. See id. Paragraph 3.9 of the Agreement requires that, if no successor trustee has accepted appointment, a resigning trustee may tender the trust fund assets to the domiciliary insurance commissioner or with a court of proper jurisdiction. See Agreement ¶ 3.9. Emmet Marvin may have transmitted and discussed the first draft of the resignation letter with BNY.
At a June 24, 2002 conference before this Court, BNY claimed that "there is no evidence in the record . . . as to whether the [first] draft was ever transmitted to the bank." 6/24/02 Transcript ("Tr.") at 13. But, for the purposes of determining whether there is a material disputed issue of fact, this Court will assume plaintiffs' version6f the facts. See Parkinson v. Cozzolino, 238 F.3d 145, 149-50 (2d Cir. 2001) (holding that in assessing the record to determine whether genuine issues of material fact are in dispute, a court must resolve all ambiguities and draw all reasonable factual inferences in favor of the non-moving party).
On October 1, 1991, an Emmet Marvin attorney again called the Securities Valuation Office to determine if the stocks were readily marketable securities; he was told that they were not. See Time Sheets. Representatives of BNY discussed Alpine with Frank and Viets, who eventually concluded that because of Alpine's inadequate funding, no trust was ever created, and BNY was not required to comply with the resignation requirements of paragraph 3.9 or the notice provisions of paragraph 2.14(b) or 4.2. See id. Defendant's Supplemental Statement Pursuant to Local Civil Rule 56.1(a) ¶ 21.
Paragraph 2.14(b) required BNY to "certify the existence and value of the Trust Fund on a quarterly basis to the NAIIO," while paragraph 4.2 required that BNY give notice of the insolvency of the Trust Fund to the NAIC and domiciliary insurance commissioner if BNY received written notice of Alpine's insolvency or sixty days after the most recent quarterly valuation of the Trust Fund below $5.4 million. See Agreement ¶¶ 2.14(b), 4.2.
Frank prepared a second draft of the resignation letter reflecting these conclusions, and Emmet Marvin mailed the second resignation letter to BNY. See Time Sheets. On October 2, 1991, BNY employee Jennepher Lattibeaudiere sent an official resignation letter to Alpine reflecting Emmet Marvin's advice. See Plaintiffs' Statement of Facts in Opposition to Defendant's Supplemental Rule 56.1(a) Statement ¶ 24. On November 7, 1991, BNY returned the stocks to Alpine. See id. ¶ 27.
II. DISCUSSION
Paragraph 3.6 of the Agreement provides for an "advice of counsel" defense, stating that "[BNY] may consult with counsel selected by it and may rely on said counsel's opinion as complete authority in respect of any action taken or omitted by [BNY] in good faith in accordance with said opinion and [BNY] shall be deemed to have exercised reasonable due care in reliance thereon." Agreement ¶ 3.6 (emphasis added). The fadts show that BNY consulted with Emmet Marvin, received written advice, and relied on that advice. The sole question is whether a jury could reasonably find that BNY relied on that advice in bad faith.
Plaintiffs argue that the sequence of events surrounding the Alpine trust, combined with the burdens of disposing of the trust according to the terms of the Agreement, suffice to demonstrate bad faith. Plaintiffs effectively allege that BNY went opinion shopping, asking Emmet Marvin to provide legal advice it knew was incorrect but that would free BNY from burdensome obligations under the Agreement. This argument only makes sense, however, if BNY's obligations under the Agreement would have been significantly more burdensome than following its attorneys' advice, thereby giving BNY a motivation to accept bad advice.
Plaintiffs argue that BNY had, t.his motivation because it "needed legal assistance in evading liability, avoiding embarrassment and eliminating the costs of administering a no-asset estate," but there is no evidence that BNY believed this or should have believed it. Plaintiffs' Supplemental Memorandum of Law on Advice of Counsel and Causation, at 12. BNY would have had no cause for embarrassment when, only four weeks after receiving Alpine's stocks, it discovered that Alpine's representations as to their value and legal status were false. Indeed, BNY had no reason to feel embarrassed because the Agreement stipulates that "each investment instruction from [Alpine] shall be a representation by [Alpine] that the investments specified therein meet . . . the conditions imposed by the definitions set forth in this Agreement." Agreement ¶ 2.7.
Nor were the burdens of administering the trust particularly high, because the Agreement stated that "[i]f a Successor Trustee has not accepted appointment and [BNY] wishes to be relieved of responsibility . . . [BNY] may tender the Trust Fund assets to the Domiciliary Commissioner . . . [or] with a court of proper jurisdiction . . . and render a final accounting of the Trust." Id. ¶ 3.9. Relinquishing the funds to a state insurance commissioner or a court would have entailed some costs, but does not provide a plausible motivation for "opinion shopping."
Furthermore, the Agreement did not impose significant liability on BNY. The Agreement states that "[BNYI shall be under no duty or obligation to require [Alpine] to make any transfers or payments of additional assets to the trust and it shall be conclusively presumed that any and all such transfers or payments to [BNY] have been properly made." Id. ¶ 2.13. It also states that "[n]o provision of this Agreement shall require [BNY] to . . . incur any financial liability in the performance of any of its duties . . . including . . . defending . . . any claims," and that "[n]o Policyholder or Third Party Claimant shall have any right . . . to . . . bring an action against [BNY]" for any assets other than those in the fund. Id. ¶¶ 2.5, 3.10.
Plaintiffs attempL to overcome the plain language of the contract by arguing that "[t]here is a whole body of trust law that says the Trustee once he signs the trust agreement and the settlor gives him non-conforming assets, he is obligated to sue the settlor to make sure that the assets are deposited in the trust." Tr. at 34 (emphasis added). But in response to this Court's request for legal authority in support of this proposition, plaintiffs failed to provide a single case for this "whole body of law." None of the cases cited by plaintiffs stand for the proposition that a trustee must sue the settlor if the settlor produces non-conforming assets.
Counsel for plaintiffs raised this point for the first time in oral arguments on June 24, 2002.
Counsel cites Central States. Southeast Southwest Areas Pension Fund v. Central Transport, 472 U.S. 559 (1985) (holding that trust documents did not excuse trustees from their duties under ERISA); In re Reinboth, 157 F. 672, 674 (2d Cir. 1907) (stating that "[a] trustee may be charged with the value of assets which never came into his possession if he failed in his duty to get them into his possession"); John C. Craft, Special Deputy Liquidator of Meadowlark Insurance Company v. Sunwest Bank of Albuquerque, N.A., et al., 84 F. Supp.2d 1226 (D.N.M. 1999) (denying summary judgment and other motions in case against a NAIC trustee bank); In re Marine Midland Bank, 127 A.D.2d 999, 999-1000 (4th Dep't 1987) (stating that once the trustee accepts its designation, responsibilities with respect to the trust spring into being, including the duty to secure possession of the trust property); Dickerson v. Camden Trust Co., 140 N.J. Eq. 34 (1947) (holding that a trustee of a testamentary trust who accepted non-conforming investments from an executor was grossly negligent); and Pickney v. City Bank Farmers Trust Co., 249 A.D. 375, 377 (3d Dep't 1937) (describing "the four elements essential to the creation of a valid trust").
In response to the Court's request for cases, plaintiffs' counsel changed his position to argue that "receipt of the non-conforming assets did not negate the existence of the trust." 6/26/02 Letter from Robert L. Brace to the Court. This proposition is significantly different from that espoused by counsel at oral argument — namely, that a trustee must sue a settlor to dompel it to deposit conforming assets in the trust. In any event, none of the cases support either proposition. See supra note 4.
Furthermore, no implied duties are imposed on a corporate trustee beyond those expressly found in the corporate trust agreement itself. Common law duties like those plaintiffs rely upon, if they exist, would not apply to BNY. "[Tihe duties of an indenture trustee are strictly defined and limited to the terms of the indenture . . . . An indenture trustee is not subject to the ordinary trustee's duty of undivided loyalty." Elhot Assoc. v. J. Henry Schroder Bank Trust Co., 838 F.2d 66, 71 (2d Cir. 1988). The only express provision dealing with BNY's putative common law duty to force Alpine to deposit conforming assets is paragraph 2.13 of the Agreement which was discussed earlier. This provision clearly declines to impose such a duty on BNY.
In sum, plaintiffs have failed to raise a triable issue of fact supporting the conclusion that BNY acted in bad faith in relying on counsel's advice.
In addition, there are several undisputed facts in the record demonstrating a lack of bad faith: (1) Emmet Marvin's legal advice was not so objectively unreasonable that non-lawyers would have recognized it was incorrect; (2) Ms. Lattibeaudiere's testimony that she always relied on Emmet Martin's advice does not constitute an abdication of BNY's fiduciary duties — to the contrary, it showed that it was her routime practice to follow such advice and that this was not an isolated incident; (3) there is no evidence that BNY directed Emmet Martin to make an informal telephone inquiry to the Securities Valuation Office; and (4) BNY did not consult a second lawyer to obtain more favorable advice.